Performance Management assignment - Essay Example

By doing so, organizations can easily project their profitability and thereby formulate effective strategies for business expansion. However, it is observed that budgetary forecasts in the modern era are not always accurate and result-bearing due to frequent market fluctuations. A recent statement from accounting press reflects that “the downturn has rendered budgets agreed last year largely irrelevant” (as cited in Jarman and Bibekar, 2009). This paper explores the scope of traditional annual budgeting process in the modern period.

Generally, companies prepare budget for the whole financial period of 12 months. This forecast for a long period of 12 months seems useless in this fast changing business scenario as the deepening downturn and increase in economic volatility largely alter nation’s economic structure. Therefore, economic and market conditions after 12 months will probably be much different from that of the current situation. Similarly, today’s highly volatile nature of economy raises several constraints to the forecastability of the future economy.

In short, the role of traditional annual budgeting process is not helpful in the present business era since it would not predict the future economic conditions accurately. In addition, the conventional practices associated with annual budgeting and forecasting processes involve higher costs. According to PricewaterhouseCoopers (PwC) survey in 2009, on an average basis, every company employs an equivalent of ‘eight full-time staff to budgeting and forecasting’ (as cited in Jarman and Bibekar, 2009).

The application of various modern financial and accounting tools is essential to predict the future economic variance. Similarly, under traditional budgeting system, a considerable portion of time is spent on data collection and tabulation activities. Hence, we can clearly assess the fact that budgeting and thereby forecasting process also includes cumbersome human efforts and it generally lasts up to three months. However, the degree of economic volatility would determine the success or failure of annual budget.

As a result, if the economic conditions turn to be unfavorable in future, it will not only affect the success of the budget but also the cost spent on the formulation of the budget. Many economic conditions may adversely affect the effectiveness of a formulated financial budget. Most of the multinational companies value their various revenues and expenditures on the basis of predicted exchange rate of currency. If the fluctuation unfavorably exceeds the forecasted limits, then the expected revenues and expenditure would vary accordingly.

Naturally, this situation may impede the successful progress of the designed annual budget. Similarly, different government regulations such as taxation and trade barriers raise further difficulties to the application of annual budgeting. When government increases tax imposition on trade activities, companies are forced to spend more on taxation which result in proportional increase in expenditure; and that will be higher than the budgeted expenditure. Moreover, economic downturn causes large deviation in budgeted figures.

In such situations, firms are compelled to postpone their predetermined developmental policies since they need to spend more on other sectors in order to stabilize the economic growth. It is very difficult for the companies to predict whether there will be an economic downturn within