The Effectiveness of Budgetary Control in Unpredictable and Dynamic Environment - Essay Example

The Effectiveness Of Budgetary Control In Unpredictable And Dynamic Environment And The Potential Solutions That Might Be Deployed Where Planning-Based Systems Fail Name Instructor Institution Course Date Budgetary Control Hansen et al(2003 p.1) in their publication Practice Developments in Budgeting:An Overview and Research Perspective, identifies that is at the cornerstone of any management process as so does Comshare (2000). This means that for any management process to be deemed as successful, issues related to how the leaders manage their budgets will always come into being. The need to remain within budget while undertaking all the tasks in an organization has remained a fallacy for many and those who are able to work within it find the task successful in one aspect already. On the other hand, there are those who view budgeting as one of the major impediments of the process of goal achievement. Marcino (2000) as well as Jensen (2001) are key advocates of this theorem. The two argue that the allocation of resources within an organization is to large extent being hindered by the various budgetary processes adopted by the various organizations. “Myopic decision making and other dysfunctional budget games” are cited to be some of the reasons why achieving these budgets becomes difficult and even where achieved, there is little difference that can be attributed to it. Bergstrand and Olve (1996) defined budgeting as the traditional way of managing and controlling companies. Companies use the budget to plan and coordinate for the preceding financial period. Some of the main objectives of the budgetary process include resource allocation, employee motivation and operations coordination. It also helps in the evaluation of performance (Libby and Lindsay 2003). Looking at all this therefore the budgetary process has for a long time been used for the same reason, and thus the majority of the organizations has resulted in using the same traditional budgetary processes over and over again. The traditional budgetary process has resulted so different problems in various organizations including but not limited to top down command orientation issues as well as poor planning and performance evaluation processes. While doing their research Neely et al. (2001) identified a number of budgetary weaknesses that were associated with the majority of the traditional budgets. Some of them includes the time consuming nature of the budgetary processes, constrain responsiveness and the most common barrier to change, lack of focus and presences of contradictions, the over emphasis on cost reduction with less focus on value, infrequent budget development and updating, improper preparation of the underlying assumptions and their inability to reflect on the emerging network structures being adopted by organizations. With all such problems being associated with traditional budgeting processes, it is therefore imperative that the various decision makers come up with various ways to deal with them. There is thus a great need to re-engineer the budgetary process so that the budgets can be of value to the organizations. One of the key problems and which Wallender (1999) also identified is the varying nature of the environment that the organizations survive by. The results therefore are little value being obtained from the budgets, yet the process uses a lot of time and resources to prepare them for all such resources to just go to waste. The ever changing nature of the environment calls for constant updating and improvements of the environment. Berry and Otley (1980) had suggested that one of the ways to improve on the budgetary process would be through providing a more static state of the organization. This called for assumption which in the current world would proof to be very difficult to maintain. Similar sentiments were also shared by Samuelson (2000). Samuelson had suggested that there is no way an organization could do budgeting while it existed in a turbulent environment. In the current world, however, very few business are able to enjoy static states of the economy. Even the government itself has had to adopt its parastatals and state organs to change. The result has been improvisation of the budgetary process. The other common problem that needs to be avoided for one to end up with an effective budgetary control mechanism is the need to have a specific budget for specific organizations and units of the organization. In the budgetary processes, there have been a tendency to copy budgets from other organizations or other units of organizations, this should be avoided at all cost. This is because, each organization is unique in its own way as so are the various units different and unique yet they all are in the same organization. The same case applies to where the budget makers use the previous budget period for other preceding periods. Such budgets should only act as guidelines to the budget making process. They should however be flexed appropriately to ensure that the different factor that time has brought in place are all incorporated into the budget making place. Same case should happen with different units within the organizations. The units should make their budget on their own and maybe only use other units’ budgets as guidelines. Hope and Fraser (2003) identified that one of the major problems that is associated with the various budgetary process is its emphasis to the top down organization structures. However, currently most of the organizations are moving towards the more flat organizational designs. This has thus created a lot of incompatibility between the various levels of employees, especially those in the budgetary processes versus thus who participate less in the process. The results is that those who are not involved in the process feel that the budget makers leave out some of their needs and thus thinks that the budget makers fail the budgets. This thus requires that for each of the changes in organizational structures, relevant adjustments onto the budgets needs to be met. This therefore calls for revision in the various aspects of the organizations. As Scapens and Roberts (1993) noted, budgets are part of the organization and this is the sole reason they remain part of it. As much as most of them are no longer relevant the fact that they are already embodied in the organizational designs, it becomes very difficult to do away with them. However, doing them right is the most important thing rather than just doing them because they are required to be done. This has been the case by most of the organization where they mostly make their budget because a new financial period has passed. Most of them have little regard for how the previous budgets performed and thus learn from them. Neely et al. (2001, p.9) noted that the budgeting activity had for a long time remained centrally placed within most of the organizations. However, for one to remain within the currently changing environments, a research by Ekholm and Wallin (2000) showed that a number of firms were moving towards the decentralization of this function. The result has been the creation of a master budget from a combination of different functional units’ budgets. Here, the different functional units of a business prepare their own budget, present the same to an overall budget committee within the organization which is tasked with the overall task of developing the master budget. The main advantage of this method of budget preparation as opposed to the traditional method of budgeting is the fact that the various functional units are more in touch with the environment in which they work in. The fact that the functional unit is also required to defend their budget before the overall budgetary committee makes them more careful while preparing the budget. They are able to justify their various needs, expenses as well as sources of the said funds. They are also required through this process to justify the existence of their functional unit of the organization. The other way through which one can improve the budget making process would be trough the adoption of proper and well set predictive models (Berry and Otley 1980). Through the various models, one is able to predict what will happen through the various parts of the year. Previous data here is very useful as it is used to evaluate the various cycles that the organization has to go through in the specific financial period. Through the predictive models the budget is made in a way that it incorporates the various changes that are expected within the year. The other way would be through constant review of the budgets. The budget is a tool that must at all times be applied in the best way possible for one to leap fruits from it. This means, therefore that unless it is applied appropriately, then it may not yield the required results. For each tool, the manner in which it used is what determines whether or not the tool will be effective. The same case with the budget, it requires constant review to ensure that it remains relevant. One of the best ways to adopt it to the environment would be to keep revisiting it on a regular basis. There is a need that the budget is at least revisited once in every quarter of a year to ensure that if there is need to flex the budget that the same is done with the set guidelines. The problem however with the constant review arises from the fact that the budget is supposed to be the guideline to the way the business operates. It should not be left at the organization’s disposal that it can be flexed each time there is something new within the organization. Its purpose is to control the use of resources. Constant flexing of the budget would that mean that the organization is not following the budget at all. For example, if had budgeted to use one million Euros as the cost of sales, adjusting the same to 1.5 million euros just because the cost of doing business would mean that the organization has in a way changed its objectives. This constant review of the budget thus has to closely monitors otherwise the main role of the budget, which is mainly control might be dissolved easily by handing the organizations the power to review it at will. Stephen et, al. (2003) also came up with a suggestion to do away with budgeting in the current very dynamic and unstable environment. They cite the fact that budgets are made from specific assumptions which in the current world are quite difficult to maintain. For example the basic of the assumptions are that some factors will remain constant or will change at a certain trend over the budget period. This is in most cases is usually next to impossible. The change trend or any factor remaining constant is a fallacy that is quite unachievable in the current organizations. The fact that the budgets on their own cannot achieve anything was the underlying factor that the researchers used to justify the point of abandoning it all together. With the current rapidly changing environment, therefore the budget makers have to change the methodologies that were being applied many years ago to be able to incorporate change in the environment. The current world is very dynamic with change being the only constant thing. Budgets therefore need to be made in the way they incorporate change as well as the environment for the organization to achieve some success. Reference List David T. O, Wim A. Van der Stede Stephen C. Hansen Practice Developments in Budgeting: An Overview and Research Perspective Journal Of Management Accounting Research Volume Fifteen 2003 pp. 95–116 Comshare 2000Survey of Top Financial Executives.. Planning and Budgeting Today. Available at http://www.comshare.com. Jensen, M. 2001. Corporate budgeting is broken—Let’s fix it. Harvard Business Review (November): 95–101. Marcino, G. R. 2000. Obliterate traditional budgeting. Financial Executive (November-December):29–31. Bergstrand, J and Olve, N-G 1996 Styr batter med batter budget Liber: Hermonds Libby and Lindsay 2003 Budgeting – an unnecessary evil CMA management Vol 77 Isssue 2. Neely, A., M. R. Sutcliff, and H. R. Heyns. 2001. Driving Value Through Strategic Planning and Budgeting. New York, NY: Accenture. Ekholm, B., and J. Wallin. 2000. Is the annual budget really dead? The European Accounting Review 9: 519–539. Berry, A. J., and D. T. Otley. 1980. Control, organization and accounting. Accounting, Organizations and Society 5 (2): 231–244 Samuelson, L. 2000. The effects of increasing turbulence on organizational control: Some reflections. In The Current State of Business Disciplines, Management Volume 5, edited by S. B. Dahiya, 2017–2090. Rohtak, India: Spellbound Selto, F. H., and S. K. Widener. 2001. Relevance of management accounting research. Working paper, University of Colorado at Boulder and Rice University. Otley, D. T. 1978. Budget use and managerial performance. Journal of Accounting Research 16: 122–149. Read More