Performance Management Issues - Essay Example

(Assignment) Performance Management Recent decades witnessed tremendous changes in domestic and global business environments creating extensive opportunities for the both customers and sellers. The increasing complexities of modern business confuse firms’ managements as they cannot target what to achieve. When a firm targets many objectives without a specific plan, it would adversely affect the sustainability of the firm. Therefore, each firm prepares an annual budget at the beginning of the financial year, which targets reasonable revenues and expenses for the year. By doing so, organizations can easily project their profitability and thereby formulate effective strategies for business expansion. However, it is observed that budgetary forecasts in the modern era are not always accurate and result-bearing due to frequent market fluctuations. A recent statement from accounting press reflects that “the downturn has rendered budgets agreed last year largely irrelevant” (as cited in Jarman and Bibekar, 2009). This paper explores the scope of traditional annual budgeting process in the modern period. Generally, companies prepare budget for the whole financial period of 12 months. This forecast for a long period of 12 months seems useless in this fast changing business scenario as the deepening downturn and increase in economic volatility largely alter nation’s economic structure. Therefore, economic and market conditions after 12 months will probably be much different from that of the current situation. Similarly, today’s highly volatile nature of economy raises several constraints to the forecastability of the future economy. In short, the role of traditional annual budgeting process is not helpful in the present business era since it would not predict the future economic conditions accurately. In addition, the conventional practices associated with annual budgeting and forecasting processes involve higher costs. According to PricewaterhouseCoopers (PwC) survey in 2009, on an average basis, every company employs an equivalent of ‘eight full-time staff to budgeting and forecasting’ (as cited in Jarman and Bibekar, 2009). The application of various modern financial and accounting tools is essential to predict the future economic variance. Similarly, under traditional budgeting system, a considerable portion of time is spent on data collection and tabulation activities. Hence, we can clearly assess the fact that budgeting and thereby forecasting process also includes cumbersome human efforts and it generally lasts up to three months. However, the degree of economic volatility would determine the success or failure of annual budget. As a result, if the economic conditions turn to be unfavorable in future, it will not only affect the success of the budget but also the cost spent on the formulation of the budget. Many economic conditions may adversely affect the effectiveness of a formulated financial budget. Most of the multinational companies value their various revenues and expenditures on the basis of predicted exchange rate of currency. If the fluctuation unfavorably exceeds the forecasted limits, then the expected revenues and expenditure would vary accordingly. Naturally, this situation may impede the successful progress of the designed annual budget. Similarly, different government regulations such as taxation and trade barriers raise further difficulties to the application of annual budgeting. When government increases tax imposition on trade activities, companies are forced to spend more on taxation which result in proportional increase in expenditure; and that will be higher than the budgeted expenditure. Moreover, economic downturn causes large deviation in budgeted figures. In such situations, firms are compelled to postpone their predetermined developmental policies since they need to spend more on other sectors in order to stabilize the economic growth. It is very difficult for the companies to predict whether there will be an economic downturn within the following financial year. Even if the firms predicted a depression, they might not get a clear picture regarding the extent to which the downturn would affect the economy. In most times, the downturn would not considerably affect the economy if the regulators applied proper monetary tools. However, most of the time regulators’ efforts would not be adequate to check the impacts of economic downturn. In such circumstances, a depression would hinder the scope of even a well prepared traditional annual budget. Consequently, organizations fail to forecast their future performance, and therefore they cannot meet the basic objectives of an annual budget. In short, an economic downturn would make the traditional annual budgeting process ineffective. As Gregory points out, since an annual budget’s objectives are concentrated only on a financial period, firms would probably fail to achieve their long term goals. However, budgeting process cannot be avoided completely as it is the central aspect that enables a business to achieve its targeted objectives for the financial year. Jarman and Bibekar opine that “budgets are used as the basis to communicate revenue and profit growth forecasts to external shareholders including analysts, banks, and rating agencies” (Jarman and Bibekar, 2009). Likewise, a well formulated budget constitutes effective basis for executives and employees in meeting their specific targets. Similarly, budgets are also useful in predicting foreign exchange exposure to some extent. In order to overcome the deficiencies associated with traditional annual budgeting process, wide ranges of techniques have been developed. One of the most accepted techniques is rolling forecasts; large numbers of companies are moving toward this trend. In the words of Jarman and Bibekar, under rolling forecasts method, a budget is prepared for 12 months and forecasts for following quarters would be updated when the actual data for one quarter is available. This system of budgeting may enable the company to verify the reliability of its forecasts periodically. Groves and Genever points out that integrated planning, dynamic forecasting, and cash management are the modern tools that contribute to effective budgeting and forecasting process. It is evident that traditional annual budgeting process is of less significance in the modern era. However it is not practical to avoid the budgeting practices completely as it would adversely affect the economic stability and growth of a business. Therefore, it is advisable to make appropriate changes in the mode of budget formulation by initiating best fitted modern techniques. While adopting a budgeting technique, the firm’s management must make sure whether the proposed technique would fit the business structure or not. It is advisable for the firms to adopt budgeting methods that give emphasis on long term objectives and forecasting. Works Cited Gregory, J Nolan. “End of Traditional Budgeting, The Journal of Performance managements.” Bnet. 2005. Web. 11 March 2011 Groves, Nick and Genever, Andrew. “Budgeting after the crunch”, ACCA Accounting and Business, May 2010, 40-42.  Jarman, Nick and Bibekar, Sanjay. “New era budgeting”, ACCA Accounting and Business, July 2009, 46-47. 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