Management Control Problem: Budgetary Issues in Guinness Nigeria - Assignment Example

Management Control Problem: Budgetary Issues in Guinness Nigeria al Affiliation Business And Management Identification And Description Of The Problem For effective operations, effective operation of organizations is crucial. In simple, internal controls define procedures in place to offer a reasonable declaration that business operations are aligned with the business plan. Companies are said to have properly designed and meaningful controls when they minimize the possibility that noteworthy fraud or errors will happen and go undetected.1 A major reason causing the undetected noteworthy errors and fraud in businesses is the principle-agent problem in areas such as budgeting as was the case with Guiness Nigeria Plc. Like most manufacturing companies in Nigeria, Guiness Nigeria needs to establish and implement a tested and effective strategic plan as a way of remaining competitive within the manufacturing environment. In order to verify the company is on the right trajectory, budgeting could be used to determine whether the company reached its strategic breakthrough within a year of strategic plan. In both the private and public sectors, budget is one of the most preferred course of action as particularly for use in shielding or excusing when the management is faced with decisions. In Guiness Nigeria Plc, there was no one form of budgeting adopted to define the company’s data, while the company projected its current year using inaccurately calculated previous year figures as the base. This aligned with the traditional form of budgeting, yet did not adopt zero base budget. During the financial depression of Nigeria in 2008-2009,2 the company experienced an increase in the cost of importation of law materials resulting in inefficient production characterized by very high costs of production. According to Obiajulum and Ngoason,3 the implementation of budgeting in Guiness Nigeria Plc involved the disintegration with strategic management causing the budgeting committee to isolate strategic issues from financial issues such as market demand, presence of labour and law materials during budget preparation, and the capacity of the plant. Analysis Of The Problem And Conclusion To The Analysis The control system of a business organization is used as a means of ensuring organizational objective attainment. The main elements of the management control framework are control environment, process risk assessment, control activities, information and communication, and monitoring.4 The control environment constitutes of the entire management, the chief executive officer, and the governing board teams that define positive tone at the company’s top most level. This implies that for the Guiness Nigeria Plc executive, operating in Nigeria provides even more significant level of control within one national environment. This team must lead in risk assessment from the top in an organized way and drop down till the department level with focus on specific processes and activities. To assist them in their control, management must define procedures and policies to assist in ensuring that the goals and objectives of the organization are attained and not negatively impacted by external and internal risks. Upon identification of any information regarding risk and the means of controlling them, managers are expected to communicate with those responsible for risk mitigation. Additionally, managers are expected to ensure that their employees effectively conduct policies and procedures under implementation.5 The disintegration between budgeting and strategic management and the use of traditional budgeting fell under technocratic or bureaucratic management control mechanism. Here, standardization of employees’ behavior was done using written manuals that prescribed the courses of action to be followed.6.Additionally, bureaucratic management control tended to adopt an output control and coordination approach where outputs were used to focus instead of using behavior. In the case of Guinness Nigeria Plc measuring outputs such as production, and financial data, relied on a comparison with pre-specified goals, which in this case was the previous year’s financial data. Consequently, the company’s focus shifted from controlling inputs such as individual employee behaviour to controlling the final output. Obiajulum and Ngoason reveal that the firm’s reliance on incremental budgeting system constrained its flexibility and responsiveness, thus providing little value and impending change. Disintegrating strategic management from budgeting at Guinness Nigeria also contributed to poor communication of management commitments.7 For any organization, the emphasis on comprehensive communication to all stakeholders, customers, investors, governing board, audit committee, and employees are a powerful tool in successful strategic planning. In Guinness Nigeria, poor communication is due to low information technology (IT) system use, characterizing the company communication with higher likelihood of mistakes, and hindering information integration and dissemination regarding organizations’ control activities. Consequently, the management control process was slow, preventing leaping the advantages that arise from integrating budgeting and strategic management, and inadequacy in the process of management control. Guinness Nigeria’s use of incremental budgeting system does not sufficiently meet the company goals and objectives of improving production efficiency so as to lower the costs of production. Through improved production efficiency, the company will manage to produce at the least price possible while reducing wastage. This improvement aligns with the creation and sustenance of a competitive advantage where both strategic management and budgeting will be integrated particularly the cost leadership advantage. Attaining cost leadership advantage translates to efficient utilization of organizational resources through functions such as forecasting and planning, evaluation and control, coordination and communication, and decision making. Recommendations, Advantages, disadvantages, and implications For the success of budgeting practice in Guinness Nigeria Plc, the search for competitiveness through the adoption of appropriate management control requires having the right model in place. First, Guinness Nigeria Plc should focus on gaining a competitive advantage through enterprise planning. Having an adequate planning structure in place would contribute to the production of good and innovative products and services for full potential operation. Unlike the current way of planning for a fixed period using previous year budgets, Guinness Nigeria Plc can focus on enterprise planning and forecasting for more than a once-a-year activity. Through adopting a budget planning requiring an ongoing dynamic activity approach, the firm will obtain smart decisions, while there will be collaboration across organizational layers and departments and link budget distributions to real-world forces. Given the changes in the business world today, traditional budgeting is out-of-date planning tool that cannot simply link data across the enterprise and offer critical capacities for management’s drill-down and what-if scenarios. As a producer and distributor, Guiness Nigeria Plc requires dynamic real-time updates of its costs, translation between nonfinancial and financial metrics, and enhanced establishment and management of what-if models. In Guinness Nigeria, what-if models are crucial in modelling and assessing diverging business scenarios that represent best practices. The firm has to understand that annual budgets do not suffice in the business market today, and the only way to attain long-term business success is through re-assessment of internal and external factors that affect the business and re-focus based on new realities.In addition, Guiness Nigeria Plc should consider taking up evaluation and control where strategic goals direct the course of action; the strategic goals, resources, processes, programmes, and objectives align with specified expected results; and continued performance monitoring and assessment, while integrating lessons in other planning in future. The advantages that come with proper forecasting and planning is the alignment of strategic goals with operational financial planning requirements. Consequently, the firm will benefit from improved budget cycle times, minimized external audit costs, lessened inaccuracies given streamlined cycles, and the presence of plans aimed at satisfying immediate financial planning needs while facilitating integration of processes in future. Additionally, it is possible to re-forecast quickly in the event of rapidly changing conditions in the business and choosing the course of action that maximize performance. In order to attain the advantages of effective forecasting and planning, and evaluation and control, the firm has to invest in next generation enterprise planning solutions to leap the benefits of technology enabled best practices. The solutions are available depending on the business requirements and this comes at a price. In addition, the planning solution has to transform the planning environment such that certainty is attained with reduced amount of pain such as cost, disruption, and effort. Furthermore, effective use of planning solutions, the firm has to invest in infrastructure, and employee training. The consideration of spearheading the firm’s enterprise planning causes the firm to focus on company’s largest problems in planning first. Such focus alleviates the most pressing issues in planning, and in budgeting is the major issue in Guinness Nigeria Plc. Furthermore, the firm will manage to establish a broad-based change consensus through acquisition of the right technology from the most suitable technology partner for superior quality technology, experience in facilitating transition, and a fully grown comprehension of objectives of corporate planning. Part B: Statement of Practice My studying experience has bestowed on me an unmatched level of experience and information that will greatly impact on my practice. Although from a theoretical perspective, I understand that sound internal control practices are crucial in safeguarding investment, shareholders’, and company’s assets. Financial controls play a fundamental role in offering reasonable assurance of efficient and effective operation, as well as compliance with regulations and laws such as Sarbanes-Oxley and Anti-Money-laundering compliance that call for formalized risk assessment. Additionally, I understand that during practice, I do not have to expect that internal controls would not eliminate all risks, but would assist in managing and controlling risks appropriately. Employees and stakeholders in any business expect the management would take the necessary action to reduce the likelihood of risks, unlike action to attain organizational objectives. Some of the dominant risk management practices are hedging and insurance and organization management must define the context of their roles in risk management and within the wider concept of management control. Furthermore, I now understand that regardless of the scope, internal controls must involve the right parties in order to identify the events that could affect the ability of the firm to attain its objectives, rate the risks, and determine sufficient risk responses. Since each business is characterized by unique risk assessment needs, I understand the need to effectively focus on the larger business problems first and ensuring that higher priority issues are attacked first. During my holidays early this year, I managed to volunteer in an ice cream store close to my home. I realized that even the smallest form of business requires internal controls for efficiency and cost reductions. My stay in the store brought to my attention the fact that the owner of the business was the major source of fraud.8 This happened as the owner was too distracted looking for more business, thus being too trustful on fewer staff, thus failing to monitor and evaluate their productivity. Additionally, the owner failed to evaluate the effectiveness of systems and procedures in the business under the excuse that no auditors would do any control checks for them. My input was to offer information on establishing an environment that discourages poor reporting, fraud, and carelessness, while paying attention to internal matters, developing a code of conduct, and avoiding lavish expenditures. In assisting the store, my role will be providing the best practices to make the store more profitable, and with the authority of the owner, assist in implementing some of the best practices. However, I will hand over the monitoring and evaluation to the owner such that they streamline the business culture to prevent asset misappropriations and employee fraud and theft. The focus on internal controls for the store is realistic since even small businesses must care to protect their assets and minimize risk of fraud. Consequently, fraud prevention, precise finance, and detection of embezzlement are reasons enough to follow proper internal control practices. The timeline for positive change in the store’s cost reduction was set to two months and this was handy given that it is now summer season and ice cream consumption will be at its peak. The expectation is that as more ice cream is consumed, amidst internal controls, the profitability will be higher since little room is left for fraud and monitoring and evaluation are efficient. Bibliography DiNapoli, Thomas. Managements Responsibility for Internal Contols. New York: Local Government and School accountability, 2010. Long, Michelle. Internal Controls for Small Businesses to Reduce the Risk of Fraud. Texas: Intuit, Inc, 2009. Obiajulum, Amalokwu and Njilefack Ngoason. Budgetary and Management control Process in a Manufacturing Organization. Masters Thesis. Nigeria: Malardalen University, 2008. Read More