Budgetary Planning, and the Evaluation of Performance - Essay Example

1. Briefly describe the budget process in relation of the work environment e.g. time scale, who is involved, documents, agreement of income and expenditure levels, devolved responsibilities. Budgeting is a key component in the management process. Understanding what a budget is and the role budgeting plays is essential to the proper exercise of a manager's responsibilities, which include planning, organizing and staffing, directing or leading, and controlling. (Botner, Stanley, 1991). A budget is, simply stated, a plan for the future, any plan for any future period. A vacation itinerary and a meeting agenda, too, are budgets. A more suitable definition for the study of budgets in the context of financial management is that a budget is a detailed plan showing how resources will be acquired and used during a specific time period. It represents a plan for the future expressed in formal, measurable terms. (Botner, Stanley, 1991). To be helpful, a budget must be prepared in sufficient detail to inform all levels of management of the exact expectations. It is not sufficient to establish a personnel budget for an institution and limit the detail to a statement of the overall number of employees. This serves no purpose except, perhaps, as part of a summary. Rather, a personnel budget should detail the quantities and types of full-time equivalents by department or cost center, perhaps by shift or by workstation. It should detail the salaries to be paid and the components, including routine, overtime, shift pay, cost of living or merit increases, and so on. All positions -- vacant and otherwise -- should be included in the budget. To assemble the quantity of data necessary to support a detailed plan, a matrix organization of rows and columns is essential. The matrix allows a significant amount of information to be displayed in an orderly manner and a limited amount of space. If organized properly, interrelationships can easily be seen, the data can be viewed and understood quickly, and the chance of arithmetic error can be reduced or eliminated. Figures 1-1 and 1-2 display two such matrix-style worksheets for a nursing department's personnel budget in computer spreadsheet form. One other advantage of a matrix-style worksheet is that it can help guard against errors of omission by specifying certain data to be collected in a particular set of columns or rows. Rather than calculate a salary budget and mistakenly omit "charge pay" or other premium payments, the worksheet can be set up in advance and require that information about these premiums be included for use in the calculations. In order to minimize the chance of leaving something out, it is best to set up budget spreadsheets well in advance of the actual budget preparation schedule and carefully consider actual data requirements. Remember that because computer spreadsheets can hold so much data, it is better to err on the side of collecting too much, rather than too little, data. (Klay, Earle, 2003) Personnel resources that pose a particular problem in terms of recruitment and/or retention can also be dealt with in the budget by inclusion of a recruitment plan, a budgetary emphasis on human resource development and training, or Figure 1-1 XYZ Memorial Hospital Nursing Budget -- Salaries, Fiscal Year 19XX Personnel 2 2 3 3 4 Class North South North South North Total Head Nurse Charge Nurse Clinical Specialist RN - II RN - I LPN Nursing Aide Unit clerk Total This matrix organization allows the salary data for five nursing units to be aggregated and displayed in such a way that the dollar amounts by type for each nursing unit can be compared easily with those for the other four units. The dollar values are added both down and across; and since the total from the rows must equal the total from the columns, the chance of arithmetic error is reduced or eliminated. Figure 1-2 XYZ Memorial Hospital Nursing Budget-FTEs and Salaries, Fiscal Year 19XX 2 North 2 South 3 North 3 South 4 North Total Personnel Class FTEs $$ FTEs $$ FTEs $$ FTEs $$ FTEs $$ FTEs $$ Head Nurse Charge Nurse Clinical Specialist RN - II RN - I LPN Nursing Aide Unit Clerk Total A variation on the previous matrix, this worksheet includes a column for the FTE (full-time equivalent employee) values for each of the five nursing units. Again, the down and across totals for FTEs reduce the chance for arithmetic error. Using this matrix, one can easily compare both FTEs and dollars from one unit to the next. It is possible to add other information to the matrix (patient days, admissions/discharges, length-of-stay, and son on) to yield a more comprehensive picture. Ultimately the whole financial planning process is likely to be summarised in a few key budgeted or forecast financial statements: a budget balance sheet, a budget profit and loss account, and a budget cash flow statement. These budgets or forecasts will then provide the reference point, or financial master plan, against which progress can be monitored and controlled. The efficiency and effectiveness of the financial planning process will be greatly aided by the application of computerised financial modelling. Proprietary software packages (e.g. Excel and Lotus) can be used to create a range of possible financial scenarios and to evaluate the financial effects of any changes in plans or targets. 2. Critically evaluate the system in terms of its effectiveness, paying particular attention to financial resource control and employee motivation. The final stage of the process will require effective management reporting and control systems to be set in place throughout the organisation. This is to ensure that plans are properly implemented, that progress is continually reported to management, and that any deviations from plans are clearly identified. Effective control systems, by providing a continual comparison of actual performance with planned performance, will alert management to deviations in a timely manner. If things are not progressing as planned, for example sales and profits are lower than expected, then remedial action can be taken to bring plans back on track. Alternatively, plans and objectives may need to be modified, if this is considered appropriate. This final control stage will inevitably lead back to a review and analysis of financial performance-back to Stage 1-which in turn will lead to new decisions being made, objectives and plans being modified and so forth, thus continuing the dynamic management cycle. Elements of a control system Having asserted the need for effective control systems, it will now be helpful to determine what constitutes a good control system. According to Grinyer (2001), any control system should have at least four elements: 1 A detector or sensor, which is a measuring device that identifies what is actually happening in the process being controlled. 2 An assessor, which is a device for determining the significance of what is happening. Usually, significance is assessed by comparing the information on what is actually happening with some standard or expectation of what should be happening. 3 An effector, which is a device that alters behaviour if the assessor indicates a need for doing so. This device is often called 'feedback'. 4 A communications network, which transmits information between the detector and the assessor and between the assessor and the effector. Grinyer (2001) goes on to describe the activities involved in management control, they include: 1 planning what the organisation should do; 2 coordinating the activities of several parts of the organisation; 3 communicating information; 4 evaluating information; 5 deciding what, if any, action should be taken; and 6 influencing people to change their behaviour. Financial control We can apply these general management control principles and processes specifically to financial control. The objective of financial control is to keep the organisation 'on track' financially, as set out in the organisation's financial plans. At any time, systems of financial control and reporting will inform management as to the organisation's actual financial position and progress compared to the financial plan. If actual events are out of line with plans, corrective action will be taken to bring events back on track, and this is known as feedback control. Alternatively, the control process may prompt the modification of plans in the light of actual experience, and this is known as feedforward control. With feedforward control a prediction is made of what outputs are expected at some time in the future. If these predictions then differ from what is desired, control action is immediately initiated to minimise future differences. The objective of feedforward control is to anticipate future deviations based on current projections and to act in advance to prevent these deviations from occurring. In summary, feedback is post-event control, feedforward is pre-event control. Control systems will be required, not just at the operational level, but at the strategic 3. Discuss the use of non-financial performance indicators in relation to the activities of your immediate work environment. Non-financial measures of corporate performance are considered critical or important by nine out of 10 companies as well as they are considered to be important within my organization. Professor R.S. Kaplan of Harvard Business School in The Evolution of Management Accounting states : "..... if senior managers place too much emphasis on managing by the financial numbers, the organisation's long term viability becomes threatened." (Krumwiede, 2000) That is, to provide corporate decision makers with solely financial indicators is to give them an incomplete set of management tools. The essence of non-financial indicators within the company is proved through the evidence of that not every aspect of corporate activity can be expressed in terms of money as well as that managers aim for excellence in their own aspects of the business, then the company's bottom line will take care of itself. The use of financial indicators helps to execute the following functions of organizational performance: manufacturing and production sales and marketing people research and development the environment Particularly in my organization, these indicators are used to evaluate the following areas of organizational life: COMPANY'S impact on society and the environment, EMPLOYEE commitment, RELATIONS with suppliers and other stakeholders, PRODUCT/service innovation, CUSTOMER satisfaction, BRAND strength, PRODUCT/service quality, and QUALITY of governance and management processes. Looking at each of these areas in turn, the following non-exhaustive list of performance measures is relevant. No one indicator should be over emphasised and no one indicator should reign supreme for long in the corporate consciousness of executives or management gurus. The two greatest obstacles to board members and executives obtaining information on many of the vital signs are the lack of developed tools for analysing non-financial measures and scepticism that such measures directly affect the bottom line. Boards and managers need to come to terms with transparency, which is inevitable. Instead of resisting transparency, they should be determining the optimal level of transparency for their organisations, given a variety of factors, including competitive-context stage of growth and the sophistication of information systems. They should balance this with management's role to implement for success in using and leveraging non-financial information. 4. Comment on whether or not you consider the use of financial and non-financial indicators contributes to the successful operation of your immediate work environment. Before commenting, I would stress that it is essentially for my immediate work environment (PLEASE REFER TO YOUR COMPANY HERE) to utilize both financial and non-financial indicators. They relate to different areas of organizational life and help to evaluate the performance as of material (financial resources) so of non-material resources (people) of the company. Performance indicators are a widely accepted input to the management of public programmes. Green and Aaronson (1992) discuss how performance indicators are used in the management of training and education schemes in 39 programmes administered by seven departments of the United States Government. Osborne and Gaebler (1992) document a great many cases where performance indicators are used by state and local government units in the United States. Extensive performance indicator systems are also used in the United Kingdom, with some measures of performance regularly reported in the official Employment Gazette. These performance indicator systems are designed to support decentralized decision-making while allowing programme managers at the national level to observe effectiveness unobtrusively. The systems being implemented allow a standardized assessment of programme performance across both administrative districts and programmes. Measures of performance have been selected so as to minimize adverse incentives. The systems are intended to promote superior performance through positive incentives, and to help identify and address poor performance through technical assistance or sanctions. Within my immediate organization, the development of performance measurement systems have had the important side-effect of improving the information systems which support labour programmes. The process has also established relevant survey skills and fostered a culture of cost-effectiveness at local, regional and national levels. The push to institute performance measurement has created an infrastructure with which to conduct experimental and quasi-experimental net impact evaluations of public employment programmes. 5. Make brief recommendations for improvement. To develop good performance indicators, the goals of the programmes must be clearly articulated. Depending on labour policy goals within a particular region, certain of the indicators will be more important than others for guiding operations toward programme goals. But the most notable principle governing the development of performance indicators is that emphasis should be on programme outcomes rather than on process. This is a particularly important rule when instituting such a system within central European government agencies where, until recently, the process of institution-building was the main objective. The monitoring of programme outcomes must not impose an excessive administrative burden on local and regional labour offices where resources are typically very limited and the first priority must be service to clients. The list of performance indicators should be relatively short for any particular programme, and the associated follow-up surveys should ask the minimum possible number of questions. If performance measurement is limited to a small number of indicators, the follow-up surveys may also remain simple.(3) This improves the reliability of data gathered, raises the response rate, and increases the likelihood that the system will survive, thereby yielding valuable information on the performance of programmes over time. 6. Discuss how levels of budget funding may be influenced by 1) the use Activity Based Costing Activity-based costing (ABC) is an accounting system that focuses on measuring the cost and performance of activities, products, customers, and other cost objects. ABC systems generally provide more accurate product cost data than traditional volume-based cost systems when manufacturing processes are complex or products are manufactured in varying lot sizes. The costs are more accurate because ABC systems trace indirect costs such as utilities, supplies, and maintenance to the products that consume the resources. Traditional volume-based cost systems simply allocate all indirect manufacturing costs to products using a volume-related measure, such as direct-labor hours. In addition, traditional cost systems allocate only manufacturing costs to products, but ABC systems trace other costs, such as marketing, to cost objects. Budget funding can be influenced by the use of ABC through the following functions of ABS within my organization (these are the steps that involve in assigning activity costs to cost objects): 1. Identify the object to be costed, such as a product, customer, or service. 2. Identify the major activities and determine the costs for each. 3. Choose an appropriate cost driver for each activity cost pool. 4. Compute the rate per unit of cost driver for each activity. 5. Assign costs to cost objects based on the cost driver rate. In addition to product costing, ABC can provide useful information for performance measurement, cost control, and strategic decisions. The same resource and activity drivers used for product costing describe the cost and effort required to carry out activities. These performance measures can be used to support cost reduction and reengineering efforts through business process analysis. 2) the main sources of organisational finance The company's budget funding can be influenced through the number of sources of financial resources. Common sources such as own capital and loans from financial institutions are of lower influence on the course of organizational budgets while such monetary documents such as certificates of deposit (CDs) and Commercial paper (CP) have an impact on the current budget. Let us further review two of them. Certificates of deposit (CDs) For a corporate treasurer with surplus funds to invest on a short-term basis Certificates of Deposit (CDs) are also a suitable form of financial instrument. A Certificate of Deposit (CD) is a written acknowledgement (certificate) issued by a financial institution, normally a bank, stating that a specified sum of money has been placed on deposit for a defined period of time. The certificate will stipulate the rate of interest to be paid and the maturity date. CDs are typically issued with maturity periods of three or six months. Negotiable CDs can be sold in the money markets before maturity. Thus a corporate treasurer investing in negotiable CDs has the option to sell the securities in the markets should the funds be needed by the firm. CDs issued by the major financial institutions have the attractions of being marketable, offering a guaranteed rate of return, and are low risk. Commercial paper (CP) Commercial paper (CP) is an unsecured promissory note issued by a corporation to raise short-term finance in the money markets, as an alternative to raising money (overdraft or short-term loan) direct from a financial institution. A promissory note is simply a written promise to pay. The paper is usually issued by large companies with sound credit ratings and with access to bank credit facilities to cover the issue. The paper can have a maturity period of from about 7 days up to one year, but 30-60 day paper is more common. When the paper matures it can be refinanced by the company issuing new paper to replace it. Similar to Treasury bills, commercial paper is sold at a discount in the markets and the rate of interest is implied in the discount offered. Corporations with short-term funds to invest can buy commercial paper and perhaps obtain a slightly better return than that available from a short-term bank deposit. Commercial paper is a form of securitisation as the funds are raised on the back of a short-term security issued direct by a company, rather than by a financial institution. See also eurocommercial paper (ECP) which we referred to earlier. Bibliography: 1. Botner, Stanley B. (1991). Trends and Developments in Budgeting and Financial Management in Medium Sized Cities of the United States. Public Budgeting and Financial Management 3(2): 443-56. 2. Green, Karen; Aaronson, Steve. (1992). Performance measurement in federal job, training, and education programs. Job Training 2000 Performance Standards Subgroup. Washington, DC, US Department of Labor. 3. Grinyer, J. Alternatives to Maximization of Shareholders' Wealth in Capital Budgeting Decisions. Accounting and Business Research, Autumn 1986. 4. Grinyer, J.R (2001). An Alternative to Maximization of Shareholders' Wealth in Capital Budgeting Decisions.' Accounting and Business Research. 5. Jordan, Meagan M., and Merle M. Hackbart. (1999) Performance Budgeting and Performance Funding in the States: A Status Assessment. Public Budgeting and Finance 19(1): 68-88. 6. Klay, William Earle. (2003). Planning and Budgeting. In The Florida Public Policy Management System: Growth and Reform in America's Fourth Largest State, edited by Richard Chackerian, 189-213. Dubuque, IA: Kendall/Hunt. 7. Krumwiede, K.R. (2000). An empirical examination of factors affecting the adoption and infusion of activity-based costing, doctoral dissertation, The University of Tennessee at Knoxville. 8. Osborne, David; Gaebler, Ted. (2002). Reinventing government: How the entrepreneurial spirit is transforming the public sector. 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