Role of Budgets in Managerial Performance and Behavior - Literature review Example

Role of Budgets in Managerial Performance & Behavior (Presented by) Name (Presented to) Lecturer Topic Date Introduction In today’s environment, every individual and organizations are direct pressure to perform up to certain level. Performance can thus be desirable or poor. All organizations desire to have positive or favorable performance, which is reflected in attainment of set goals and objectivists study seek to investigate the role of budgets in managerial performance and behavior. Back ground of the study Managerial control is a function in organization management that seeks to determine if the established organizational goals and objectives are attained. This is by measuring the actual performance and comparing it with the targeted standards and taking corrective actions when the two differ. In organization there are different goals and objectives that are all important and have to be met for core goal to be achieved. They involve use of different organizational resources such human capital resource, material resources, time and financial resource (Businesslink, 2011). Managerial control seeks to ensure that there is an organized way of utilizing the scarce organizational resources in an efficient manner. Managerial control tools such as budgets, performance targets among other tools. Budgets in managerial control play an important role in influencing the extent and level of managerial performance and behavior (Schick, 2004). They form a guideline on how to spend the scarce organizational resources; different functions or tasks are allocated specified amount of resources mostly financial resources which they must not exceed. Performance is a responsibility of the management and thus managerial control over budgets is necessary. Statement of the Problem: All organizations exist to attain some pre-determined sets of goals and objectives, their success is measured on how much of the pre set goal are actually achieved. Budgets are tools of achieving the goal and evaluating performance. Therefore, this study on the role of budgets in affecting the level of managerial performance and behavior is relevant. It affects all business and non profit –making organizations. A budget in itself is a formal way of stating the available resources that are allocated or set aside for carrying out specified activities within specified time periods (Accounting Education, 2010). They ensure coordination of different functions and activities in an organization, for example between the sales and the advertising functions among others. The economic environments are tough and businesses need to use tools that ensure performance and managerial control. Significance of the Study: The study seeks to establish if budgets play a role in affecting performance and behavior in organization. This will help managers in making business decisions. Small and mid-sized businesses can also use the study report in formulating strategic goals and courses of action. Governments and the general public can benefit from the finding of this research study. Other researcher and student in the field of business can use this study as a basis for further research studies. It will help them to get a deeper understanding of better management control by use of budgetary control. It will also show the importance of integrating strategic planning and goal with budget systems to enhance favorable performance. Justification of the Study: Budgets have been commonly used in financial control and planning for many years. Managements and other leaders are always concerned with attaining organizational goals and objectives, since that is what is seen as a representation of good performance. As student taking a unit in issues in contemporary accounting, the study is relevant. This is because it seeks investigates the impact of budgets on managerial performance and behavior. Other researchers have also investigated the relationship between budgetary control and organizational performance under different setting. Literature Review: Budgets allocate resources depending on how much is available thus control overspending; they involve planning ahead on what needs to be done, and estimating the amount of resources that will be required, with due consideration of course to what is available. All estimated expenses and costs are budgeted for economic efficient. Resources that are already in hand are planned for in budgets as well as expected inflows. if the expected inflows falls less of the expected resources inflows adjustments on the budgets are made to ensure that the operations of an organization remain within manageable budgets; if the expected resources are more the management may increase budgets allocations of some functions or tasks. The management should always plan ahead on where the finances that are to be used in different tasks will come from, budgets can be financed by available capital and savings or sometimes borrowing, when there is need for more finances (Kenneth, 1981). Unplanned spending, that is, without following the budget, may strain an organization finances, and thus the overall performance. Naturally, the amounts of finances invested or used in a task determine how much is expected, and thus budgets influence performance and people behaviors. In an ideal situation, the performance results should be commensurate with amount of resources employed in a project or a task, however there are other factors that may come along and influence performance. People behavior in task is affected by the targets and allocated budgets; if the budgets allowances are inadequate, the employee tend not to motivated while running out the tasks due to anxiety of not succeeding, resentment of management, fear and stress. On the other hand, a sensible budget ensures that the employees’ morale is high and they are willing to do more than the basic expectations of the management (David, 2001). All tasks or activities are tied to the amount of available resources and thus behavior is influenced by the managerial budgets. Performance goes hand in hand with how much efforts and resources are put in a task, though there may be other factors influencing performance or the actual results, what is put in is very important (PEW, 2011). It represents what an organization has invested in a task and thus it should be in line with what result is expected. The more that is put in a project or a task the more the expected results but of course this happens up to a certain level, usually the break even point, which the point at which all the inputs or the invested resources are fully utilized giving optimal results and further inputs would yield decreasing productivity. The management control how much is invested in an activity based on how important the activity is to the attainment of the organizations core goals and objectives (Jane, 2011). Budgets ensure compliance to the pre-determined tasks and activities since resources are allocated in advance, deviating or including unplanned activities would not be possible, unless the budgeted resources are adjusted appropriately. A budget that is effective in managerial control has clearly defined centers of responsibility and accountability. The operational periods are also established in advance and control, this is because project or tasks period impact on the total financial and material resources used. The expected performance standards should be regularly reviewed against the actual results and the budgetary allocations. This is because businesses operate in highly dynamic environment and changes that influence a budget and performance may occur somewhere along the process and hinder success. It is important to have suitable and relevant systems for collecting information for managerial control and measuring performance (Mercer, 2011). Budgets are tools of management control which enables the management to influence the organizational performance. This is because all the different functions in any organization are dependent on the budget. Budgetary control is used to create sustainable competitive advantage. Budgets and performance are thus intertwined as they re representations of what is within operation limit. They also serve as bench marks for measuring actual performance (Principles of Accounting, 2011). Proper planning and forecasting which increases the chances of achieving desirable perfomance needs use of budgets to exercise control. Through budgets, the strategic and operational level are forced to interact which enhances communication and coordination across different levels of management (Nelson, 2011). Competitiveness requires an organization’s strategy to be integrated to the budgeting system, this when done effectively implies high performance. In budgetary control, each activity that is included in the budget has to be looked upon and analyzed in terms of the value it adds to a business towards attainment of the business core goals. Budgets promote accountability; they ensure that that each department performs its duties within the set limits and financial targets (Vitez, 2011). The allocation of funds enhances accountability since each resource that is released is directed towards an already established activity. Budgets aid in getting desired performance in the sense that they involve comparisons of results to the strategic plans and the acting appropriately where deviations are seen. One way of getting the desired performance is ensuring that a business sticks to the budgets limits. Operating outside the budget allocations is impossible, or it would means getting others sources of funds. Budgets thus ensure integrity (Hope &Fraser, 2003). Research design The method used in collecting research data differ with respect to the type of study in terms of the needed information. The research general and specific objectives help in forming the research questions which determine the most appropriate research methodology. Some research studies can be done by use of secondary sources of literature while others require for one to get primary data sources (Gummesson E. 2000). The study can use a case study design by conducting an investigation of the impacts of budgets on managerial performance and behavior in a specific organization. Questionnaire can be designed and used to collect some empirical data, opinions preferences perceptions and attitudes since behavior is all about attitudes. Conclusion: Budgets play a vital role in influencing managerial performance and behavior. With businesses and other organizations operating in highly aggressive and competitive environments, and challenging economic conditions, proper managerial control becomes important. To achieve core organizational goals strategic management has to include budgetary control (Herath & Indrani, 2007). Budgets are tools of ensuring control and finance management in every department. When used well, budgets and strategic management can become an effective tool of communicating management’s expectations. The management in different organizations is expected to control operation in a way that ensures that the core goals are attained in cost effective way. Some organizations general goals include profit maximization and growth which means that management who are the leaders and decision makers, have to practice intentional influence on the people behavior. Behavior in terms of the efforts imputed in tasks and different activities. Behavior can influence by attitudes and employee morale, therefore managerial control should influence employee morale in a positive manner to ensure performance is up to set standards. Budgets are away of setting expectation standard in every contribution of each relevant person (Gregory, 2005). Managerial control involves holding each department responsible and accountable for their activities and thus the final results. The practice of budgetary control is one of the most effective tools which managerial control over resources and finances can be exercised in different departments in an organization without making the employees feel its coercion from the management’s side. It helps guard against unplanned use of resources and checks against overspending. Ensuring that there is enough revenues for meeting expected expenditures ensure smooth cash flow and accountability in an organization (Henry, 2005). Good performance calls for use of strategic plans and not deviating from organizational objectives and core goals unless there is a justifiable reason which would mean readjusting the budgetary provisions. Budgets play a positive and evident role in influencing the level of managerial performance and behavior in all business and non-business organizations. References: Accounting Education, 2010, Importance of Budgetary control Available from: http://www.svtuition.org/2010/06/importance-of-budgetary-control.html Businesslink.2011, Budgeting and business planning: Use your budget to measure performance Available from: http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074417241&type=RESOURCES David Frederick (2001), Budgetary control, credit management, Available from: http://findarticles.com/p/articles/mi_qa5308/is_200108/ai_n21477031/ Gregory J Nolan, 2005, The End of Traditional Budgeting, performance Management Available from: http://findarticles.com/p/articles/mi_qa4148/is_200501/ai_n13638925/ Gummesson E. 2000, Qualitative Methods in Management Research, London: Sage Publications Ltd. Henry, David, 2005, Loading Up on Junk. Available from: http://www.businessweek.com/magazine/content/05_05/b3918136_mz020.htm Herath, S. K. & Indrani, M. W. 2007, Budgeting as a Competitive Advantage: Evidence from Sri Lanka Journal of American Academy of Business Available from: http://www.jaabc.com/jaabcv11n1preview.html Hope Jeremy &Fraser Robin, 2003, Beyond budgeting: how managers can break free from the annual performance trap, United States of America: Harvard Business Press Jane Mary, 2011, How Can Budget & Performance Reports Help a Company's Decision Making Process? Available from: http://www.ehow.com/info_7779833_can-companys-decision-making-process.html Kenneth, A. Merchant, 1981, The Design of the Corporate Budgeting System: Influences on Managerial Behavior and Performance”, the Accounting Review Available from: http://www.jstor.org/pss/247203 Mercer John, 2011, Performance-Based Budgeting Available from: http://www.john-mercer.com/pbb.htm Nelson Kevin 2011, Budgeting Available from:http://www.referenceforbusiness.com/management/A-Bud/Budgeting.html PEW, 2011, Performance-Driven Budgeting Available from:http://www.pewcenteronthestates.org/initiatives_detail.aspx?initiativeID=51276 Principles of Accounting, 2011, Budgeting:  Planning for Success Available from:http://www.principlesofaccounting.com/chapter%2021.htm Schick, Allen, 2004, Twenty-Five Years of Budgeting Reform OECD Journal on Budgeting Available from: http://www.oecd.org/dataoecd/3/22/43488789.pdf Vitez Osmond, 2011, What Is the Role of Budgets & Performance Reports? Available from: http://smallbusiness.chron.com/role-budgets-performance-reports-861.html Read More