Budgetary Control as the Part of Overall Organisation Control - Essay Example

Finance and Accounting Introduction The word, budget, had originated centuries ago and has been defined as an estimate of expenditure and income fora particular time-frame or can also be defined as the amount of cash that is available or needed for executing a work. In today’s dynamic world of management, a budget is employed by almost every organisation. It is used as a tool for measuring the targets and objectives of an organisation. The budget has given the base of understanding to the managers for formulating objectives for their organisation. It is mainly scripted in quantitative terms and for a period of one year. Hence, budgetary control can be defined as the method of planning, coordinating and motivating the organisation by extracting value for money as well, as the department. Budgetary control has created a greater impact on the performance management, thereby making it a vital part of every small or big corporation. The essay highlights the function of budgetary control and also, stresses on the importance of a system for efficient operation of an organisation. Budgetary control as the part of overall organisation control Budgetary control forms a major part of management control, which have encountered important modifications in both practice and literature, in latter part of the 20th century. Many researchers have put forward their theories for evaluating the scope of budgetary control as well as the performance of an organisation. Among them, Otley (2001) has put forward few assumptions regarding the essentials of budgetary control. The assumptions are formulated by him to describe the “main integrative control method” (Otley, 2001) for any organisation. The assumptions depict that a business plan of any organisation may contain financial budget, which is prepared to monitor and control the complex financial issues of the plan. The budget also helps an organisation to create an idea regarding composition of the source of finance and the extent to which debt and equity capital can be introduced to support the financial back-up. An organisation includes a number of segments which has diverse programs and functions. Budget aims at transforming the strategic plan of an organisation into actions. These actions are coordinated and directed for providing a simple structure to the organisation. It also helps in motivating employees for achieving the organisational goals. Performance management is defined as a set of metrics employed to evaluate both effectiveness and efficiency of any action. The performance of the managers is evaluated through this set of metrics and whether they are complying with the standard performance metrics is examined. Budgetary control can be elaborated as the establishment of budgets, which are related to the responsibilities of executives that are in compliance with policies set by the management. The comparison between the actual budget and the budgeted result gives an idea regarding the financial position of an organisation. So, the process of budgetary control permits managers to examine and keep track of the actual results against the budget that has been formed earlier. The discrepancies, observed after the comparison, are investigated and appropriate measures are taken to correct them, so as to ensure that the budgetary standards are attained. The budgetary control has been regarded as an effective tool that assists managers to enhance the performance of the organisation. The impact of budgetary control on the performance management is observed to result in a higher budget. It creates a unit for the organisation, which is assumed to generate higher profits. The budget cycle is defined as the time-frame in the annual budget, which is formulated, enacted and presented in such a way that it complies and is executed in accordance with the law. It is basically defined as the interim between two successive budgets. The budgeting cycle helps in examining the budget, in terms of whether it is prepared on basis of evaluation, since judgements is made on performance of the budget. The budgets provide a base for the managers, against which the actual performance is measured and variations are observed in order to take corrective actions against it. Palmer (2012) had suggested that managers can control the organisational activities by gauging the progress, which has taken place in the plan. Thus, the managers will have better information regarding the impacts of the action (Coombs and Hobbs, 2005). The information will permit managers to take necessary steps in advance and make adjustments in the future actions, so that the organisation does not encounter any hurdle. The budgetary control provides the greatest advantage to managers, since it offers a clear picture of the plan, which is formulated to achieve the goals set by the organisation. It is also evaluated whether the objective is achievable with respect to the budget that is set for the plan. Besides that, it also outlines the detailed plan that helps in targeting the business functions and achieving them. Hence, the managers anticipate few directions and make a plan for achieving the business functions (Atkinson, 2009). In today’s world of management, the budgetary system plays a vital role in the integrative control process. It is applied by majority of the organisations for preparing the financial representation of their objectives. It is also a tool for controlling the methods, which are implemented to eradicate problems that are encountered in the business plan. The budgets can also cause negative impacts on an organisation. A conflict can arise within an organisation, if the budget reflects any sign of unfairness or inverse relation between the objects mentioned in it. This may create difficulties in achieving the targets that are set by the organisation. Barnat (2005) has stated that managers often tend to overestimate the cost and thus, overspends and exceeds the target. They take this decision of overestimation to safeguard themselves from accusations, later when the budgeted amount is seen to exceed. These are unfavourable circumstances that may take place in future. The changes in budgets are due to alterations that are taking place in the business environment (Thukaram, 2006). The influence of shareholders encountered an increasing rate in 1990. This steered the attention of shareholders towards the budget, which provided them with a clear picture of the financial status of an organisation. The demand for the financial updates from an organisation, by the shareholders, promoted the utilisation of rolling budgets. Wollacott (2003) had defined rolling budget as the budget that marks the continuous amendments, that takes place during a quarter or annually. So, the budget is widely used as a powerful tool for facilitating communication between the shareholders and organisation. It allows integration of a corporation with the vast capital market (Chadwick, 2003) The concept of flexible budget is also used by organisations for observing the performance of various activities. The flexible budget is used by most of the companies, instead of static budget, since it gives an idea of the flexibility of activities, taking place within the organisation. Steven (2012) had suggested that the flexible budget permits an organisation to adjust the modifications that take place in the market environment and new business. Budget has been observed as the main association between both the awareness of shareholders and performance control that relate to the organizational goal. It has also helps in establishing a closer relation between the shareholder and organisation, than that observed in the past (Lucy, 2003). Hence, the firms have changed the position held by them in the business environment. The main focus of organisations is to establish a strong position in the capital market by attracting shareholders for investing in them. Thus, it has been observed that shareholders have become a stronger influence on the corporate behaviour, especially performance of the business. It will determine the price of shares too. (Rappaport, 2006). Before taking any decision, the investors concentrate on determining the organisation’s performance through variances that are observed in the budgets. If these variances are higher, the investor does not make the investment decision. This creates greater pressure on the organisational leaders to create a budget, which will calculate the exact fund of the organisation. The inter-dependence between the organisation and shareholders can become long-term, if the former stays loyal to the latter. Even so, Rappaport (2005) had argued that if managers give their full effort in satisfying the shareholder’s demand, then they will lose track of their long-term objectives. Thus, the managers will bring in problem for an organisation, if they concentrate only on the short-term objective of meeting the demand of shareholders. The shareholders or investors are interested in the current valuation of the organisation. This situation is unhealthy for the organization. So, the reaction of shareholders is to be handled by the managers in an efficient way, without harming the long-term objective (Riahi-Belkaoui, 2001). It has been elaborated before in the essay that managers overestimate the cost, or even the targets, due to the pressure that is exerted on them, during unfavourable circumstances. Thus, the budget creates an overall confusion for the organisation and performance is observed to decline over time (Mittal, 2010). This indicates the fact that managers should modify the ways for controlling the budget and not become rigid in performance appraisal. Given the uncertainty prevailing in the competitive climate, along with a dynamic business environment, budgeting is suggested as the main adaptive process that replaces traditional budgeting methods, which were used during 1990. Budgetary control has been implemented to overcome the problems that are encountered by the traditional budgeting. During mid-1990s, new budgeting principles were invented for controlling processes and performances of an organisation. It included new leadership principles that reflected the delegation of decision making and performance accountability among the line managers. So, it creates a culture for self-managed working environment and responsibilities (Daum, 2003). The new principles included in the new management system permitted the companies to become responsive and created a huge scope for better delegation of responsibilities, such as, increasing the customer and employee satisfaction. Budgeting control has been regarded as the most useful tools in budgetary control, since then. In 21st century, the importance of budgetary control has been realised by most of the organisations and they have been using it for evaluating the organisational performance. It is also regarded as the major aspect in measuring the performance of the management as well as controlling them. It is used as an integrative process by many firms as it has the ability to provide useful information to the managers. Thus, this knowledge can be utilised by the company to motivate its employees in setting financial goals, thereby helping to increase the performance of the organisation as a whole. Conclusion The essay here examined the rapid changes that are brought to the financial environment and acted as a driver for implementing budgetary control in organisations. The budgetary control helped the organisations to build a good relation with the shareholders or the financial community. Through the budgets, the investors evaluated performances of organisations and then took the decision of investment. When the variance is high, the investment decision is rejected by the shareholder. Thus, it creates a pressure on the managers to satisfy them. These pressures force managers to create an overestimated target or cost for their organisations. This misrepresentation of budgets creates conflict between the management and employees, thereby bringing in trouble for the organisation. There are alternative ways of budgeting that are elaborated in the essay, like, the rolling budget and flexible budget. This budget types helps in decentralizing responsibility in different parts of the departments, which in turn enhances efficiency in the performance of managers. The activity will help managers as well as the management to look at a wider scope of budget and make them flexible if required. The flexible budgets, however, enable the management to focus on the organisational goals, without worrying much about the shareholders’ demand. Reference List Atkinson, A., 2009. Management Accounting. London: Thomson Learning. Barnat, R., 2005. Strategic Management: Advantages and Disadvantages of Budget Control. [online] Available at: < http://www.strategic-control.24xls.com/en211 > [Accessed 17 January 2014]. Bhattacharyy, D., 2011. Management Accounting. New Delhi: Pearson Education. Chadwick, L., 2003. Management Accounting. London: Thomson Learning. Coombs, H. and Hobbs, D., 2005. Management Accounting: Principles and Applications. London: Sage Publication. Daum, J., 2003. The Origins of Beyond Budgeting and of the Beyond Budgeting Round Table. [pdf] Beyond Budgeting. Available at: [Accessed 17 January 2014]. Lucy, T., 2003. Management Accounting. London: Continuum. Mittal, R., 2010. Management Accounting and Financial Management. New Delhi: V.K. (India) Enterprise. Otley, D., 2001. Extending the boundaries of management accounting research: Developing systems for performance management. British accounting research, 7(2), pp.56-66. Palmer, D., 2012. Budget Control Variance Analysis. [pdf] Financial Management Development. Available at: [Accessed 17 January 2014]. Rappaport, A., 2005. The Economics of Short-Term Performance Obsession. Financial Analysts Journal, 61(3), pp. 65-70. Riahi-Belkaoui, A., 2001. 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