Budgeting Perspectives from the Real World - Assignment Example

Budgeting: Perspectives from the Real World Introduction The article ‘Budgeting: perspectives from the real world: a survey of senior accounting and finance managers examines the budgeting process at for-profit companies, including the usefulness and perceived value of the process, users' satisfaction with it, and the impediments and challenges to budgeting’ by Karen Shastri and David E. Stout has been chosen for discussion. The main reason for choosing this article is budgeting has all along been considered to be an integral part in the planning process of any form of business organization. Each organization spends a considerable time every year in setting up budgets as they are considered to be one of the most important tools of managerial control also through analysis of variances of actual figures from those that have been budgeted. Any evaluation and analysis of such an important tool, especially regarding its usefulness as perceived by senior accounting and finance managers who are supposed to benefit most from the entire procedure surely arouses interest and it deserves a thorough discussion as it might provide new perspectives that have been hitherto either overlooked or simply not realized. Summary of the article The article begins with two contrasting viewpoints on the efficacy of budgeting procedure. While Jeremy Hope and Robin Fraser trash the whole concept of budgeting (Hope & Fraser, 2003), a survey by Theresa Libby and R. Murray Lindsay (Libby & Lindsay, August 2007) throw up a more charitable opinion about budgeting procedure. Shastri and Stout conducted a follow up survey to the one conducted by Libby and Lindsay where they sought responses from senior finance and accounting managers regarding the exact steps that they go through during the entire budgeting process and whether they feel that this process indeed adds value to their organization. The respondents were further queried about how satisfied they were with budgets and what role do budgets play in the day-to-day functioning of their organizations. Two further pointed queries were also made as to the behavioral consequences budgets have on employees and whether budgets do significantly influence other managerial activities. The objective of the survey was to find out what significance do for-profit companies attach to budgeting procedures what do senior managers think about it. The survey adopted the method of sending questionnaires through email to those members of the Institute of Management Accountants who according to their job titles were most likely to be involved in the budgeting process. Care was taken in sending these questionnaires to senior level finance managers working in different capacities to get a comprehensive response that would succinctly portray how all relevant members of finance and accounting department genuinely perceive budgets and their utility. There were a total of 815 responses to the questionnaires sent and after screening out responses from managers working in not-for-profit companies, the authors analyzed 720 responses from managers working at various levels in different for-profit companies. A majority of these companies are based in United States and to preclude any sector-wise bias, the sample contained 52.5% traded companies, 42.4% privately held companies and 5.1% partnerships. Such an assortment ensured that the researchers got a balanced view of the budgeting procedure from companies that had differing ownership, and hence, controlling patterns. The article then proceeds to analyze how respondents have described the budgeting process undertaken in their respective companies. A majority of the respondents, 69.2% of them to be precise, stated that budgeting process is essentially a negotiated one where the top management and lower and middle management discussed and negotiated about the proposed production, sales and other crucial figures that the company desired to achieve in the coming year. Once the quantities are determined, finance and accounts department imputed money values after taking into account possible fluctuations in prices of inputs in the coming period. The most important revelations, however, from the responses is that almost all companies take a static budget as a base and engage in marking up or marking down relevant figures depending upon the planned levels of production, output and sales. Though other forms of flexible budgeting as rolling budgets and zero based budgeting are available, rarely do companies opt for these alternatives. That budgets are taken seriously by companies is evident from the fact that almost all the respondents stated budgeted figures and actual figures are routinely compared on a monthly basis in their organizations and 78% of the respondents also confirmed that managerial incentives are totally dependent on achieving budgeted targets. The survey also asked respondents about how useful they think budgets are especially in areas of strategic planning, operational planning, operational control, communication and coordination – both vertical and lateral – in their organizations. Budgets have always been held as potent tools for planning and control in conventional management accounting theories but a majority of respondents also felt that budgets are equally useful in other functional areas as strategic planning, communication, coordination and calculation of incentives. But, 21.4% respondents felt budgets are totally useless in fostering coordination among departments and subunits while 14.1% recorded their dissatisfaction about budgets being effective tools of motivation and 11.8% stated that use of budgets in calculating incentives is totally erroneous. The survey also throws up an interesting inconsistency. While a majority of respondents felt budgets were useful, when queried as to whether budgeting process adds value to the organization only 40% of the respondents replied in the positive. A substantial 23% felt that it does not add any value at all. Shastri and Stout try to explain this inconsistency by assuming that respondents might have applied the cost-benefit test when they evaluated the quantum of value addition achieved through budgeting process. Or, it could be that the concept of value-addition varies from organization to organization. The survey had asked whether budgets have a negative impact on the initiative of employees and unduly pressurize them, especially first line managers, to achieve targets by any means whatsoever. Also, asked was whether budgets force managers to often opt for a short term solution instead of taking a longer run and potentially more beneficial perspective. Respondents were further asked to give their views on the other, often discussed, shortcoming of using budget as a means of calculating incentives and rewards. A majority of the respondents indicated that budgets generally do not have any such negative impact and indeed formed a rational base for calculating incentives and rewards. Many respondents also felt budgets do play a positive role in engendering cooperation and coordination in the organization and form a backbone for continuous development and provide senior managers adequate information for effecting changes when they become necessary. In order to explore the extent to which budgeting and other managerial activities are interrelated, respondents were asked whether their companies implemented activity-based costing, target costing, supply-chain management, or the balanced scorecard and whether these practices are integrated with the budgeting process. An analysis of responses indicated that supply-chain management and balanced scorecard are the most popular management practices and they were integrated with the budgeting process. Though only about 33% of the companies used activity-based costing as a managerial tool, more than three fourths of those companies ensured that it was linked with the budgeting process. Nearly the same results were obtained for target costing. Thus, managers in general are of the opinion that budgeting can and should be integrated with other modern managerial tools. Shastri and Stout thus conclude that budgeting process is perceived as a very potent tool by a majority of practicing finance and accounting managers and it surely will retain its position of preeminence in foreseeable future. Critical Evaluation This article is drastically different from standard literature on this subject in that instead of providing the actual steps in budgeting process, this article concentrates only on responses from senior level finance managers regarding their perceptions about the importance of budgeting procedure. As for example, if one reads the article by Douglas Rusth one would get an idea of how a budget is drawn up in a multinational firm (Rusth, 1994). In contrast, a reader who is not so conversant with budgeting process would learn precious little after going through the article by Shastri and Stout. Similarly, the article by Walter W. Perlick and Alan M. Weatherford gives the reader a clear picture of how capital budgeting process is carried out in small and fast growing business firms (Perlick & Weatherford, 1991). Though this article also collects data through questionnaire, the entire emphasis is on the process of budgeting and how it is conducted for capital management in small and fast growing companies. The article highlights the different procedures managers follow while doing capital budgeting and how they differ in defining certain key concepts in capital budgeting. Hence, after reading this article one would not only have a clear idea about what is capital budgeting and its significance in small and fast growing business entities but also would know how it is perceived in different backdrops. Or, if one considers the article by Eng C. Wu one would get a clear insight in how budgeting process transcends cultural boundaries and essentially remains the same in differing cultures, management patterns and social mores (Wu, 2005). This article, once again dependent on questionnaires, still provides a clear description about levels of employee involvement in different social and cultural milieus that vary widely starting from United States through Europe and right up to Japan and emphasizes that irrespective of levels of employee empowerment, budgeting process remains basically the same in any for-profit business entity. The article by Shastri and Stout, however, does not provide any such expansive view as it concentrates only on responses of US based managers and that too only Finance and Accounting managers thus excluding the Production, Administration and Marketing managers and their views on effectiveness of budgets and the justification of undertaking an elaborate budgeting process. This study thus is not complete in any sense and it would not be prudent to draw sweeping conclusions after reading only this article. The article, however, does not contradict any traditional views about budget though its attempt to gloss over the well documented drawback of any budget in that it stifles employee initiative seems rather incongruent. Reflective Views The opportunity of being involved in the budgeting process of a ball bearing company gave me some glimpses of how budgets are actually prepared in practice. I observed, as is also corroborated in the findings of this article that budgets are essentially mark ups or mark downs of a static budget prepared on the basis of certain specific production figures. In fact, the real situation is often worse than that as current year budgets are simply last year’s budgets with percentage changes in all areas. Such budgets for sure are often preferred by top management as they would never bring out their inefficiencies or shortcomings as previous year’s actual figures are considered in a way as standards on which current year’s budgets are drawn up. Zero based budgeting is rejected as being too time consuming while activity-based costing as too complicated to effectively implement in real life situations. My personal view about this article is that it has covered too small a population to be of any real significance. Further, it has accepted many notions simply because majority of the respondents agreed to it. But a balanced perspective can be obtained only when minority or contrarian views are also analyzed with equal precision. Lastly, simply because majority supports a contention it is not necessarily always correct. Senior managers in any department generally have a tendency to retain status quo and this attitude many a times prevent these senior personnel to think laterally or out of the box. This tendency to adhere to what has been going on for years together might have also influenced their responses as they rooted in favor of traditional budgeting process and use of budgets as a managerial tool. Conclusion Budgeting process has long been one of the most crucial tools in the arsenal of top management in its planning and control activities. Though there have been of late some differing opinions about the efficacy of budgets, most senior managers in finance and accounting departments of for-profit companies still perceive budget as an indispensable tool. The article by Shastri and Stout collects detailed responses from practicing finance managers regarding their views on budget and conclude that, irrespective of what is being said to the contrary, budgets indeed are here to stay. However, the research by Shastri and Stout leans heavily on majority opinion and does pay scant respect to the opinions of those in the minority. This might reduce the levels of objectivity and balance in the entire exercise. Further, Shastri and Stout collected responses only from US based managers thus precluding opinions from other cultures and social milieus and somewhat stunting the overall impact of the painstaking research that they had undertaken. References Hope, J., & Fraser, R. (2003). Jeremy Hope and Robin FrasHow Managers Can Break Free from the Annual Performance Trap. Boston, Mass.: HBS Press. Libby, T., & Lindsay, R. M. (August 2007). Beyond Budgeting or Better Budgeting? Strategic Finance , 46-51. Perlick, W. W., & Weatherford, A. M. (1991). The Capital Budgeting Process in Small and Fast Growing Firms. Journal of Business and Entrepreneurship, Volume 3, Issue 1 , 125-130. Rusth, D. B. (1994). The Budgeting Process in a Multinational Firm. Multinational Business Review, Volume 2, Issue 2 , 59-63. Wu, E. C. (2005). Convergence of Attitudes in Different Cultures towards the Budgeting Process. Journal of Business and Management. Volume: 11. Issue: 2. , 29-40. Read More