Corporate Budgeting - Literature review Example

Part II: Article review Name of the student Name of institution Date of submission Reasons for budget Practitioners as well as academicians for long time have criticized budgets mainly for their evaluation and performance weakness (Prabhu et al., 2009). Most scholars have embraced budget due to their planning and control benefits but claims that they lack evaluation and performance. Organization do budget for reasons other than those considered by critics of budgeting. Annual budgets, apart from evaluation, it can be used for planning and control activities within the organization. Some scholars argues that rolling forecast can perfectly substitute annual budgeting since it involve a more precise manner therefore, it is able to generate more accurate financial predictions solving the problem of annual budgeting. Prabhu et al (2009) discussed three main performance evaluation of budget and they include budget use, budget participation and budget emphasis. Emphasis of budget considers the attention and focus organization gives budget preparation process. Emphasis, further consider extent to which companies are using budget as a management control tool. Participative aspect of budget considered the extent of staff participation in budget preparation. This is very important for evaluation purposes and understanding. Lastly, the budget use is considered as the role of budget in formal performance and work evaluation (Prabhu et al., 2009). In discussing the operation reasons for preparing budget, Prabhu et al.,( 2009) have failed to consider all the operation aspects of the budget rather dwelt on three major aspect which is participation, budget use and budget emphasis. The scholars have left the visionary nature of budget as budget helps organization to set realistic goals, which have time frames and can be achieve. Beyond budget Traditionally, budgets have played critical roles in organizations systems of control management. However, currently budget has been subjected to criticism and Theresa & R. Murray Lind (2009) identifies four major areas of concern when it comes to traditional budgeting. First, budgets take too much time to prepare hence consuming the manager’s precious time which they can use to respond to other needs of organization. In their study, Theresa & R. Murray Lind (2009) found that managers spent 25% of their annual time preparing budgets; this is higher than the time spent in responding to other key areas in an organization. Secondly Theresa & R. Murray Lind (2009) argues that budgets impends adaptability in an organization. They argues that the current competitive market environment is characterized by unpredictability, price an margin changes which traditional budgets are not able to meet hence calls for the overhaul of the traditional budgeting model. Thirdly, Theresa & R. Murray Lind (2009) argues that budgets are so much disconnected from the firm’s strategy. Most of firms have literally failed to connect the firm’s budget with its strategic plan leaving gap which in long run hindered the achievement of strategic objectives of the company. This is one area which scholars have failed to give enough literature when it comes to ways through which managers are able to link the company strategic plan and company budget. In most cases the budget are prepared in isolation from and not aligned with the firm’s strategy. However Theresa & R. Murray Lind (2009) have failed to offer ways through which this can be achieved otherwise criticized it and left it open with no solution. A good study should be in a position to offer alternatives to the existing problem. Lastly, Theresa & R. Murray Lind (2009) argues that the use of budget has fixed performance contracts. The nature of these particular contracts is whether the performance meets or exceeds a pre specified budget plan and if not, the variance is calculated. If it meets, it is deemed satisfactory while if it fails, the performance is deemed inefficient. This is one of the most incompetent ways of determining the performance of a firm hence needs to overhaul of the traditional method of budgeting. Budgeting Gamesmanship Budgeting is one of the important tools in management however, most manager dislikes dealing with the budgets. Budgets help in institutionalizing firms’ goals, monitor the performance and progress of the business. It is important that the budgets give the real picture of what is happening in the firm given their unique position and role in the planning process. Christopher (1988) defines budget as the translation of strategic plan into measurable financial standards and goals in an organization. However, the results, which comes from the budgeting and planning process in most cases are distorted and sometimes falsified bringing the idea of gamesmanship in budgeting. The gamesmanship is considered as a dysfunctional behavior in that it frustrates both the planning process and accuracy of business evaluation process by management. The budget manipulation by managers is one area of study which has been often forgotten by many scholars. Researchers and investigated the various variables on the budget that impacted on the management outcomes. Christopher (1988) uses a case study of six firms which include Alpha, Beta, Delta, Kappa, Omega, and Phi. They investigated the performance of firms based on the firm use of budget in planning and control. From the result, firms which have strictly followed budget perform better compared to firms (Christopher, 1988) The study analyzed the games which product managers do play while preparing budget, these games leads to overstating the budgets hence leading to unrealistic budget which cannot help in monitoring, planning and management of organization. However, the budget games played by project managers do not entirely lead to incompetency on budget; therefore like any other management tool budget is still crucial in management control and planning. Annual budget Annual budget is seen as incapable of handling the competitive changing market environment and needs changes. Bo-Go & Jan (2000) states that annual, budgets are ineffective, inefficient and incomprehensible, calling for its replacement with the system focusing on strategic performance. Another criticism advance against annual budget is that they are rigid planning and incremental thinking which should be avoided by management. It further consumes company planning time yet does not reflect changes in the company’s organization process (Bo-Go & Jan, 2000). Annual budget sometimes leads to production of inadequate variances report, it further ignore key shareholders value drivers as it mostly focuses on short term financial needs of the organization building on a culture which is more risk averse resulting to a false sense of security in an organization. Despite these weakness of traditional budget, the study findings by Bo-Go & Jan (2000) reveals that majority of firms still embrace the traditional budgeting techniques while some are ready to adopt the new method. The sectors, which are ready to adopt new method ranges from manufacturing to retail companies, they prefer rolling forecasts and in some cases a balance scorecard. The study concluded that even with much weakness, annual budget is not fully ready for scrap though its prime time has passed and companies needs to start revising on the new ways of preparing budget (Bo-Go & Jan, 2000) Annual budget is still very important in controlling spending in an organization. It is necessary management tool in terms of comparing the budgeted figures in an organization and the actual budget which has been spent in an organization. This important aspect has been overlooked in the above study pointing to the weakness of the study carried out by Bo-Go & Jan (2000). There is need to give the two sides of the story hence for budget. Corporate budget In their study, Michael (2001) introduces traditional budgeting as a process that waste time presenting distorted decisions while turning good honest managers into a mere schemers. Therefore, corporate budgeting is a mere joke and should be avoided at all cost. In traditional corporate budgeting, there are normally budget targets which corporate managers are suppose to meet (Michael, 2001). This budget targets normally drives compensation through performance incentive system. Managers are required to meet specific targets and whenever they meet the targets, they are entitled to specific bonuses. This kind of pay for performance system has caused by the minimum hurdle bonus creating strong incentives to game system (Michael, 2001). As long as managers believes that they can pass this hurdle, they will push is by all means available to meet this particular target even it means pursuing illegal means to reach this particular target (Michael, 2001). This illegal practice and struggle to meet corporate budget targets is brought about by traditional budgeting system making even faithful managers to cheat in the name of meeting budget targets. If budget manipulation in an organization becomes routine, it is capable of diluting the integrity of the entire organization. Once chief executives have felt okay to cheat and conceal information, they will continue doing so as this will extend dishonest behavior to other parts of management systems (Michael, 2001). However, Michael (2001) admits that the main aim of corporate budget is to set goals, help in planning and management controls, this has been missed by many and calls to overhaul the traditional corporate budget and replace it with a more inclusive approach which can encourage transparency accountability and honesty among managers. This article has failed to highlights some of the ways through which the dishonesty brought by corporate budgeting can be corrected and way forward. Summary and conclusion This paper gives a review of five articles discussing traditional budget and changing practices in budgeting. The first article has reviewed reasons for preparation of budgets in an organization. The paper list control and planning issues as the key reasons for making budgets in an organization something which critics of budget has dismissed as a mere public gimmicks since budget lack evaluation characteristics making it incomplete tool when it comes to management control tool. Second articles discuss critical roles played by budget in planning, managing and controlling organization hence beyond budget. It enumerates four major areas which the budget has failed to address its core functions in an organization. They include time consuming nature o budget as managers spent much time making budget, rigidity nature of budget is mentioned, disconnection of budget with the company strategic plan and lastly, budgets are only able to meet fixed performance in an organization. The third articles discuses the budget gamesmanship where managers manipulates budgets presenting distorted information in the budget hence traditional budgets lacks basic principle of budgets which is faithfulness and consistency. The fourth article annual budget which is seen as incapable of handling the competitive changing market environment and needs changes and further points weaknesses in traditional budgeting system. It concluded that, despite many challenges faced in traditional budgeting, it is still widely embraced by many firms. Lastly, the weaknesses of corporate budgeting is discussed and reasons why it is not necessary in the current changing business environment. In conclusion, traditional budgeting has many weakness, it still forms important part o management tool in modern market. It is especially useful when it comes to internal control management. Bibliography Bo-Go Èran E. & Jan W 2000 Is the annual budget really dead Swedish School of Economics and Business Administration The European Accounting Review 2000, 9:4, 519–539 Michael C. 2001 Corporate Budgeting Is Broken - Let's Fix It Harvard business review Prabhu S., Peter B., Teemu M., David A. 2009 An exploratory study of operational reasons to budget. Accounting and Finance 49 (2009) 849–871 Christopher K. 1988 Budgeting Gamesmanship Faculty of Business, McMaster University Canada Theresa L & Murray Lindsay 2009 beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice School of Business and Economics, Wilfred Laurier University, Waterloo, ON, Canada Read More