Budgetary Process Essay Example for Free

Budgetary Process EssayIdentify and describe the key shoot a lines that a budgetary surgical procedure should achieve to achieve managerial goal congruent demeanour. However if budgets ar over forceful ill-considered behaviour may be observed where a manager (or groups of managers) takes action(s) that meliorate budgetary implementation in the short term but may cause long term harm to the boldness Discuss.A budget is a short term, often one year, worry plan, usually expressed in financial terms (Atrill, Mclaney, 2011, p.314). There atomic number 18 ternion broad functions of budgeting, these are quantification of plans, help in financial planning, and monitoring and dominateling scarce resources through performance measurements. Throughout this essay I shall be discussing these three knowledge domains, breaking them down into seven more specific features of budgeting. Furthermore I shall discuss how scant(p) behaviour stop cause long term harm to an institutio n. Goal congruity means developing and maintaining the unlike activities within the enterprise in proper relationship to separately other (Welsch, Hilton, gordan, 1988 p.50). From a managerial bill of view this is punter explained by making sure they are aware of the different goals adjust by multiply departments within the organisation as well as making sure their own goals are in line with the organisations overall plans.There are seven key features that a budgetary process should achieve in order to achieve managerial goal congruent behaviour. The first key feature is authorization, this makes managers account adequate to(p) for their actions/spending and helps prevent fraud in an organisation (Atrill, McLaney, 2011). For an organisation it is cardinal to make the decline choice between a centralised control of the budget, where the organisations overall aspirations are at the heart of whatsoever decision making, or to delegate the responsibility to subordinates who lead have a better savvy of their pop offical anaesthetic environment. Usually a mixture of centralised and delegated control is chosen, giving some responsibility to subordinates to maintain actuate (Berry, Broadbent, Otley, 2005 p.108).Goal congruence is best achieved by using authorization in the budgetary process to apply Managers / Subordinates clear on what is expect of them from a financial point of view. The next four functions come into stamp when planning a budget. Forecasting is critical in preparing an organisation for what is to come in the future, looking earlier must be better than moving forward with eyes closed (Garrett, 2010). It involves calculating umpteen variables in order to predict future economic conditions as well as how governments and competitors result behave. On top of this, the company needs to forecast how the relationship between price and demand will depart.Planning links in closely with forecasting as both use secondary data to help organisa tions regard what to do next. Drury (2004) states that managers are encouraged to plan whilst preparing the budget so that they rotter consider what changes may overtake and how they can respond. An organisation needs to plan out how they are going to treat upcoming circumstances, for causa seasonal changes, trends in the commercialise and the likely hood of the company incurring growth or decline. A combination of forecasting and planning enables managers to remain goal congruent as they are aware of what is expected from them and what is expected to happen to the market or organisation in the future. This allows them to have a better understanding of how they are going to achieve their goals and helps keep them focus and in line with the organisation.Berry, Broadbent, Otley, (2005) states the budgetary process pass ons, in different ways, a focus for forecasting and planning, whilst serving as a channel for communication and coordination. conference is a critical part of t he budgetary process as it is vitally important that each theater of the organisation is given a budget that is relevant to the overall goals of the organisation as well as to their specific needs. It is extremely difficult to keep every area of the phone line content with the budgetary targets and goals set. separate areas in a business will be competing with each other when relating to funding, resources etc. Goal congruence is achieved through communication by making sure communication is efficient between the different graded levels and between each department. Most organisations form a budgetary committee which includes the senior management that are responsible for designing the strategy they also receive the initial budgets from each functional manager (Weetman, 2010, p.319). This will enable swift and clear transparent communication when negotiating the budget, resulting in the best possible budget for each area of the business, whilst achieving the organisations overal l aspirations.The final feature of a budget that comes into effect during the planning stage is control / coordination. I have touched upon coordination in the budget process whilst talking about communication as at that place can non be effective control/coordination without effective communication and vice versa. Control is critical in planning budgets, as it is important to make sure each area of the business is accountable for its actions, as well as being able to link the budget/targets for each area together to insure for possible weaknesses in the organisation. Such weaknesses arise when one area of the organisation is relying on another area that cannot commit to what is needed (Weetman, 2010, p.325). Having coordinated budgets allows superiors in the organisation to realise where there are weaknesses early on and balk the negative effect. An example of this would be out sourcing if the work load for one area of the business is more than it can handle. Budgetary control i s often implemented through cost centres or profit centres. Profit centres allow centralised responsible for revenue, expenses and profit. Whereas a cost centre enables responsibility for mainly cost (expenses) (Welsch, Hilton and gordan, 1988 p.597).These again support goal congruence as the business as a whole is able to see how each specific sections of the organisation is financially performing and whether or not they are percentage to achieve the companys aspirations. Motivation and evaluation are features of budgets that come into effect once the budgets are active. Motivation in budgeting can make or break how goal congruent managers are as motivation in budgeting is an extremely tricky procedure. It has been proven that budgetary targets can indeed improve provide motivation. However too soft a target will make it too easy for cater to achieve and therefore staff performance may fall, whereas setting targets that are deemed unachievable are also likely to decrease perfor mance. Geert (1968) reached the conclusion that provided the budget does not exceed the highest target acceptable to an soul the results will increase in line with increasing difficulty. A budget allows organisation to set targets and goals that are consequently compared with actual performance and evaluated. When using budgets (that have been used for motivational purposes) for evaluation, managers need to be careful not to look on small deviations to harshly. A motivational budget is harder to achieve as it is there to improve performance and efficiency in the organisation (Drury, 2004, p.595).Managers should remember that the budget is financially based and evaluating areas such as innovation, corporate social responsibility, staff moral and customer satisfaction are also important to the organisation when evaluating good performance. In the context of dynamic demand analysis, habit formation is defined to be myopic when in each period the individual takes into account his con sumption history but does not have a go at it the impact of his present consumption decisions on his future tastes, (Pashardes 1986).Myopic behaviour is where individuals, organisations or managers focus solely on the short term. In an accounting context this can be extremely detrimental to an organisations long term goals, as managers are more focused on achieving their short term budgetary plans than looking at the companys overall targets. A myopic mind can fetch many problems to an organisations none financial goals. If managers are too focused on achieving there budgetary targets it can stifle the creativity and risk taking culture of the organisation (CIMA, ICAEW, 2004).This intern can have dramatic long term effects on an organisations creativity and entrepreneurial ability, as it is critical for them to move forward and develop as an organisation. A prime example of this can be seen with the demise of Woolworths, history might have been different had woolworths not clung t o its time-served pic and mix business model (Boje, Burnes and Hassard, 2012, p.332). In the retail industry it should be critical for managers to remain focused on tutelage their store modern. It is proven that modernised stores can set higher prices, leading to larger profits, delinquent to a higher net value added (Hemashree, 2008). Clearly Woolworth lack of enthusiasm towards modernising their stores and being too focused on cutting costs lead to a negative operating environment, hindering their chance of survival. A myopic approach to budgetary goals leads to a concentration on cost reduction and not value instauration for managers. For any retailer like Woolworths, managers know that staff take up a huge essence of the companies costs. In the short term it sounds increasingly tempting for managers to enforce staff redundancies to help achieve those targets set by superiors (Berry, Broadbent, Otley, 2005).The actions of cost cutting by retail managers including Woolworths, for example reducing staff during seasonal change (e.g. after Christmas), would cause long term costs to the organisation. Instead of paying high costs due to seasonal staff redundancies and staff training, organisations could reduce staff hours during low points in trading then increase staff hours in line with increasing sales. As well as hindering the organisations ability to work out of bare-ass ideas, the budgetary process can also have an effect on future information that is already in the pipeline. New projects are often put on hold by organisations which become more worried about meeting financial targets, than trying to expand the company and launch into pertly markets or create new products. IBMs budgetary process became so long during the 1970s that it took 18 months to complete their annual planning cycle (Hope, Fraser, 2003, p.7). IBMs management were affected by another budgetary related issue becoming excessively inward focused to the point where they were unawar e of competitors behaviour.Due to their high planning cost this lead them to be unable to, and lacking the agility and ability, to counteract (CIMA, ICAEW, 2004). Whilst competitors like Apple were becoming innovated and pushing through their new ideas involving personal computers, IBM were too busy focused on how they, as market leaders, were going to launch the next big thing. IBM misread the personal computer revolution and was unable to react to lower cost advanced computers created by competitors (Hope, Fraser, 2003). Keeping an eye on the potential risks and changes in the operating environment is essential as one delegate noted, budgeting may provide you with a map but if you drive with your eyes closed, you will crash anyway, (CIMA, ICAEW, 2004). There are many methods or remedies that IBM and Woolworths could off used to prevent the budgetary problems associated with myopic behaviour. Beyond-budgeting is a modernised version of the conventional budgeting process that all ows bottom up empowerment. This seems to be the best way for organisations to adjust to the fast changing earth of the information age (Hope and Fraser, 2003). IBM were affected by being inward focused and unaware of competitors actions.If IBM had been aware of the new beyond-budgeting process they would have been setting their goals in relation to beating their competitors and not the budget (principle 7) (de Waal, 2005). This would of kept them market focused and enabled them to react faster to their competitors actions instead of misreading the market. Driver based planning and budgeting would of, again benefited IBM by helping to shorten their annual budgetary process. Incorporating operational drivers would have meant IBM could reforecast on request and would have been fast enough to adapt to uncertain trading conditions (Barrett, 2005). This process as well as enforcing beyond-budgeting principles could off weakened the planning process involving three thousand people that IBM had in place.Woolworth main problem, like many organisations woefulness from managerial myopic behaviour, was a lack of innovation. They became too focused with cost cutting practices, trying to achieving budgetary goals. Everybody has a sandpit to play in. my sandpit financially is my control plan, If I stay within it, Im free to play (Marginson, Ogden, 2005). Keeping innovated and flexible is critical to achieve the organisations long term goals as well as meet short term budgetary targets. In conclusion, traditional budgets are seen as being incapable of meeting the demands of the competitive environment and are criticized for impeding efficient resource assignation and encouraging dysfunctional behaviour such as myopic decisions (deWaal, Hermskens-Janssen, Van de Ven, 2011). I have demonstated how individual beyond budgeting principles can add to traditional budgeting to support organisations, using examples of IBM and Woolworths to demonstrate.De Waal (2005) states that r esearch shows the more beyond-budgeting principles an organisation implements, the better it performs. A combination of budgeting and beyond-budgeting principles allows managers to balance the inherent rigidity of their budgets with the more organic processes of innovation. (Marginson, Ogden, 2005). Using the key principles of beyond budgeting enables managers to focus on achieving long term goals, in line with the organisations overall objectives, as well as helping to speed up and modernise the traditional budgetary process. It is however important to remember that the features of a traditional budget are extremely important to most organisations. Budgeting provides an overall theoretical account of control without which it would be impossible to manage, (CIMA, ICAEW, 2004).ReferencesAtrill, P., Mclaney, E., 2011. Accouting and Finance for non specialists. 7th ed. Essex Pearson Education Limited. Barrett, R., 2005. Budgeting and Reforcasting, Financial Management. Berry, A. J., B roadbent, J., Otley, D., 2005. Management Control. 2nd ed. Hampshire Palgrave Macmillan. 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