Budgetary Control and Performance Management - Assignment Example

Budgetary control and performance management Table of Contents Introduction 3 Background study of budgeting and budgetary control 4 Impact of budgetary control on performance management 5 Use of budgetary control in performance management 7 Conclusion 9 Reference List 10 Introduction Empirical researches offer profound evidences where academic scholars have shown their appreciation for good management accounting practices adopted by public sector and voluntary sector organizations, which contributed significantly towards performance management. One such management accounting practice is budgeting and budgetary control that is increasingly being adopted by organizations throughout the world with the underlying aim of managing performance. Budgetary control has of late been used as a more integrative mechanism of control within organizations (Stieglitz and Heine, 2007). Accounting practices such as, budgetary control and performance management prevails within organizations and as such they are part of organization’s wider environment (Scott, 2001). The practice of budgetary control has the potential to create several ways of social and organizational functioning and this practice often goes through certain modifications in response to changes in organizational form and society (Hopwood, 1994). As a consequence of this, budgetary control and performance management practices are by no means stationary phenomena within organizations. These practices that change over time are not homogenous and can take a different shape in response to varying contents, places and times. The management accounting practice of budgetary control and its subsequent use in performance management and reporting are considered to be very important in current business environment (Fowler, 2008). The requirement to adopt such accounting techniques was a tenet in the 90s followed by majority of world organizations. The usage of budgetary control as an accounting practice has evolved since then, precisely because of its significant contribution in the field of organizational performance management (Stieglitz and Heine, 2007). In order to be able to critically evaluate the claim regarding use of budgetary control in performance management, the researcher will have to conduct a thorough review of empirical literatures, encompassing each and every aspect of budgetary control with an aim to establish a relationship between budgetary control and performance management. Background study of budgeting and budgetary control It is widely known that resources of an organization need to be efficiently and effectively managed in order to achieve organizational objectives. This implies that organizations must have the ability to achieve its objectives by adopting cost effective strategies. Thus, management of performance requires coordination and control of the efforts made by an organization so as to achieve performance related objectives. The mechanism of management initiates with charting the further course of achieving certain objectives well in advance. Thereafter, decisions are made in a very professional manner, which coordinates the efforts made by individuals and groups. The decisions are made regarding the course of action that is to be taken in order to achieve a particular objective. The process of making such decisions and subsequent management of performance is largely based upon the process of budgeting and budgetary control (Prajogo and Ahmed, 2006). Budget can be referred as a monetized expression of targets that are to be accomplished within a specified time by an organization, nation or an individual. It can also be defined as a deliberate attempt made in order to accomplish higher targets over time by utilizing resources that are available. Such targets are often subjective to past experiences and future expectations. Budgetary control, on the other hand, is referred to as the mechanism by which financial control is exerted by organizational managers who are responsible for preparing budgets for expenditures and revenues of every function carried out within organizations before the period of accounting. This is where the relevance of budgetary control lies as this process involves an incessant comparison of actual performance with the budget so as to enable managers to ensure that the objective has been achieved or to provide a basis for revision of performance (Collis, Holt and Hussey, 2012). In other words, budgetary control can be referred to as establishment of budgets that is related to the responsibilities of executives in a particular strategy and the constant comparison of actual and budgeted results. Hence, definitions suggest that budgetary control is used significantly in order to manage performance in organizations that allows them to estimate performance exhibited by individuals or groups, following which managers can make decision regarding whether to bring upon modification in performance or not (King, Clarkson and Wallace, 2010). Impact of budgetary control on performance management It was Luft (1997) who stated that organizations had begun to adopt budgetary control practices during the 60s in order to specify performance objectives and benchmarks that had to be met. Following that, during the 70s, the measure of performance effectiveness was based upon meeting financial target, which means managers used to greatly focus on achieving huge amount revenues with the budget allocated for a particular project and extent of revenue earned was the measure of performance effectiveness. Higher the level of revenue better is the effectiveness of performance. This constant evaluation of performance is facilitated by the budgetary control mechanism. Such has been same for organizations in the contemporary business environment as well (Kaplan and Norton, 1993). For example, as per the requirement of Serena Group of Hotels Finance policy, each and every business unit has to prepare their own budget in order to compare with financial statements that are drafted on a monthly basis. This enables the management to assess performance of each and every functional unit within the organization in terms of the budget allocated to them and their corresponding outputs. Budgetary control in the initial stages of an organization’s development is only concerned with preparing correct measures of performance evaluation. The management accounting control process provides vital information to managers through a thorough assessment of the changing environmental circumstances within a company (Otley, 2001). This information allows managers to assess the threats and opportunities lying external to the organization, which in turn helps them to implement appropriate strategies and add value (Marginson and Ogden, 2005) The assessment of opportunities and threats also helps officials to conduct budgetary control process precisely because accounting and budgeting is closely related. Budgets are allocated according to the underlying threats and opportunities and performance output is measured in accordance with the allocated budget (Van der Stede, 2000). Budgetary control is generally known to play a critical role in transmitting the expectation that top management have from officials belonging to the lower level in an organizational hierarchy. According to Ryan (2007), budgetary control is conducted in order to communicate top management’s expectations to employees and subordinate managers. The author also referred budgetary control as a plan of action that is formulated in advance and is quoted in terms of money. Sprinkle, Williamson and Upton (2008) stated that organizational performance is driven by several factors that include clarification of responsibility and authority, planning and coordination, effective internal and external communication, appropriate resource allocation, engagement level of middle and lower level management. Appropriate budget needs to be allocated to each and every factor that has been mentioned above. If actual performance delivered throughout the entire financial year is equivalent to the allocated budget, then it implies that the management has a good understanding of business and that they have been largely successful in rightly driving their actions, which leads them to their organizational objective (Van der Stede, 2001). On the other hand, if the actual performance deviates from the budget by a huge margin, then it indicates that the business is going out of control. Due to this reason, budget based performance management can be referred as the evaluation done by manager as per budgetary goals. Due to the diverse aspects (both positive and negative) of budgetary control and its resultant impact on performance management, it has been a chief subject of research in the field of strategic management control systems (Frow, Marginson and Ogden, 2010), Use of budgetary control in performance management The fundamental purpose of budgetary control is to enable managers to plan and control the allocation and subsequent use of resources in a logical and systematic manner so as to ensure that financial objectives are achieved (profit maximization) effectively and efficiently. In context of the hotel that has been taken as an example for this study, it has been observed that after having made their performance assumptions for the upcoming period, the organization starts formulating its financial strategies in detail by drafting non-financial as well as financial budgets, encompassing each and every aspect of the organization’s activities (Lapsley and Pallot, 2000; Norreklit, 2000). According to Berland and Boyns (2002), small business is comparatively easier to control. Their performance can be measured without difficulty. However, when the business expands in size where different business units have to be formed, performance measurement and subsequent management becomes relatively difficult. This is the time when budgetary control needs to be exerted so as to allocate budget for each and every separate business units. By doing so, the management of the organization starts expecting an equivalent performance outcome for the allocated budget (Neely and Bourne, 2000). In that way, the management can clearly specify the performance that is expected from their subordinates. Thereafter, the actual performance output in terms of profit generated by an individual’s or a group’s performance is compared with the budget that is allocated. This helps managers to identify the strengths as well as the areas of improvement that lie within performance of individuals and subsequently proper amount of focus is directed towards improving the performance. Hence, it can be said that budgetary control serves as a performance benchmark, enabling organizations to conduct performance management effectively and efficiently (Burns and Scapens, 2000). In the contemporary business environment, budgetary control is extensively used in order to integrate an organization’s strategic planning with budgeting as well as the processes of cost control (Cohen, Dey and Lys, 2008). By integrating strategic plans with the budgeting system, an organization is able to identify the budgeting or financial skills that are required to facilitate better decision making, whether it is a running business or concerns formation of a new one. Such has been the strategy adopted by Serena Group of Hotels. The hotel implements an appropriate budgetary control strategy, which allows subordinates to exhibit exceptional performance in terms of achieving budgetary objectives. According to Burns and Vaivio (2001), when an organization exerts high budgetary control, budgetary participation from subordinates increases accordingly. This is precisely because with the use of a rigid budgetary control, organizations are able to manage performance of their employees in an adequate manner. Moreover, with an ongoing budgetary control, subordinates are keener to learn about the assessment criteria of their performance. This also provides organizations with the opportunity to specify assessment criteria in details for the subordinates to follow them. By doing so, the organization is able to measure performance on the basis of the set benchmark and subsequently conduct effective performance management. Budgetary control does not have a direct impact on the performances of employees; however, budgetary participation induced by budgetary control does have a direct effect on performance. In organizations, where budgetary control is high, budgetary participation of employees also increases. This in turn impacts their performance positively. In that way, organizations are able to attain significant improvement in their performance. Conclusion Budgetary control is considered to be very important in each and every sector (public, private and voluntary) as far as performance management is concerned. Not only does it enables management to manage the performance of employees, but also supports them to bring upon improvident in overall organizational performance. The increasing importance of budgetary control in organizations throughout the world can be justified by the performance output generated through increased budgetary participation of employees. It allows managers to set standards of performance and communicate the same to employees in order for them to be able to make efforts to achieve such standards. It also helps managers to conduct a thorough comparative analysis of actual performance outputs and the allocated budget, thereby indicating whether or not implementation of the set strategies have been successful. 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Frow, N., Marginson, D. and Ogden, S., 2010. “Continuous” budgeting: Reconciling budget flexibility with budgetary control. Accounting, Organizations and Society, 35(4), pp. 444-461. Kaplan, R. S. and Norton, D. P., 1993. Putting the balanced scorecard to work. Harvard Business Review, 71, pp. 134-147. King, R., Clarkson, P. M. and Wallace, S., 2010. Budgeting practices and performance in small healthcare businesses. Management Accounting Research, 21(1), pp. 40-55. Lapsley, I. and Pallot, J., 2000. Accounting, management and organizational change: A comparative study of local government. Management Accounting Research, 11(2), pp. 213-229. Luft, J., 1997. Long-term change in management accounting: perspectives from historical research. Journal of Management Accounting Research, 9, pp. 163-197. Marginson, D. and Ogden, S., 2005. Coping with ambiguity through the budget: the positive effects of budgetary targets on managers’ budgeting behaviors. Accounting, Organizations and Society, 30, pp. 435-456. Neely, A. and Bourne, M., 2000. Why measurement initiatives fail. Measuring business excellence, 4(4), pp. 3-7. Norreklit, H., 2000. The balance on the balanced scorecard a critical analysis of some of its assumptions. Management accounting research, 11(1), pp. 65-88. Otley, D., 2001. Extending the boundaries of management accounting research. British Accounting Review, 33, pp. 243-261. Prajogo, D. J. and Ahmed, P. K., 2006. Relationships between innovative stimulus, innovation capacity, and innovation performance. R&D Management, 36(5), pp. 499-515. Sprinkle, G. B., Williamson, M. G. and Upton, D. R., 2008. The effort and risk-taking effects of budget-based contracts. Accounting, Organizations and Society, 33, pp. 436-452. Stieglitz, N. and Heine, K., 2007. Innovations and the role of complementarities in the strategic theory of the firm. Strategic Management Journal, 28, pp. 1-15. Van der Stede, W. A., 2001. 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