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

Introduction Budgetary controls are important and vital elements of organizations and business entities. This is because they provide a framework within which a budget can be streamlined and directed to reflect issues and matters that occur in reality. Hence, budgetary controls are significant aspects of the management system of an organization. This paper examines the issue of the budgetary process and situations where budgets become outdated and need quick and emergency updating. The paper will evaluate and discuss the effectiveness of budgetary controls in unpredictable work environment and the potential solutions that can be used. The Budgetary Process & Budgetary Controls “A budget is a quantitative expression of a proposed plan of action by management for a future time period and is an aid to the coordination and implementation of the plan” (Stefan et al, 2006; p357). This implies that budgeting is about the presentation of the quantitative elements of an entity and this include the estimations of the income, revenue, capital, assets and liabilities for a futuristic period. This involves the drawing up of a financial statement based on expectations for the future. A master budget is an integration of strategic objectives and operational plans to present a summarized financial statement that is expected of a corporate entity over a period in future (Freeman, 1997). The strategy of a company is formulated when a firm examines its internal capabilities and matches it with the current trends in the external environment in order to draw a plan that makes the best use of the firms opportunities and minimise threats in order to attain the best results (Johnson and Scholes, 2010). Thus, the plans and strategy that a firm formulates is valued and costed and integrated into a financial statement that becomes known as the master budget. Budgets are not an end in itself. This is because there is no known ways of predict the future with absolute accuracy. Hence, a budget is used as a means to the attainment of the end – utilising a firms resources appropriately to meet expected ends. In most situations, there are variances that result from the fact that the budget is not the same as the actuals (Henderson, 2012). This means that budgets are not always accurate or perfect. Hence, there is therefore the need for some kind of controls and streamlines to ensure that budgets are suitable for dynamic and unpredictable periods. Due to the need for careful consideration and analysis, budgetary processes are slow. This is because there is the need for budgets to deal with issues in the future as and when they come up. This is the only way a firm can get the best from existing information and attain optimal results from the budgeting processes. Issues of Budgetary Controls in Unpredictable and Dynamic Environments Budgetary control is a process through which an organisations budgetary process is enforced and integrated into the organisations course of affairs (Hofstede, 2012). This involves an intentional and well planned process through which an organisation gets to set limits and targets within which various components of the organisation must operate financially. This involves the setting of spending and resource usage ceilings and floors to ensure that various departments and units of the company work within a steady stream that guarantees that resource utilisation targets set in the budget is met and there are as little limitation as possible (Anderson et al, 2007). Budgetary controls are checks and balances that are used to ensure that a firm maintains a disciplined approach and attitude towards its spending limits and targets. This include different possibilities and different plans that are put together to ensure that a firms components and units stick to the budgetary allocations in a strict way and a strict matter. The budgeting process involves planning, coordination and control (Sahaf, 2009). Therefore budgeting planning and implementation falls in the first category. After implementation, there is the need for some kind of checks and balances to be put in place to ensure that a firms budget is in line with the realities and there are as little divergences as possible (Sahaf, 2009). Therefore budgetary control is about creating a system through which the different departments and units can be monitored and checked from time to time to ensure that they are living within the budgetary constraints and trying to streamline the organisation and its affairs so that the targets of the master budget are checked and fulfilled at all points in time. Controls are necessary to administer the budget and ensure that a firm lives within its planned budget. This is because the budgets essence is to provide a disciplined and reasonable method and process through which a firm can meet its budgetary needs and expectations. However, in most cases, there are divergences and restraints In spite of this, the people charged with top level governance of an organisation have that desire and expectation to maintain control and spending discipline in order to retain control of the firm and also continue to maintain the regularity of the firm and its operations throughout various stages of the budgeted period. In reality though, there are various things that happen in the operation of a firm. As identified above, managers cannot predict the future accurately. There is always room for new opportunities and new circumstances. In such cases, there might be an urgent need to revise and review the budget. If a firm operates in a very dynamic environment, it will have to take risks and it will need to review its processes and activities in order to streamline affairs and deal with issues to remain competitive and operational (Brunner, 2010). This is because for a firm to survive, it will need to capture a market share and maintain that market share, in order to expand and grow, it will either need to find new markets or expand its market share and this can be done by utilising its competitive advantage and taking risks in order to expand and attain results (Porter, 2008). In cases where a firm remains extremely rigid in its observance of its budgetary controls and constraints, the firm is likely to rely on past and subjective ideas and views that were put forward by their management. This means that they will have to rely on assumptions and sentiments of the managers who came up with the old budget based on previous periods realities. This means that they are likely to miss out on emergent issues and possibilities that can modify or improve their affairs and operations. Hope and Fraser therefore asserted that rigid adherence to budgets is “.... a process that dispproves the frontiline, discourages information sharing and shows little response to marketing departments until it is too late...” (2003, p109). This sentiment mirrors the conflict between the marketing unit and the accounting unit of many organisations. Whereas the accounting unit will typically be concerned about getting the different units to be mindful of their budgetary constraints, the marketing unit will typically be concerned with taking opportunities in the versatile and dynamic environment. This provides the firm with the chance to grow and expand to become more profitable. Where the accounting department insists so much on budgetary control, the firm is likely to have a conflict that will prevent the ability to grow and take up opportunities and chances as and when they come up. This leads to budgetary system failures. Solutions to Planning-Based Budgetary System Failure In order to deal with the issue of constraints in planning-based budgetary system failures, there is the need for some degree of flexibility in the budgetary systems. This means there must be some kind of flexible approaches and methods that will be used to deal with cases and issues that demands quick and prompt actions. Most firms deal with this through the organisation of meetings and other processes that allows the different departments to come and discuss issues and matters. This is called an emergent strategy, which is a process where the firm becomes open to new possibilities and new circumstances (Johnson and Scholes, 2010). And such an emergent strategy is very appropriate for firms that are operating in volatile environments. Such processes are enhanced by the usage of flexible budgets which provide a range within which the firms units can have a range of resources within which they can operate and meet their needs and expectations. Thus, where there is a reason to come up with such a system, the various units and departments will have to meet with management and explain why they deserve to be given more resources to meet their objectives. In other cases, there could be contingent arrangements that will enable the firm to raise money from certain sources to deal with emergent issues of high significance. This could include the possibility of extending the cap on borrowing where the need arises. This will help to prevent a situation where budgetary control will become a stumbling block for a firms growth and survival. Conclusion A budget is a quantitative plan for the future of a firm. This include the presentation of the way financial matters are going to be conducted over a given period of time in the future. This is done through estimation and the presentation of limits and constraints for the firm to operate within. In order to ensure discipline and the utilisation of budgets, a firm needs to have budgetary controls. These are targets and limits within which a department of the company will have to operate within as part of the main budget. This include various ceilings and floors that guide operations. Where there are divergences and targets are not met, the management will have to query the responsible manager in question. Strict adherence to budgetary controls causes a firm to focus on things that are based on outdated information and data. This proves to be problematic because other opportunities may come up that demands some degree of flexibility in the implementation of budgets. Such matters will need some degree of flexibility in budgeting and contingency budgetary concessions which can enable the firm to grow and enjoy various benefits. References Anderson, S. D., Molenaar, K. R. and Schexneydar, C. J. (2007) Guide for Cost Estimation and Management New York: NCHRP Brunner, B. (2010) Principles of Management Accounting London: SAGE Freeman, E. (1997) “Turn your Budgeting Operation into a Profit Center” Datamation 43(1) p90 Henderson, L. (2012) “Managing Budgets in Complex Times with Tight Variances” Applied Clinical Trials 21 (7) pp16 – 18 Hofsteded, G. H. (2012) The Game of Budget Control London: Routledge Hope, J. and Fraser, D. (2003) Management Accounting London: Routledge. Johnson, K. and Scholes F. (2010) Exploring Corporate Strategy London: McGraw Hill. Porter, M. E. (2008) Competitive Advantage London: FT Press. Sahaf, M. A. (2009) Management Accounting: Principles and Practice London: Routledge Stefan, S., Bennett, M., Burritt, R. (2006) Sustainability Accounting and Reporting London: Springer. Read More