The use of budgets in the improvement of management performance and control within global businesses - Essay Example

?The use of budgets in the improvement of management performance and control within global businesses Introduction Budgeting is a management tool forperformance measurements and its variants have appeared from time to time depending upon the market situation, prevailing competition etc. What were relevant a century ago are no longer valid because of increased competition and ever changing products, their characteristics and consumer preferences. The following piece of information would be useful for companies presently engaged in traditional budgeting but willing to switch over to other types of budgeting. The purposes of budgeting One of the functions of management is “planning”. Budgeting is a part and form of planning necessitated by resource constraints. It has been defined as the formal expression of plans, goals, and objectives a management is committed to, concerning all aspects of operations in a business for a given period of time. It is a part of profit planning mechanism based on forecasting and probabilities according to the manager’s best judgement. Budgeting is more often found to be useful in making a business more profitable (Shim, Siegel, & Shim, 2011). Thus, budgeting helps estimate resources in terms of monetary value needed for business activities. Budgeting process forces one to rigorous thinking and the realities of the process will also force one to rethink the plans. Budgeting helps in determining the timing of the requirements. The business is able to monitor its income and expenditure and identify problems if any. It is the basis for accountability of managers and provides transparency. Without the budget, funds cannot be raised from financiers (Shapiro, 2001). Conventional budgeting Called traditional budgeting, it is based on the historical accounting though for the first year the figures are only estimates. Past expenditures are taken as bench marks for future performance. Thus, the budget turns out as list of planned expenditure and incomes. These budgets calculate estimated sales through market demand or production capacity and arrive at estimated revenues. It main purpose is to verify whether actual results are as per the estimates made for each cost or responsibility centre. Thus, budgeting serves as a management tool for the purpose of controlling the responsibility centres. It also helps to have an overview of how different responsibility centres are interrelated. This type of budgeting can be useful for producer dominated markets such as those existed during the period immediately after world war II when demand for products was high with limited competition (Rohm, 2007). Types of budgets Unlike traditional budgeting which is function oriented, activity based budgeting (ABB) focuses on activity. It looks at the budgeted cost of activities that are required for manufacture and sale of products or for providing services. The activity based budgeting is directly linked to cost management as a part of planning and control. As in traditional budgeting, ABB starts with the forecasting of demand for the company’s products or services known as sales budget. Where as in functional budgeting, company proceeds to make inventory budget, material purchases and the cost of goods sold budget, ABB considers the demand for output of each activity determined by its cost driver. Rate of consumption of resources for each activity is used for estimating or budgeting the needed resources. In functional budgeting, resources required are directly measured with the use of sales forecasted. In ABB, sales forecasts are employed to measure the activities which then enable determination of resource requirement. This way a company is able control waste and efficiency which is the ultimate goal of budgeting. Application of activity based costing helps preparation of master budget in a more practical manner. In effect, ABB applies the ABC model which assigns resource costs to activities and allocates activity costs to produce products and services (Shim, Siegel, & Shim, 2011). Zero Based Budgeting (ZBB) proceeds on the assumption that costs or activities should not be the basis for future plans although they are available and have been used in the past for budgeting purposes. But every aspect to be included in the budget must be taken into consideration and justified. It involves development of decision packages and each discrete activity is analysed with reference to cost and purpose. The analysis will also consider benefits of the activity and alternatives available, manner of measurement of performance, and consequences for non-performance. It questions the established beliefs and gives value for money with clear links between budgets and objectives. It can result in better resource allocation (Anonymous, 2007). Beyond budgeting Traditional budgeting based on functionality represents command and control model of the 20 Th century (1900s). At the time, such a model was necessary for companies to meet increasing demand for products and services and to maximize profitability. Division of labour, performance incentives, functional organisation and centralised decision making were the hall marks of command and control approach which led to substantial increase in productivity while dehumanising the labour. The annual planning and budgeting process characteristic of command and control is no longer effective because of the problems in command and control approach not suited to modern thinking. The present day business environment is characterised by “discontinuous change, unpredictable competition, fickle customers” (p.1) that only a few companies are able to cope with. Many organisations are still not ready to abandon the traditional approach of making fixed targets which does not reflect reality and hence is a constraint on responsiveness. “Beyond budgeting” is a coherent model that responds to present day “competitive success factors”. (p.1). This model places accountability on front-line managers dispensing with annual planning and budgeting with “alternative steering mechanisms” (p.1). The Beyond Budgeting Round Table (BBRT) has found in several case studies and vouches for the competitive advantage this Beyond Budgeting model offers. The principles of the model have been tested in the case studies of Svenska Handelbanken and ALDI in vogue for more than 30 years and the UBS Wealth Management and Business Banking that has adopted the model only recently and it has led to the development of scientific basis for justification of the model. Principles that justify a coherent model, another name of ‘beyond budgeting” model are the leadership principles and process principles. Under the leadership principles are the broad outlines of customers, organisation, responsibility, autonomy, values and transparency. Everyone in the organisation must focus on improving customer satisfaction rather than people in certain hierarchical relationships. Instead of centralised functioning, there must be a network of lean and accountable teams. Everyone in the organisation must be motivated to think and act like a leader instead of remaining a follower. The teams must be given the autonomy so as to act with freedom and capability instead of managing people at micro levels. Instead of rules and budgets, governance should be through “values, goals and boundaries”. There must be transparency in operations through open information to facilitate self-management without any hierarchical restrictions. Under the “process principles”, are goals, rewards, planning, controls, resources and coordination. Goals should be relative for continuous performance. Rewards must be for shared success rather than for meeting fixed targets. Planning should not be a top down annual exercise. Rather it should be a continuous and inclusive process. Controls should not be by verifying variances from budgets but should be based on performance indicators and trends. Resources must be made available as per requirements and should not be restricted by budgetary allocations. Coordination by interactions should be on a continuous basis dynamically and not through annual planning cycles. Providing leadership consistently in the above said manner is the only way of control and not through budgetary process (Hope, Fraser, Bunce, & Roosli, n.d.). Behavioural aspects of budgeting Budgetary control is in place only for the purpose of motivating managers to achieve the organisational goals. While this is one positive behavioural aspect of budgeting, negative behavioural aspects of budgeting can be counter-productive and can defeat the very purpose of budgeting. The negative aspects as behavioural problems with the managers are, (1) the managers who fix budgets or standards are not ones who implement them. They are not responsible but only the managers that implement are responsible for achievement or otherwise of the set goals. (2) The goals of the management reflected in the master budget may not be in alignment with the personal life goals of the individual managers. Since control reports are not on uniform basis for all levels , the supervisor receiving weekly reports and those receiving monthly reports are likely take different actions on the same problems (Bhar, 2008).Success of budgeting system depends on the goal congruence by those involved in budget implementation. There are chances of giving under-estimates so that actuals can be shown as exceeding the target (Lucey, 2003). Conclusion It is hoped that the foregoing report has given the intended recipient engaged in the global operations an overview of budgeting and that this report sufficiently answers questions raised on the modern trends in budgetary process. References Anonymous (2007). The budgeting process .Avialble from [Accessed 22 March 2013]. Bhar, B. (2008). Cost accounting methods and problems (17 ed.). Kolkatta: Academic Publishers. Hope, J., Fraser, R., Bunce, P., & Roosli, F. (n.d.). Beyond budgeting. Available from [Accessed 22 March 2013]. Lucey, T. (2003). Management accounting. NY: Cengage learning EMEA. Rohm, S. (2007). Are traditional budgeting practices out of kilter with companies' competitive environment. Grin Verlag. Shapiro, J. (2001). Budgeting. Washington DC: CIVICUS . Shim, J. K., Siegel, J. G., & Shim, A. I. (2011). Budgeting basics and beyond (4 ed.). 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