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Performance Management: Beyond Budgeting - Essay Example

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Performance Management: Beyond Budgeting Introduction Funding is undoubtedly among the most important assets an organization possesses, and is usually second only to the personnel in this respect. These funds are often entrusted to the organization by its stakeholders as an investment of sorts…
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Performance Management: Beyond Budgeting
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Download file to see previous pages This being the case, the executives and managers of a particular organization tend to be very discriminating and cautious when allocating funds, albeit justifiably so. Their allocation of funds to various departments quite clearly needs to be done with the utmost care and deliberation, with more important departments and/or projects requiring more funds. Such a task is often easier said than done, as assigning the budgets of multiple departments within an organization requires copious reliance on one’s skills in planning and micromanagement. Even then, things can still happen that end up forcing sudden changes in the allocation of funds. Budgeting, then, is a concept any company would do well to keep in mind. Despite being relatively dated, the traditional method continues to be widely used all over the world, and in some cases has even been used to great effect. As of late, though, newer and more modern methods have begun to expose flaws in the traditional approach, most notably the Beyond Budgeting approach. To be discussed in this paper is the traditional approach to budgeting, in terms of its most glaring weaknesses, in order to allow a more objective comparison to the Beyond Budgeting model. Traditional Budgeting – Major, Major Weaknesses Hill (2012) summarizes the traditional approach as being a blend of the top-down and bottom-up budgeting methods. This means that top management sets goals that subordinates are to collaborate towards. At the same time, department managers come up with budget plans for their respective departments, which are then given to the top management for review and for consolidation into a plan encompassing the whole company. This setup looks easy enough to understand. Under such an arrangement, the top brass sets goals the company is to work towards, while the heads of various departments report exactly how much money they need to accomplish their functions in this regard. Thus, at first glance, it seems like a very much reasonable approach to the task of budgeting. It may even be considered an effective approach, at least in theory. Unfortunately, in practice, the results tend to be less than satisfactory. First and foremost, it should be pointed out that the persons in charge of setting company goals are the executives. More likely than not, these executives have rather lofty goals they intend to have the company work towards. Nothing is wrong with this in itself; however, the problem is that they go about setting goals without the input of the departmental managers. As such, their goals may very well be beyond their ability to achieve, and end up being not only unrealistic, but often arbitrary and unfair. Smith & Lynch (2004) expound on this, saying how allocated funds tend to have little correlation to company goals and performance. In this way, the money is allocated on a more general level, as opposed to being focused on a specific area, with no room for alteration based on the performance of a particular department. This does have some rational basis to it; after all, if a department’s track record happens to be rather sketchy, it would be but natural to be hesitant in giving it too much money to work with. At the same time, though, it might be more prudent to keep the company’s future needs in mind when allocating funds, rather than focusing too much on the past performance of a given department. Murray (2010) also expounds on this in her article. Most traditional ...Download file to see next pagesRead More
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