Accounting Synoptic - Essay Example

 Accounting Synoptic Are the criticisms made by the ‘Beyond Budgeting Round Table’ more or less applicable to non-profit organizations than to for-profit organizations? Beyond Budgeting Round Table (BBRT), an independent industry established in the UK in 1988, is a learning network of member organizations that is internationally shared with an interest of transforming the organization’s performance so as to enable superior and sustained performance. The BBRT was set up in response to the growing dissatisfaction, indeed frustration attached with traditional budgeting. The BBRT helps organizations to learn from the best studies practiced world-wide, and encourages organizations to share information, their past successes and experiences on implementation of different strategies so as to develop improved solutions to traditional budgeting constraints. The purpose of the BBRT is to assist organizations in improving their bottom-line performance by introducing adaptive control principles that are simple and continuous planning techniques. BBRT promotes principles that lead to front line accountability and more dynamic processes. (Lalli, 2011, pp. 4-7) Beyond Budgeting (BB) is a definite idea which regards that to improve management control within organizations, the abolition of the traditional budget process is necessary. The BBRT solution is considered to be fundamental which believes that abandoning budgeting is the only way to overcome the shortcomings of the budgeting process. Beyond Budgeting has identified two main advantages- BB is a more adaptive process than traditional budgeting BB is a decentralized process. The criticisms of traditional budgets as identified are- Traditional budgets are often contradictory and rarely strategically focused. Traditional budgets are costly and time consuming. Traditional Budgets lack flexibility and responsiveness. As compared to the time taken to prepare a traditional budget, it adds little value. Traditional Budget concentrates on cost reduction and not on value creation. Traditional Budget often acts as a barrier to change. Traditional Budgets seem to strengthen vertical control and command. Traditional Budgets do not reflect the emerging network structures that organizations are adopting. Traditional Budgets encourage perverse behaviors and gamming. Traditional Budgets are based on guesswork and assumptions that are unsupported. Traditional Budgets make customers feel undervalued. Traditional Budgets are updated and developed too infrequently, usually annually. Traditional Budgets bring about departmental barriers inspite of encouraging knowledge sharing. The criticisms laid by Beyond Budgeting Round Table are more applicable to non-profit organizations than profit organizations. It is said so because the objectives of non-profit organizations are not specific and often link to multiple activities which necessitates trade off. Non-profit organizations are dominated by professionals and thus are less accessible to control systems and measures. Non-profit organizations incur a huge amount of discretionary fixed cost and the relationship between outputs and inputs are difficult to specify which raises difficulty in ascertaining profit. Non-profit organizations with their rigid rules and guidelines face problems in adapting to the changing policies, regulations and measures. Non-profit organizations use the concepts of traditional budgets to ascertain cost and reduction of cost of activities, but the members are very little concerned to the developments, improvements and benefits which the activities are pursuing or shall pursue. The strict governance under which non-profit organizations operate has made it static, inflexible, not responsive to the changing environment, not focused on the formulation of procedural strategic plans, has lead to increase in discretionary fixed cost and lacks vertical control and supervision. Thus the shortcomings of traditional budget have decreased the value of non-profit organization in the current scenario inspite of creation of value, which have in turn lead to decrease in its significance (Migliore, 1995, p. 21). Are the criticisms of budgeting made by Beyond Budgeting Round Table (BBRT) valid? The disadvantages of traditional budgeting are- Time required- Creation of Traditional Budgets is very time consuming using too many management resources, since the collections of the different iterations required for the purpose of the budget consumes time. Gaming the System- An experienced manager of an organization may attempt introduce budgetary slack which would involve increasing expense and reducing revenue estimates deliberately, and achieving a favorable variances against the budget. Only considers financial outcomes- Traditional budgets are concerned with the allocation of cash to specific activities and the expected outcome out of such business transactions. Traditional budgets donot deal with the subjective issues, such as, the quality of products and services provided to the customers. Mechanical and Rigid- Traditional Budgets are applied mechanically and rigidly. Thus it lacks flexibility. A rigid budget structure reduces innovation and initiative and thus makes the way to obtain money from new ideas impossible. Lack of Participation- Employees can be de-motivated because of the budgets as it lacks participation. Budgets are imposed from the top management to the employees, and the employees are unable to understand the reason behind the allocation done in the budget. Thus, they will not be committed to it (Botten, 2007, p-445). Unfairness- Traditional Budgets can cause perceptions of unfairness. Low change responsiveness- Most organizations carry out annual budgeting cycle, and this often makes the budget obsolete. Reviews regarding the budget are not conducted regularly to account the changes periodically. Disconnection from strategic plan- Managers in their aim to hit the numbers right, often miss the strategic purpose of budgeting. Traditional budgeting focuses on cost reduction than value creation, which indicates that strategic initiatives are taken but it add no priority. It is a part of organizational culture- Most companies consider traditional budgeting, a part of the organizational culture. So, the believers of Beyond Budgeting suggest that the decision to abolish this method due to the shortcomings attached to it may be a risky decision. Blame of outcomes- If a department in an organization is unable to achieve its budgeted outcomes, it may blame any other department for not providing it the required service on time and the required support adequately. This would lead to disarray within the departments in an organization which would in turn lower the performance level and affect operations. Inaccurate assumptions- Traditional budgets are as good as the data that are used to prepare them. Unreasonable and inaccurate assumptions can convert a budget into unrealistic in no time. Thus from the above it can be concluded that the criticisms laid by Beyond Budgeting Round Table are similar to the disadvantages of the traditional budget. So, the criticisms laid by BBRT can be said to be valid (Hope and Fraser, 2003, pp.4-5). To what extent does the type of organization, its culture and environment affect how successfully a budget might operate? The type of organizations, i.e., whether profit or non-profit organizations; the culture and environment prevailing in each of the organizations, affect the successful operation of a budget. Strategic Management is the process by which managers make the selection of a set of strategies that shall help in to achieve better performance, effectiveness and efficiency in activities and operations. Strategic Management is referred to as the societal role of the organizations’ human resource, environmental and technological factors. Strategic Management determines the actions taken by a manager to arrive at a decision. The way a strategic plan is developed depends on the nature of the organization culture, organizational leadership, expertise of the planners, organization size, and the complexity in which the organization is operating. Non-profit organizations are extremely diverse in terms of the work and activities it undertakes. Though the individuals managing non-profit organizations are dedicated to the company’s goal, usually work according to formulated strategy which consists of objectives and visions, tries to implement such strategies accordingly, and attempt to move as per the budget, still these organizations fail to exhibit the features of a sound strategic plan as they are less likely to engage in the implementation of procedural strategic management. But profit organizations attain a success in the process to exhibit the features of a sound strategic plan as because they try to implement strategies procedurally. Profit organizations have a keen motive to earn higher and higher profit which is a strong tool ruling the procedural strategic implementation since in such the personal requirement of the implementer is being considered. So, therefore to satisfy own needs the implementer tries to put maximum efforts and efficiency in the activities which lead to success in most times. The efficiency of implementation of strategic plan is depicted in the financial statements of the profit organizations. The successful implementation of strategic plan also affects the way in which the budget is to operate (Anheier, 2005, p.4). Sustainability organizations try to implement sustainable strategies which provide them cultural and economic benefits which are attained through environmental responsibility. Through implementing sustainable strategies an organization can bring about long-run profitability with an effort to protect the ecosystem, providing opportunities to achieve the traditional competitive advantages, attain cost leadership, and market differentiation with environmental responsibility. Each individual organization should choose its own goals and objectives and the approaches to their attainment in a way that they pertain to corporate sustainability. In its way to implement sustainable strategies an organization must have ecological and economic motives, abiding by the legal and regulatory pressures. Non-profit organizations through their social creation values play a part in the society. Most of the non-profit organizations have adopted an organizational sustainability focus in both operational and strategic levels of management. Non-profit organizations adopt strategies which aim at establishing sustainable and viable organizations so that they maintain to pursue their social mission. This approach of non-profit organizations affects the way of operations of the budget. Ethical standards of the environment are acceptable to most people. Ethical thinking involves the intricate process used to realize the impact of actions performed. It is the foundation of ethical decision making which guides to discard bad choices in favor of bad ones. When people work closely in together in a project, all the individuals have a propensity to take in the core values of the group. Individuals tend to compromise their own values in favor of the group values. As a result of this, a group follows the 3 rules of management, i.e., The rule of private gain, If everyone does it, and Benefits v/s burden. Group dynamics are an important measure to organizational success, and the standards pertaining to this are measured in terms of profit and integrity. In the comprehensive view of an organization, the advisors development program must address ethics, the role culture, and values that play a significant role in ethical decision making. It is through individual values that culture is defined and broad social guidelines for desirable standards are obtained. Thus organizations must understand the impact of ethical values on the society, since it reinforces the internal and external environment of the organization. Failure of such can bring in negative public opinion and worse legal issues. Non-profit organizations in general try to abide by the ethical values in their operations which also impact the operation of budget. What are the differences between for-profit and non-profit organizations? The differences between profit and non-profit organizations are- On the surface of profits The main objective of a profit organization is maximizing its profits, whereas the main objective of a non-profit organization is welfare-maximizing. This statement does not mean that non-profit organizations donot make profit. Non-profit organizations need to make profits so as to pay rent if they are carrying their activities on a rented area, to pay salary to their staff, to pay electricity and telephone bills, to provide newsletters or mail-outs; i.e., they use the profits to cover their costs. Profit organizations differ from a non-profit making organization in the way they handle their profits. Profit organizations as per the rules of law are free to use their profit in a way they like, i.e. it may be shared among by the members, or re-invested in the business. But non-profit organizations cannot distribute surplus profits among themselves; the profit needs to be invested into the organization so as to meet the objectives (Migliore, 1995, p. 4). The mission The mission underlying the activities of a profit making organizations is how to earn more and more money out of the activities. Thus, so as to fulfill this they try to introduce efficiency in their activities along with strategic management planning and decision making. But, the mission underlying the activities of non-profit making organizations is to contribute something to the existing society or community at large so that the society improves, develops, and prospers ( Beamish and Ashford, 2012, p.258). In respect to the owners In profit organizations owners are referred to those persons who own the stake of the company. They may be entrepreneur, shareholders, board members or other stakeholders. But in non-profit organizations it is confusing to determine the persons who can be referred to as the owners of the business since such organizations are set up by a community group or a group of persons taking the initiative to do some welfare activities with the help of their own capital and other donations received (Wolf, 2009, p.22). In the eyes of law Profit and non-profit organizations are viewed differently in the eyes of law. Most non-profit organizations receive tax concessions or benefits in some form or another depending on the type of organization and the activities performed. The possible tax concessions include income-tax exemptions, refund of imputation credits, tax-free threshold, tax deductible gifts, fringe benefit tax exemption, fringe benefit tax rebate, and GST concessions. In return to the financial advantage provided through tax concessions, it is expected that the organization would act responsively, remain true and obliged to its missions and make a fruitful contribution to the society. But profit organizations receive no tax concession or benefits; they need to pay proper tax on the profit earned by them in the course of their operations. Liquidation of assets When a profit organization goes out of business, it liquidates its assets. The income earned on such liquidation is used at first to pay of the dues, if any, and the remaining amount is distributed among the owners or the shareholders of the organization. But when a non-profit organization goes out of business, it has to give its assets to another non-profit organization. No member of the non-profit organization has the right to sell the assets of the organization for his own benefit. Accounting perspective The mode of accounting differs between a profit and non-profit organizations. The profit organizations prepare Income or Profit or Loss statement at the end of the year so as to ascertain their profits. But non-profit organizations prepare a Receipt and Expenditure Statement at the end of the year to proportion their receipts to the expenditure incurred by them so as utilize the surplus or overcome the deficit. Consideration of long-lasting property and equipments for the process of capitalizing and depreciating fixed assets differs between a profit and a non-profit organization. How do the differences between profit and non-profit organizations affect the way in which they should employ budgetary controls? Budgetary control or cost control should be implemented to save costs. This may bring about expansion of services and increase in user services. Most of the cost items are discretionary in nature, i.e. the nature of cost depends on the type of activity for which such cost is to be incurred. As non-profit organizations have a bottom-line, identifying objectives is difficult in a non-profit organization than a profit organization. Therefore, control systems are not used in non-profit organizations than in profit organizations. Firstly, organizational goals in non-profit organizations are less clear and are often multiple, which necessitates trade off. Secondly, professionals typically tend to dominate non-profit organizations and thus are less accessible to control systems and measures. Thirdly, measurement is difficult as there is no profit to determine; the non-profit organizations incur a huge amount of discretionary fixed cost and the relationship between outputs and inputs are difficult to specify. Thus budget process in non-profit organizations is related to playing bargaining games as the higher authorities’ has the authorization of discretionary fixed cost. When budgetary outlays are approved for a unit, they are appropriated for the individual items in the budget and apportioned accordingly. The management or the higher authorities must spend funds on each item as per the amount provided in the budget for such items. Any amount to be spent above the allocated budget must receive authorization before the expense is to be made or cost incurred specifying the requirement. Since non-profit organizations in most times incur excess cost than specified and apportioned so it is difficult to implement control systems on such organizations and allocate resources. The budget represents a proposed plan for raising and spending funds for specified functions, programs, activities and objectives during a financial year. Profit and non-profit organizations governing body should review and adopt an annual budget and ensure effective budgetary control and accountability at the start of every financial year. Different activities are undertaken by a non-profit organization so as to raise funds for carrying out its operations with an aim to promote welfare to the society at large. But some of such activities might be subjected to regulation under one or more statutes and the organization is bound to abide by such statutes. A non-profit organization needs to obtain license for carrying out some activities, and even conducting some activities is considered to be unlawful, and the organization is to be bound such norms. But, since profit organizations follow a single line of business and perform activities either for fund raising or for expenditure in line to the line of business, so they do not face regulatory barriers in respect to the activities as faced by a non-profit organization. The governing board should adopt and formulate a travel policy applicable to all members and employees of a non-profit organization so as to establish controls and procedures necessary to ensure that public money is used on travels that would benefit a public purpose. But profit organizations need not to adopt such travel policies prepared by the government. Travel policies are considered to be a part of internal control and management by a profit organization. The board and management of the organization takes decision on travel based on the requirement of the business which they need not publish or inform to the public or the government. References Hope, J. and Et.Al., No Date. Beyond Budgeting. [Pdf]. Available at: [Accessed on: June 06, 2013]. Christensen, P. and Et.Al., 2003. What’s Wrong with Budgeting?.[Pdf]. Available at: [Accessed on: June 06, 2013]. Hope, J. and Fraser, R.C., 2003. Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. USA: Harvard Business Press. Lalli, W.R., 2011. Handbook of Budgeting. UK: John Wiley and sons. Botten, N., 2007. CIMA Official Learning System Management Accounting Business Strategy. USA: CIMA. Rickards, R.C., 2006. Beyond Budgeting: Boon or Boondoggle?. [Pdf]. Available at: [Accessed on: June 06, 2013]. Migliore, R.H., 1995. Strategic Planning for Not-For-Profit Organizations. USA: Routledge. Anheier, H.K., 2005. Nonprofit Organizations. USA: Routledge. Wolf, T., 2009. 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