Budgetary Control in the Organization - Essay Example

 Budgetary Control in the Organization One of the major concerns for the organization is to control its performance. Organizations use different budgetary control techniques to control performance of management. Institute of Cost Management Accountants defines budgetary control as, ‘The establishment of Budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual action the objective of the policy, or to provide a basis for its revision’[Ben10]. In the current world, organizations use budgets as a tool for to determine and measure their goals and objectives[Ger11]. In addition, it is used as a tool to measure capacity and abilities of management who set targets for the organization. Budget allows executives of the organization to set quantitative objectives and provides financial interpretation to these objectives[Ben10]. Therefore, organizations use budgetary control techniques to plan, monitor, and co ordinate the distribution of value money to the respective departments within their structure[Kap06]. This is one of the major reasons that the budgetary control is the one of the significant elements in performance management as the budgetary control allows an organization to determine its performance in the sustaining market[Ben10]. In addition, it allows management to evaluate the relationship between corporations and capital markets[Ben10]. This document highlights the significance of budgetary control techniques; it further analyzes budgetary control and its limitation in the capital market. Organization operates in various segments, classified on the basis of its functions and programs[Ben10]. These segments have unique and distinct objectives according to their performance and tasks[Bhi09]. Organizations make use of Budget techniques to strategically plan their actions to structure the organization and to sustain motivation of their employees to attain objectives of the business[Ste111]. Performance management is related to the activities undertaken by management to ensure that goals of the organization are effectively and efficiently met[Ger11]. Therefore, it is essential for the management to control the performance of employee in order to attain its objectives[McK11]. Management of companies uses financial and budgetary control methods to monitor its performance[Ste111]. Budgetary control allows management to observe the actual results of the organization with respect to its anticipated goals through this an organization is able to identify the discrepancies, which can be investigated and addressed with appropriate actions to ensure the sustainability and effectiveness of its goals[Ger11]. Budgetary control can be used as an effective tool to forecast and calculate the future outcomes and returns, fix the responsibilities of the department and to make an effective use of company’s resources[Ben10]. One of the major significances of budgetary control is that its plays an effective role to enhance performance management; it is suggested that the higher budget is expected to produce higher profits[Ste111]. Therefore, setting a budget is one of the most crucial elements for performance management. To make an effective performance management organization formulate budget. The process of formulating budgets involves execution, legislation, assessment and auditing. The budget cycle is the time period in which the other budget is proposed. Budgeting cycle allows evaluate how a budget can be used to assess performance of the organization and make appropriate measures[Bhi09]. The management can use the budget as a platform to determine the difference variance through which the performance and goals of an organization is achieved[Ger11]. It is suggested that the through measuring progress and plan, management is able to monitor and control activities. It further provides detailed information about the progress of organization[Nee10]. The management can use budget as a tool to identify the effectiveness of performance management towards organization’s goal[McK11]. One of the major significance of the budgetary control is that it provides a clear direction to the management to make adequate measures to make strategies and plan[Wey09]. It makes clear for the management to evaluate if the plan is attainable with respect to its objectives and budget, it helps management to formulate plan accordingly. It also outlines the detailed information about the plan to achieve its objectives and provide direction to the business. Budgetary control systems play an essential role as an integrative control method[Ben10]. Several business organizations use these systems for financial representation of goals and a tool to solve the problems of business plan. Though there are several advantages of budgets, but there are certain limitations of budget. This is because of the reason that the budgets are perceived as unfairness among the organization[Kap06]. This develops a sense of discrimination among employees, this may de-motivate employees to achieve the targets, this may reverse the performance of employees. According to Stedry (2011), overspending is considered to be a booster for the performance, therefore, some manager overestimate the expenditures or targets in order to overcome the future burdens and blame. However, the use budgeting tools in today world are diverse, this is because of the reason that these tools correspond with the changing business environment. The implementation of a single business plan is an ineffective approach[Kap06]. Studies suggest that an effective budget is the one that address the dynamic conditions in business organization[Wey09]. Therefore, the implementation of a single budget plan in changing business environment is an ineffective approach[Ste111]. Consider the oil crisis of 1970’s lead to develop a zero-based budgeting. This budgeting approach allowed Peter Pyhrr to revalue the budget from zero without use the information from the past year expenditures to anticipate the costs in the current budget. Consequently, the management is suggested to revise their budgets time to time in order to be competitive with the economic conditions[McK11]. During 1990’s, with the growing influences of shareholders the budgeting became a very significant element in the performance management to determine the organization’s performance[McK11]. The demand for getting the update of the results of business performance promoted the use of rolling budgets. McKinsey (2011) illustrates that the rolling budgets anticipate the changing market conditions therefore, they are continuously amended after the defined period of time. Therefore, budgets are one of the essential communication tools for investors to understand about the integration of the corporation in the capital market. There are two types of the budget that are used by various organizations, that is, flexible budgets and static budgets. In the current world, organizations prefer flexible budgets than static budget, because of the various activities in the business firms[Ger11]. According to Bennouna (2010), the flexible budgets allow the organization to be compatible with the different business and market environment, whereas the static budgets are rigid [Ben10]. Budgets allow the organization to control its performance and provide information to shareholders about the objectives of organization and relationship between shareholders and business in the past years[Ben10]. Instability in the market conditions influences business activities[Ben10]. It is essential for the organization to adopt a budget that incorporates these fluctuations. In these conditions, the organization should change its position and strategies accordingly to maintain its edge in the market[McK11]. Moreover, the organization prior focus shall be its capital market and shareholders rather than its product market[Kap06]. Research illustrates that the shareholders immensely influence the corporate behaviors and business performance as their interests and contribution play a significant role in the rise and fall of stock prices[Ben10]. Management carefully determines the market before making a business decision that has eventually enhanced significance of budgets in the current world. Regardless the fact that there is no long-term relation of shareholder with the organization has been observed, but the significance of shareholder has put great pressure on the organization leader and corporation performance[Wey09]. However, some scholars argue that if the organization pays too much importance to the shareholders the managers may lose their objectivity in the short term[Wey09]. The reason for this is that investors are more concerned with the current value of the business and seek short-term interests and objectives of business[Kap06]. On the contrary, managers have a long-term relation such situations are considered to be unhealthy for the organization. Unnecessary pressure of shareholders shall be handling with effective and appropriate measures by the management. The approach of managers to overestimating the costs and underestimating the targets is usually observed during the pressure on management that influences the company performance in various circumstances[Wey09]. This slack may decrease performance of the company over the time. It is essential for the managers modify their controlling measures to ensure flexibility of the budget[Ben10]. In addition, the dynamic market and economic conditions and uncertainty of the business environment, it is suggested that the management shall acquire adaptive process approaches rather than traditional budgeting techniques to enhance budgetary control. Robin Fraser and Jeremy Hope in 1990’s came up with the new budgeting principle, it states that not only controlling process and performance management effect performance and decision making of an organization but new leadership principle are also important to develop a responsible and self managed work environment[Ben10]. This allows management to ensure an efficient work environment, dedication of its employees and customers’ satisfaction. Therefore, budgetary control is one of the most effective tool in business organization to manipulate its performance. In1992, Robert Kaplan introduced ‘Balance Scorecard’, he explain ‘The Balance Scorecard is an integrated and organization wide management system that transforms, modernize and improve the efforts of all hierarchical level towards the accomplishment of an organization strategy[Kap06].’ Balance Scorecard plays a significant contribution for the new managerial accounting practice. It allows examining traditional financial and non-financial performance of organization[Wey09]. The balance scorecard has been implemented and adopted by the worldwide organization; this provides detailed information to the management regarding the environment[Nee10]. According to Gould and Murby (2005), a major strength of balance scorecard is its reporting capabilities, understanding about strategies, resources and performance management[Nee10]. This further allows managed forecasting short and long term response of market towards the budget and performance measures of the company[Ste111]. The study also highlights that the short-term operational information allows determining the long-term strategies of an organization[Nee10]. James Oscar (2011) also agrees with that the short-term budget interest and the inflexible approach of budgetary control address the changing business environment and sustains business performance[Nee10]. The information advocate accountability explains to the anticipated performance measures and the actual performance of business. Analyzing the information it can be determined that in the twentieth century budgetary control has gained great importance as a performance measure and management-controlling tool. The budgetary tool is widely used as the most integrative tool by several organizations because of its ability to provide detailed information to management. The information can be used as an effective tool to enhance the effectiveness and motivation of employees and setting financial objectives. Moreover, the changing financial environment has influenced the capital market; the studies suggest that a budget is medium to communicate between management and shareholders. Budget allows the organization to determine its performance and identify the problem. In addition, studies suggest that the flexible budget can be used as an effective tool to control and manage strategies to address the dynamic market conditions. It also allows shareholders and manager to identify the potential of the organization and setting targets. Analyzing the information, it can be determined that the use of budgetary control performance measures of the organization can be manipulated shareholders may develop pressure on the managers to meet the objectives. List of References Ben10: , (Bennouna, Geoffrey & Marchant 2010), Ger11: , (Gervais, Heaton & Terrance 2011), Kap06: , (Kaplan & Norton 2006), Bhi09: , (Bhimani & Bromwic 2009), Ste111: , (Stedry 2011), McK11: , (McKinsey 2011), Nee10: , (Needles & Powers 2010), Wey09: , (Weygandt, Kimmel & Kieso 2009), Ben10: , (Bennouna, Geoffrey & Marchant 2010), Weygandt, JJ, Kimmel, PD & Kieso, DE 2009, Managerial Accounting: Tools for Business Decision Making, 5th edn, John Wiley & Sons, Charleston. Read More