Budget Process (finance) - Essay Example

Budget Process (finance) Budgeting process in Current Dynamic Competitive Environment Budgetinghas been defined as 'planning the use of resources and allocating them among potential activities to achieve the objectives of the organisation' (L S C)1. In fact budget is a detailed plan of operations for some specific future period. It is a sort of estimate that is prepared in advance of the period to which it is applicable. It is claimed that budgetary control has almost become a necessary tool for the management to control the costs and enhance profitability. But the changing time is so competitive in business and other activities that many times changes in activities occur so fast that relevance of budgets and budgetary control look useless, as with frequent changes the budgetary prediction often look unreal. It is important to understand the term 'environment' under which the budgetary system has to operate in the modern business set up. 'The term environment is much used. Some people associate it with value system or value code. However in strategic terms, it is used to indicate the context within which the manager and the organization operates.'(Murdock and Scutt, page 280)2. With regard to budgetary operations in this competitive environment, the proponents of budgets argue that 'budgets are established to provide a benchmark for evaluating performance. For cost centers these budgets typically seek to achieve efficiency and control by specifying the expected cost levels.'(Cooper and Argyris, 126)3 Moreover, those who support budgetary system also argue that budgets are very effective even in modern competitive business environments and help the business to grow discounting the adversities the business face from competitions. Those who favor budgetary controls also stress that since a budget shows expected performance of the organization, the management is pre informed about coming financial and production difficulties. Based on such anticipation management can always take corrective actions to overcome the difficult situation. They also point out that once a budget is presented it provides a yardstick to measure the actual performance. In this way there is certain strength in budgetary control system that budgets emphasize while clarifying the responsibilities of managers; and such an attribute of budgets is always beneficial to the organization. There is other side of the picture as well. Budgets are supposed to be means of internal control. 'But the leadership dictates top down the amount of sales and therefore allowed costs for the different cost centers, based on past experiences. The responsibility centers try to negotiate about their targets in a bottom up process. Usually there is a compromise between parties in the hierarchical ladder. As a consequence, this procedure fails to focus on shareholders value , because compromises tend to be comfortable from all sides , but not challenging or at least not completely focused on profit maximizing.'(Sven Rohm, page 15)4 Accordingly instead of servicing the organization as internal control instruments, budgets actually provide boost to disarray the control system; and it is not possible to keep check on the checking systems. Competitive business environment is place for perfections and such parameters change frequently with new style and inventions in this competitive fields. 'Budget is always based on estimates. The estimates cannot be accurately made in this dynamic world, although many statistical techniques are available' (National Association of Accountants, page 377)5. Further, 'budgetary control system is lopsided managerial device; in as much as in qualitative aspects of managing cannot be fully and precisely made a part of it.'(Principles of Management, page 253)6. The most important weakness of budgeting is that 'budgets are usually based on historical trends which may not continue.'(Kumar & Mittal, page 538)7. That gives an impression that budgeting is a control tool of bygone era and that is difficult to use in this dynamic competitive business environment. What the supporters of budgetary control claim are theoretical facts. Practically speaking the facts are completely different. Budgets are made in environments that reflect bureaucracy and lethargic attitudes of the management. How organizations can with such approach compete in this ever changing business world. Sven Rohm (2004)8 states that 'some big European companies have dismantled the budget or are about to so. It seems that theoretical debate increasingly changing the companies' attitude towards the traditional budgeting.' The basic reason for such a shift is the creation of 'slack' resources by the budgetary controls. Creation of 'slack resources' is asking for more resources than required, and it is seen that those slack resources are often misused. 'The practice of reducing budgets where they have not been spent has been a feature of both public and private sector organizations, and has led to managers spending their budget allocations at year end, whether the expenditure is needed or not, to avoid budget cuts in the following year. Similarly managers bid for more resources than they need in the knowledge that their bid will be reduced by the more senior managers. Budget expectations perceived to be unfair or exploitative are not internalized by employees and can lead to lower motivation and performance.'(Collier and Ampomah, page 65)9 This has been proved time and again that success and effectiveness of the budgetary control system depend upon willingness and cooperation of the team associated with budgetary affairs in an organization. But in practical world there remain always a silent competition among employees in order to achieve what cannot be achieved in regular course. Under such a situation cooperation among the team associated with budget is a remote possibility. Marcia, Todd and Walker (1992, page 107)10 has rightly commented that 'when budgetary controls are effective, it is partly because managers know that budgets are only tools that assist but do not replace good management.' This is also very much clear from the limitations of budgetary controls that have been provided in detail in this write up. Accordingly, Bart is right when he said 'managers made their budgets out of fear that senior management will arbitrarily slash their submitted budgets and the mangers' own concern about uncertainties in the competitive environments.' This is the real reason for increasing unpopularity of budgetary control system in this dynamic competitive environment. References: Read More