Human Behavior in Budgeting - Essay Example

?Human Behaviours in Budgeting Table of Contents Table of Contents 2 Introduction 3 Objectives of Budgeting 4 Human Behavior in Budgeting 5 Budget asa Motivational Instrument 6 Behavioral Trait of Budgeting 7 Management Control in Budgeting 8 Budgetary Control in Manufacturing Industry in Nigeria 9 Budgetary Control in Guinness Nigeria 9 Budget as Motivational Instrument in Guinness Nigeria 10 Communication and Coordination through Budgeting 11 Management Control System in Guinness Nigeria 11 Conclusion 12 References 13 Bibliography 16 Introduction In recent times, increased attention is being given to the importance of human behaviours in budgeting of the organizations. Budget is used in business organizations for developing future plans for production, sales, training and almost all other activities. Budget can be used for managing the administrative operations and motivating employees to perform coherently with the organizational goals. A budget can deliver a criterion where employees are encouraged to achieve their targets under certain conditions. Conversely, budget can also inspire disorganization and conflict between employees or managers. If people are dynamically involved in developing budget, then it can be used as a device to support managers in handling their branches effectively. Budget can be a useful device for motivating people but if budget is developed from top level and enforces a threat for employees it can be resisted and will cause harm to the organization (Drury, 2007). Objectives of Budgeting Through budget, organizations can regulate the actions of different divisions. An effective budgetary system can act as a comprehensive control system for organization if there are certain implied or apparent links between budgetary processes and organizational rewards (Flamholtz, 1983). Budgeting comprises of creating specific targets, implementing strategies to accomplish the targets, and occasionally match actual status with the targets. The targets can be general business objectives and particular goals for the individual divisions within organization. Budget provides a way for business by drawing the strategies of the operations in financial expressions. Budget helps organizations to direct activities and decreases the negative results (Warren & Et. Al., 2011). Though budgets are usually related with profit, they also play significant parts in operating several divisions of government. For instance, budgets are useful tools for managing finance for education and ration in rural areas. Budgets are also used in non-profit organizations such as public hospitals and cathedrals among others. Budget comprises of three activities which are planning, directing and controlling. Before planning the budget, it is important for organizations to forecast the amount of budget. The forecasting is often developed by considering the conclusions of past outcomes. Several statistical approaches are used for forecasting budget. The planning phase is comprised of forming specific objectives for future actions. It is a part of management process. Directing is the activity for satisfying the planned actions and controlling is periodically judging the progress of activities with the planned actions (Warren, 2008). Human Behavior in Budgeting Budget can have substantial effect on human behaviour. Budget can stimulate managers for developing their performance; adversely it can also de-motivate from putting extra effort and flatten the self-esteem of managers (Kimmel & Et. Al., 2010). The behavioural problems or dysfunctional consequences can arise from budgeting in three conditions which are: 1. The goal of budget is unattainable 2. The goal of budget is too simple to accomplish 3. The goal of budget disagrees with the goals of employees Unattainable goals: Employees will be de-motivated if performance expectations set by the managers are impractical or unattainable. An aggressive and achievable goal can probably motivate employees to accomplish the organizational objectives. Thus, employees should be engaged in developing sensible budget estimations. It can inspire collaboration among different divisions. Employee engagement also raises the awareness of each division’s significance for accomplishing general objectives of organizations. Employees can see budgeting more efficiently when they are given the chance to contribute in the budget making procedure. The reason is that employees who have greater sense of control on the budget have greater commitment to accomplishing the business objectives (Warren, 2008). Simple goals: Though it is necessary that organization develops achievable goals but setting lower target is undesirable as it can also impact on the behaviour of employees. This kind of budget is also known as ‘budgetary slack’. Slack budget can develop a relaxed mentality among employees and they will be de-motivated to put their full effort towards job (Warren, 2008). Conflicting goals: Disagreement in goals happens when the employees’ interests vary from organization’s interests. It can occur when management creates individual employee’s objectives that differ from general organizational objectives. This kind of conflict happens between two or more departments, for instance, sales department in an organization can develop a sales target which might conflict with the target of production department (Warren, 2008). Budget as a Motivational Instrument Every budget denotes a target which focuses on the employees’ performance towards it. Budget can be regarded as a powerful motivator for employees. A challenging target can help employees to perform better. In developing the target, organizations need to consider the following aspects: Too much low target can pull down the real performance of employees than their actual capacity Too much high target can make employees to give up as employees certainly understand that they will not meet the target no matter how much effort they put in the task Thus, the target needs to be challenging which can be perceived by putting considerable effort. As the opinion of different employees may vary regarding the difficulties of target, organizations can make tailored budgets for individual employees (ACCA, 2010). Several organizational philosophers have suggested a progressive association between performance of workers and involvement in budgeting. In maximum budgetary circumstances the environmental aspects, decision-making abilities, and efforts mutually regulate the performance of employees. Job relevant information is vital for motivating the employees as it allows correct forecasts of environmental circumstances and permits more effective assortments of suitable ways for accomplishing targets. Involvement in developing budgets results in discussion about the tasks with other professionals which lets gaining awareness regarding more effective methods to accomplish difficult tasks (Kren, 2007). Behavioral Trait of Budgeting Through budget, organizations can communicate the goals to the managers so that the objectives are accomplished. Managers develop approaches and plans which encourage and maintain helpful and supportive associations with employees. The degree of support and involvement relies on the management’s method towards budgeting. There are two behavioural traits of budgeting which are: authoritarian style and participative style. The following diagram describes the behavioural issues of budgeting in organization: Source: (Gunatilake, 2006). Authoritarian style: The authoritarian style is based on hierarchical organizational structure which includes several managerial levels. In this style, budgets are determined by ‘top-down’ basis where the goals of budget are levied by the top management on employees. The assumption under this kind of budgetary style is that the budgetary goals can only be accomplished by strict obedience to organizational rules. The employees necessitate continuous administration to avoid laziness and wastefulness of time. The authoritarian style is dependable on several traditional approaches (The McGraw-Hill Companies, 2011). Participative style: In participative style, organizations believe that individuals play significant part in budgetary procedure. In this system, the managers and employees naturally have access to information regarding the tasks of their fields of duty which is inaccessible to their seniors. The subordinates’ involvement in budget provides the chance for seniors to integrate the information about budget for improving accuracy. This style can be regarded as ‘bottom-up’ approach. The ‘bottom-up’ style increases the employee motivation and obligation to objectives and targets. When subordinates are requested to join in developing budgets, the objectives of business are co-opted, i.e. the budgetary objectives become the objectives of employees as well (The McGraw-Hill Companies, 2011). Management Control in Budgeting The success of budgeting in any organisation depends on the organisational culture and management control systems used by the organisation. The management control is the set of actions taken by administration for improving the effectual use of organisational resources. For any organisation, the management control involves the following activities: planning, directing, communicating, assessing, decision-making and motivating. Budgetary Control in Manufacturing Industry in Nigeria To understand the impact of budgetary control on motivation of employees and behavioural aspects of budget, manufacturing industry of Nigeria has been analysed. The Nigerian manufacturing industry is quite small when compared to other industries. This industry is concerned with slow growth rate because of weak budgetary control, carelessness from other segments, over reliance on crude oil and disintegrating infrastructure among others. The traditional budgeting has been critiqued for insufficient management control. The rapid change in present business environment calls for more flexible approach towards budgeting. The traditional rigid approach has become obsolete for competing in modern business environment (Akintoye, 2008). Budgetary Control in Guinness Nigeria Guinness Nigeria is a beverage manufacturing company in Nigeria which was established in the year 1950. It is an African company and also popular globally for its rich tradition and effective growth. In the year 1965, the company was registered at Nigerian Stock Exchange. As a manufacturing organisation, Guinness Nigeria has 17 different divisions which are liable for budget planning. The budget division is controlled by finance director and strategy division is controlled by brand manager. The organisation attempts for better competitiveness by implementing suitable management control systems. The financial manager of Guinness Nigeria understands that higher employee participation in budgeting procedure is a strong motivational instrument for organisation. Thus, the organisation attempts to inspire the employee involvement in budgetary process by arranging periodical conference between the management and the employees for attaining their opinions on the important aspects. Thus, it helps employees of Guinness Nigeria to become more involved in the execution of several activities (John & Ngoasong, 2007) & (Guinness Nigeria Plc, 2011). In order to certify that the actual outcomes follow the budgeted outcomes, Guinness Nigeria implements departmental monitoring of employees performances on monthly basis by variance reporting. If any gap between actual and budgeted results is identified, remedial actions are taken instantly. The distribution of assets is made on the basis of: Production capacity Wants and requirements of employees Manpower to handle the assets Source: (John & Ngoasong, 2007) Budget as Motivational Instrument in Guinness Nigeria The involvement of employees in the budgeting process was regarded as one of the major motivational concerns for the organisation. In order to improve the performance of employees, Guinness Nigeria has adopted several measures, for example: formal assemblies between the management and the employees and the establishment of budget board comprising of the senior managers of the different divisions. Besides, budget can deliver the criteria which are helpful to measure the performance of employees (John & Ngoasong, 2007). Another aspect for budgeting in Guinness Nigeria is the cost control. Cost control assists to guarantee that actual budget follows the planned budget. The cost control activities of Guinness Nigeria comprises of budget plans, assessment of actual budget with planned budget and taking remedial action to rectify any deviation. Challenging budgetary target is significant for Guinness Nigeria, thus the company focuses on setting challenging targets and maintains high level of budget control. The managers are highly dedicated to use the accounting control methods for accomplishing organisational goals. It can also improve the budgetary performances of employees and reduce slackness in the budget. The budgeting of Guinness Nigeria helps to motivate employees towards accomplishing the organisational goals in best possible way (John & Ngoasong, 2007). Communication and Coordination through Budgeting Budgeting acts as a way to educate employees. Through budget, Guinness Nigeria sets the target for every division, such as, production and sales among others which discloses the harmonisation and communication between them. While preparing the budget, the budget commission evaluates the suggestions of different divisions of the organisation and attempts to link those suggestions with target arrangement. The suggestions from every division reveal the opinions of front-line managers at the operational level and strategic managers at managerial level. Thus, budgeting practices of Guinness Nigeria help to manage the relation between decision-making management with front line management by allowing all mangers in the budgeting procedure (John & Ngoasong, 2007). Management Control System in Guinness Nigeria In Guinness Nigeria, budget is used as an instrument for management control. Though Guinness Nigeria plans the management control structure on the basis of strategic concerns, the company also uses traditional budgeting system. It uses the records of preceding years as a basis for preparing budget for current year. The company uses budget for immediate demonstration of longstanding strategic plans which allows influencing strategic innovations. The budgeting performances of Guinness Nigeria are up-to-date with certain incorporation of traditional method (John & Ngoasong, 2007). Conclusion Budget is made for all departments of organisation and every managerial level from top to bottom is liable for its success. Traditionally, organisations were tremendously unenthusiastic to deliver information to the lower and middle management and even in present times several information regarding budget are kept confidential and are accessible to the top management only. To motivate the employees, there is a need to provide all managers with the details of actual performance and the standard in which the budgeted performance is calculated. It can help to make the budget more efficient. Budgeting practices in Guinness Nigeria is much efficient as it has given opportunity to all managers to provide their opinions for budgeting. In decision making process, the opinions of all divisional managers are considered which help to make a challenging target for employees. Due to involvement of all managerial executives, Guinness Nigeria’s competitiveness has increased and the company has successfully reduced production expenses without sacrificing the product quality. By considering the economic condition in Nigeria, organisations need to manage the budget more effectively and employees’ interests need to be considered for making the budget successful. References Akintoye, I. R., 2008. Budget and Budgetary Control for Improved Performance: A Consideration for Selected Food and Beverages Companies in Nigeria. European Journal of Economics, Finance and Administrative Sciences. ACCA, 2010. Behavioural Aspects of Budgeting. Student Accountant. [Online] Available at: http://www.acca.co.uk/pubs/students/publications/student_accountant/archive/sa_f5_beh_asp_budgeting.pdf [Accessed November 17, 2011]. Drury, C., 2007. Management and Cost Accounting. Cengage Learning EMEA. Flamholtz, E. G., 1983. Accounting, Budgeting, and Control Systems in their organizational Context: Theoretical and Empirical Perspectives. Accounting, Organizations and Society, 8(2/3), pp. 153 – 169. Gunatilake, P. A. G., 2006. Does Budgeting Kill the Initiative and Innovation in Organizations? Evidence from Sri Lanka Telecom. University of Sri Jayewardenapura. [Online] Available at: http://gayathri.orgfree.com/research.pdf [Accessed November 17, 2011]. Guinness Nigeria Plc, 2011. Overview. Guinness Nigeria. [Online] Available at: http://www.guinness-nigeria.com/AboutUs/ [Accessed November 17, 2011]. John, A. O. & Ngoasong, L. N., 2007. Budgeting And Budgetary Control Process In A Manufacturing Organization. Guinness Nigerian Plc. [Online] Available at: http://www.eki.mdh.se/uppsatser/seminarie/foretagsekonomi/VT2008-FEK-D-2031.pdf [Accessed November 17, 2011]. Kimmel, P. D., & Et. Al., 2010. Accounting: Tools for Business Decision Makers. John Wiley and Sons. Kren, L., 2007. Budgetary Participation and Managerial Performance: The Impact of Information and Environment Volatility. The Accounting Review, 67(3), pp. 511 – 526. The McGraw-Hill Companies, 2011. Behavioural Aspects of Budgeting. Budgeting. [Online] Available at: http://highered.mcgraw-hill.com/sites/dl/free/0074711717/57451/Budgeting_Ch09.pdf [Accessed November 17, 2011]. Warren, C. S., 2008. Survey of Accounting. Cengage Learning. Warren, C. S. & Et. Al., 2011. Financial and Managerial Accounting. Cengage Learning. Bibliography Doherty, T. L., & Horne, T., 2002. Managing Public Services--Implementing Changes: A Thoughtful Approach To The Practice Of Management. Routledge. Rasmussen, N., 2003. Process Improvement for Effective Budgeting And Financial Reporting. John Wiley and Sons. United Nations Economic Commission For Africa, 2005. Assessing Public Financial Management and Accountability in the Context of Budget Transparency in Africa. Development Policy Management Division. [Online] Available at: http://www.uneca.org/eca_resources/publications/dpmd/budget_transparency.pdf [Accessed November 17, 2011]. Read More