Ways of Removing Negative Budget Variances - Essay Example

? Report of the Human Resources Manager on ways and means of removing negative budget variances Introduction From the accounting records it is obvious that an alarming situation has evolved where the actual profit before tax is fallen by ?1,605,000 from the actual which in terms of percentage means 44% less than the targeted amount. There are obviously some serious issues that are involved and these need to be addressed without any more delay. From the perspective of a HR Manager, there are three items that need special attention and they are Salaries and Wages Payroll Costs Employee Training and Development Costs and, Recruitment costs. Salaries Wages and Payroll Costs A more detailed study of the available accounting data reveals that Salaries and Wages showed a 9.6% negative variance over the budgeted amount and Payroll Costs also showed a negative variance of 9.6%. While Salaries and Wages are basically the amount of money paid to employees and are self explanatory, it must be mentioned that Payroll Costs essentially consist of employers’ contribution to social security and other statutory expenditures incurred by an employer in connection with employing a personnel. These variances, though noteworthy, can, however, be explained. One must remember there is a genuine dearth of good manpower in the area of operation of our company and the management must be prepared to pay high remuneration packages if they are intent upon selecting the best that is available in the market. So, an increase in Salaries and Wages and Salaries is bound to happen if the company wishes to remain competitive. The increase in Payroll Costs by almost an equal percentage is obvious as these are statutory liabilities that are bound to increase if Salaries and Wages increase. The main variance, however, lies in Recruitment Costs which is a massive 82% over what had been budgeted. This surely needs some serious analysis. Employee Training and Development Costs The foundation of any organization is talented and hardworking people who are the principal assets of any firm, especially one that is involved in providing consultancy services. It is an established fact that the growth of an organization requires continual infusion of quality staff and an organization can achieve its objectives only when it has the right person in right positions (Carlson, Connerley and Mecham 2002). But this is a continuous process that just does not begin and end with getting hold of suitable people and somehow put them on company’s payroll. Even in a situation where only a single job vacancy might attract a few hundreds of applications, there is a challenge of selecting the most appropriate one. Freshly appointed persons might need orientation training to familiarize them of the way things are done in the organization. And, in case they have been selected only on the basis of academic qualifications and aptitude for learning, they might need training in specific skills as well. The employee’s experiences during orientation and placement form their ‘first impression’ of the organization. So, any organization, especially a service provider like us that is so very much dependent on the quality of human resources available at our disposal we should be extra cautious about ensuring that the new recruits get a very good “first impression’ about our organization. This would motivate employees and who does not know that a motivated employee is the costliest resource that an organization can ever possess. However, training and development is never restricted to new employees. Even existing employees, whilst on job, need training for up-gradation of knowledge and skills and for preparing for higher responsibilities. One should never lose sight of the acutely competitive market where we operate. It is absolutely necessary for our company to be well acquainted with cutting edge technology in order to remain at the top of the heap and this can only happen if there is a continuous system of training and development (Olaniyan and Ojo 2008). From the records available we observe that in-house development and training costs have overshot the budgeted amount by 40% and one has to accept that if the company has to remain ahead this is an expense that has to accepted and instead of analyzing the reasons as to why such costs overshot the budgeted amount the budget for the next year should be increased. This might sound like an attempt to gloss over the incompetence of Human Resource Department but those in the know of the human resource market we recruit from and also about the market where we provide our services must agree that sustained employee development is the only sure shot remedy to reduce levels of employee turnover that would in its turn reduce recruitment costs. Therefore if one takes a long-term perspective instead of comparing the actual figures with those that appear in the annual budget, one would surely agree in-house training costs should never be reigned in, rather it such training and development must be wholeheartedly encouraged by the top management (Liccione 2005). Recruitment Costs There are two sources of recruitment – internal and external. The main sources for internal recruitment are transfer and promotion. Transfers can be with or without a substantive change in the responsibilities and status of an employee. By substantive changes it is meant a transfer may lead to changes in duties and responsibilities and working conditions but not necessarily salary. It is practically a horizontal movement of employees. Shortage of suitable personnel in one branch may be filled through transfer from one branch or department to another. In times of tight market conditions this is surely an attractive option but one must appreciate that such horizontal transfers can only be affected if suitable openings arise. Promotions are surely an excellent way to improve employee morale, loyalty and levels of job satisfaction and consequently reduce employee turnover but once again it must not be forgotten that only the most eligible employees should be promoted. Else, it would result in an additional burden of Salaries and Wages without any corresponding increase in productivity which is a very crucial issue in times of economic crunch (Breaugh 1992). Though there are several sources of external recruitment, only those that are relevant for our company are being discussed here. Placement Agencies: In technical and professional areas, placement agencies provide a nationwide service in matching personnel demand and supply. These agencies compile bio-data of a large number of prospective candidates and recommend suitable names to their clients. The placement agencies that we deal with specialize in middle level and top level executive placements and often advertise the jobs on our behalf to assist in our quest for the right type of personnel. However, such agencies charge considerable fees for their services but are useful where extensive screening is required. As our organization cannot afford to settle for the second best, we have to depend to a large extent on these placement agencies (M2 Presswire 2009). Campus Recruitment: Many big consultancy and technology related organizations maintain a close liaison with universities, vocational schools and management institutes to recruit qualified fresh graduates from these institutions for their entry level vacancies. We rigorously cultivate this source for continuous supply of fresh and youthful talent to retain the sense of urgency and dedication that is required for our organization to survive and prosper (Humber 2005). Web Publishing: Internet is fast becoming a common source of recruitment these days and we have not fallen behind our competitors in this regard. Together with advertising our vacancies in well known job portals we also update our company’s website regularly. But, it must be admitted that job portals happen to be a far more dependable means of attracting better talent as many more prospective candidates visit these websites than that of our company (Feldman and Klass 2002). Conclusion However, external recruitment is a time consuming and costly process as a lot of money has to be spent in availing of services of placement agencies and keeping good contact with universities and other leading management and technology institutions. Job portals also charge a considerable amount for advertising our vacancies in their websites. There is no escaping from these expenses if our company wishes to survive in the cutthroat competition that is prevalent among companies providing consultancy services. Some might suggest outsourcing a part of our job to external vendors as a possible option of reducing recruitment cost but there are two risks associated with it. The first one is the relative scarcity of suitable vendors. The second one is even more substantive. Our business requires constant interaction with our clients, often on a one-on-one basis. It would not be advisable to introduce a third party in such an interaction. Thus the only viable option is to take concrete steps towards reduction of employee turnover through implementation of attractive bonuses and incentive schemes and other non-financial incentives (Arthur 2001). Beyond Budgeting Each organization spends a considerable time every year in setting up budgets as they are considered to be one of the most important tools of managerial control that is exercised through analysis of variances of actual figures from those that have been budgeted. Jeremy Hope and Robin Fraser, however, trash the whole concept of budgeting (Hope and Fraser 2003) and have put forward a new concept called ‘beyond budgeting’. The concept of beyond budgeting evolved out of growing dissatisfaction of managers about the efficacy of budgeting as management tool of control. The Beyond Budgeting Round Table (BBRT) was established in 1998 to provide an alternative to budgeting process as it was widely felt that mere criticism of budgeting process without providing a viable alternative would hardly be of any perceptible value. Beyond budgeting is perceived to have two distinct advantages over traditional budgets. The first is that it is perceived to be more pliable and adaptable to specific requirements of companies and second is it is basically a more decentralized process where inputs and suggestions from the lowest operational levels are used as starting points for setting up organizational targets for the entire organizations. Traditional budgeting, on the contrary, is basically a top-down process where top management decides what the targets would be for an organization for a particular period. Beyond budgeting uses different tools to achieve its basic objective of improving efficiency and effectiveness of an organization. The tools commonly used in this new approach are Balanced Scorecard, rolling forecasts and various tools that enhance Shareholder Value. The most radical departure beyond budgeting has made from traditional budgeting is in its calculation of managerial incentives and bonuses. While in traditional budgeting achieving absolute targets is the only criterion for managerial bonuses and incentives, this new method adopts a relative achievement approach to calculate those incentives. Thus, the manager who performs above the average level of performance becomes entitled to receive a bonus irrespective of whether they have been able to achieve a predetermined target. This approach is especially useful in times economic downturn when it becomes very difficult for managers achieve budgeted targets. Similarly, in times of economic prosperity, the company only rewards those that have performed genuinely well. This in a sense improves accountability and instills a spirit of healthy competition among managers who try to outperform others in order to receive bonuses and incentives (Michael 2007). Swedish bank Svenska Handelsbanken and Swedish wholesaler Ahlsell have completely shifted to beyond budgeting principles. Both these organizations give complete freedom to their managers to operate within clearly specified priorities and boundaries. The rewarding system is completely transparent and is based on relative efficiency. Taking decentralization to a newer level, small units within these organizations are empowered to take their own decisions (limited by overall priorities and guidelines) and manage their own resources (BBRT 2010). However, a survey by Theresa Libby and R. Murray Lindsay (Libby & Lindsay, August 2007) throw up a more charitable opinion about traditional budgeting procedure. Shastri and Stout conducted a follow up survey to the one conducted by Libby and Lindsay where they sought responses from senior finance and accounting managers regarding the exact steps that they go through during the entire budgeting process and whether they feel that this process indeed adds value to their organization. The respondents were further queried about how satisfied they were with budgets and what role do budgets play in the day-to-day functioning of their organizations. Two further pointed queries were also made as to the behavioral consequences budgets have on employees and whether budgets do significantly influence other managerial activities. The objective of the survey was to find out what significance do for-profit companies attach to budgeting procedures what do senior managers think about it (Shastri and Stout 2008). A majority of the respondents, 69.2% of them to be precise, stated that budgeting process is essentially a negotiated one where the top management and lower and middle management discussed and negotiated about the proposed production, sales and other crucial figures that the company desired to achieve in the coming year. Once the quantities are determined, finance and accounts department imputed money values after taking into account possible fluctuations in prices of inputs in the coming period (Shastri and Stout 2008). The most important revelations, however, from the responses is that almost all companies take a static budget as a base and engage in marking up or marking down relevant figures depending upon the planned levels of production, output and sales. Though other forms of flexible budgeting as rolling budgets and zero based budgeting are available, rarely do companies opt for these alternatives (Shastri and Stout 2008). That budgets are taken seriously by companies is evident from the fact that almost all the respondents stated budgeted figures and actual figures are routinely compared on a monthly basis in their organizations and 78% of the respondents also confirmed that managerial incentives are totally dependent on achieving budgeted targets (Shastri and Stout 2008). 21.4% respondents felt budgets are totally useless in fostering coordination among departments and subunits while 14.1% recorded their dissatisfaction about budgets being effective tools of motivation and 11.8% stated that use of budgets in calculating incentives is totally erroneous (Shastri and Stout 2008). The survey also throws up an interesting inconsistency. While a majority of respondents felt budgets were useful, when queried as to whether budgeting process adds value to the organization only 40% of the respondents replied in the positive. A substantial 23% felt that it does not add any value at all. Shastri and Stout try to explain this inconsistency by assuming that respondents might have applied the cost-benefit test when they evaluated the quantum of value addition achieved through budgeting process. Or, it could be that the concept of value-addition varies from organization to organization (Shastri and Stout 2008). Thus, it might be concluded that in spite of what Hope and Fraser might say about budget, especially that it “no longer represents an annual fixed performance contract that defines what subordinates must deliver to superiors for the year ahead” (Hope and Fraser 2003), traditional budgets are here to stay for a long time. References Arthur, Diane. The Employee Recruitment and Retention Handbook. New York: AMACOM, 2001. BBRT. "What is BBRT?" BBRT - Beyond Budgeting Roundtable . 2010. http://www.bbrt.org/ (accessed January 9, 2011). Breaugh, J. Employee Recruitment: Science and Practice. Cincinnati, OH: South Western Publishing, 1992. Carlson, Kevin D, Mary L Connerley, and Ross L III Mecham. "Recruitment evaluation: The case for assessing the quality of applicants attracted ." Personnel Psychology , 2002. Feldman, D., and B. Klass. "Internet Job Hunting: A Field Study of Applicant Experiences with On-line Recruiting." Human Resource Management 41 (2), 2002: 175-185. Hope, Jeremy, and Robin Fraser. Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Boston, Mass.: Harvard Business School Publishing Corporation, 2003. Humber, T. "Recruitment Isn't Getting any Easier." Canadian HR Reporter , May 23, 2005: R-1. Libby, Theresa, and R. Murray Lindsay. "Beyond Budgeting or Better Budgeting?" Strategic Finance, August 2007: 46-51. Liccione, W. "Balanced Management: A Key Component of Managerial Effectiveness." Performance Improvement Journal 44 (2), 2005: 32-38. M2 Presswire . "Recruitment Agencies Market Report 2009: UK Permanent Recruitment Market Worth GBP4.28bn in Year Ending March 2008." M2 Presswire, March 25, 2009. Michael, Alexa. "Beyond Budgeting." Topic Gateway Series. October 2007. http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_beyond_budgeting_oct07.pdf (accessed January 9, 2011). Olaniyan, D. A., and Lucas. B. Ojo. "Staff Training and Development: A Vital Tool for Organisational Effectiveness." European Journal of Scientific Research, 2008: 326-331. Shastri, Karen, and David E. Stout. "Budgeting: perspectives from the real world: a survey of senior accounting and finance managers examines the budgeting process at for-profit companies, including the usefulness and perceived value of the process, users' satisfaction with it." Management Accounting Quarterly, 2008. Read More