Management to Achieve Organisational Objectives - Essay Example

Budgets are primarily p ressure devices used by management to ensure organisational objectives are achieved Introduction Properly focusing the planning process on the organizations' strengths and weaknesses will help the organization to achieve its strategic and financial goals. In the case of the hotel industry, a critical part of this strategy includes the budgeting process which, according to Marshall (2004) "quantifies future financial plans and is the process of planning, in financial terms, the organization's activities and the results of those activities". Some of the purposes of budgeting in the hotel industry include: helping to plan work effectively; assisting in allocating resources; aiding in controlling resources during the budgeting period. Moreover, it is important to understand that a budget is developed to insure that management is working toward the same goal, with a knowledge base of the organizations' resources and constraints. Although strategic planning, budget forecasting, performance analysis are inclusive operations of the budgeting process; it is ultimately up to the financial analyst to determine whether the budget is guiding the company toward the achievement of its goals. Sometimes inefficiencies result due to poor integration of the finance and strategy. "Budgeting and performance are typically overseen by the finance department, whereas planning s coordinated by strategy department. Often, the two processes aren't well integrated, resulting in strategies that are often dictated by the budget process instead of vice versa" (Gary 2003). The reason for this could be that everyone involved may be attempting to accomplish the same goals, but also trying to make sure that the outcome will be beneficial to them, such as a substantial bonus or a reward. Although many companies implement this reward theory in an effort to increase organization effectiveness, this theory does not always work. According to Aranya, "participation may create intrinsic valences due to a tendency for individuals to become "ego" involved in decisions which they have contributed, and this affects their subsequent performance" (Aranya 2001). Forms of budgeting There are many forms of budgeting, but in the hotel industry "the first step in the budgeting process is to develop and communicate a set of broad assumptions about the economy, the industry, and the organizations strategy for the budget period" (Marshall, 2004). By establishing an operating and financial budget for a future period, management can identify problems in advance. This can be maintained by forecasting for future predictions. A forecast is a reflection of the future. When forecasting is taken into account, two key aspects to consider are cash budgets and sales forecast. The cash budget, usually 1 to 2 year increments, is a statement of the company's inflows and outflows of cash. It allows the company to estimate the short-term cash limitations, with attention to potential planning for excess cash or shortages. On the other hand, sales forecast estimates the monthly cash flows that will result from projected sales receipts, production and inventory. Management can also determine the level of fixed assets required to support the forecast level of sales and production. However, it is important to obtain reliable data. As a result, this data should be acquired by internal, as well as external means. The internal sales forecast is based on unison of sales forecast through the company's internal network. External forecast, on the other hand, is based on the relationship between the company sales and key external economic indicators. This means being able to identify how future economic events will affect the business as a whole. This includes looking at consumer outlook, inflation, and political events. Many companies are now implementing a new concept of rolling forecasts in an effort to reflect the most recent market trends. "Rolling forecasts have considerable merit. A forecast produced on a quarterly basis will obviously reflect the most recent market trends and economic variables" (Burriesci 2005). Capital budgeting Capital budgeting is another noted area to focus on budgeting, especially in a manufacturing environment. Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the company's goal of maximizing owner wealth. These long-term investments represent large operating costs that commit an organization to take a stand. Consequently, the organization should have procedures in place that will allow them to analyze and wisely select these investments. Although these investments may vary, management must be able to measure cash flows and apply appropriate decisions. One of the most common types of investments is fixed assets. These assets are typically the basis for the organizations earning potential and value, such as equipment, land, and property. Proactively identifying potential industry trends and determining how to turn them into a competitive advantage is a required skill for a manager to posses. This means being able to identify changes in the economy that will affect the overall growth of the organization. The business control cycle, without any doubt, has to be a priority focus in any for profit business. Successful analyzing of this cycle encourages management to recommend options and plans to tackle any business performance deficit. If this is overlooked, company profits can decline, along with the economy. However, if the primary focus shifts to the market and economic trends, the company can make the necessary adjustments that will help to maintain profits. For the last three years, ExxonMobil has been transitioning work to other countries. As a result, many employees within the US have lost their jobs in an effort to streamline the budget. Labor is considered to be "less expensive" in other countries, which will ultimately increase revenue. At ExxonMobil, the budget must be prepared for the current year's outlook and the next two years' forecast. The budgeting process for the annual budget normally starts in late May or early June, when early guidelines with regard to economic assumptions such as crude price, exchange rates, and inflation rates are issued. It is then submitted to the planning department who initiates the process of identifying the basic assumptions to be used in the budget. Budgeting is the process of categorizing proposed expenditures and linking them to goals. The types of budgets and budget categories used are strongly influenced by the make up of the organization. Organizations that have functional structures normally have a budget for each function or area of business. This allows management from each business unit to manage their budget efficiently within the realm of the department's needs. In keeping aligned with the budgeting process, whether is a new process or the historical process, organizations can continue to profit as long as management keeps abreast of the internal, as well as, the external occurrences that will affect the budget. The Process of budgeting Budgeting is the process of: identifying, gathering, summarizing and communicating, financial and non-financial information about the companys activities for a set period. During the identifying phase, activities consistent with corporate strategy are identified by various departments such as: production, marketing & research and management. Once identified, activities are evaluated and screened by estimating how they affect future firm cash flows and hence, the firm's value (Peterson & Fabozzi, 2002). This stage is important to the company's future success. It provides management with the opportunity to carefully match the goals of the company with the resources necessary to reach or exceed those goals. Gathering information may start with an estimate of expected revenues and costs, but as the analysis is refined, data from marketing, purchasing, engineering, accounting, and finance functions are put together (Peterson & Fabozzi, 2002). In creating a budget, decision makers attempt to forecast numbers as accurately as possible. Doing this requires detailed assumptions regarding future costs and returns on investment. While historical data can provide insight into future performance, it is by no means a reliable method that should be expected to provide consistent results. Essentially, historical data is a "best guess." The level and validity of the assumptions are open to interpretation. As noted in the passages below, assumptions are required to create budgets for a company, department, or given project. The first step in the budgeting process is to develop and communicate a set of broad assumptions about the economy, the industry, and the organization's strategy for the budget period. This is frequently done by planners and economists and is approved by top management. These assumptions represent the foundation on which the action plans for the budget period are built. A number of assumptions about the timing of cash receipts and disbursements must be made when the cash budget is prepared. Once the assumptions about the timing of cash receipts and disbursements have been made, the preparation of the cash budget is a straightforward mechanical process. The cash budget, with its assumptions about collections of accounts receivable and payments of accounts payable and other liabilities, purchases of equipment, and payment of dividends and other financing activities, is the source of many budgeted balance sheet amounts. The most challenging parts of the budgeting process are developing the sales forecast, coming up with the assumptions related to the timing of cash receipts and disbursements, and establishing policies for ending inventory quantities, the minimum desired cash balance, and other targets (Marshall, et. al, 2004). Assumptions are necessary to create a capital budget and are based on previous empirical data with the hope of predicting future events (growth, expenditures, sales, profit, earnings etc.). The more detailed the assumptions, the more likely they are to provide an accurate portrayal of future events. For example, retailers have supporting data that they will do 80 percent of their business between Thanksgiving and Christmas, thus they can assume for planning and budgeting purposes this number will remain consistent. However, it is always prudent to look at external factors which may impact historical data. For example, if the economy is in recession and revenues are largely reliant on consumer spending, it may be helpful to investigate how previous recessions have affected similar businesses in the industry. Again, more information can help provide a clearer picture of future results. Summarizing Summarizing is the part of the budgeting process that entails relating the short-term activities to the companys long-term goals and establishing performance measures in relationship to budget activity. Finally, communication during the entire process is critical to the company. Budget information must be communicated to the individuals who are accountable for a particular department. Remember it is the directions that will allow them to take their department from point A to point B. Management can set expectations and coordinate the activities. It is at this point, that management can challenge and motivate their staff with the establishment of performance measures that have rewards tied to them (Cingoranelli, 2006). Performance Measures Budgets can serve to identify and eliminate inefficiencies in the hotel's performance. The most effective way of using a budget for this purpose is to implement a control system that provides information about how well things are going, and to indicate how better results might be achieved. By making good use of both internal and external audits a company can identify inefficient areas that are perhaps struggling to perform. Corporate procedures exist to minimize wastefulness, which when adopted promote efficient operation and conserve scarce resources. Business Control Cycle Managers use the budget throughout the business control cycle to help them plan, execute, review and report the organizations financing, investing and operating activities. After the initial budget creation, the execution includes communication, benchmarking and results & problem recognition. However, in order for results to be known they first have to be measured and analyzed. The analysis entails reviewing the activities and calculating variances, evaluating performance and timeliness, and identifying solutions for continuous improvement (Marshall, et. al, 2004). Monitoring and evaluating the budget can be done using both internal and external control mechanisms. Budgetary rules or controls establish the extent of control the budgetary structure has over accounting transactions. The various levels of control are: " Full: Total obligations charged against the budget period cannot exceed the current budgeted amount. " Presence: The budget period associated with the allotment program must exist but the budgeted amount may be exceeded. " None: Budget periods may not be established within the fund. " Cumulative: Leftover unobligated amounts can be used in a future budget period (GASB, 2006) Budgets can be used in the performance accountability and reward process. The idea behind using the budget in performance accountability and reward process is that it provides management another tool to measure achievement and identify areas needing improvement (Cingoranelli, 2006). It was through budgeting that this writer was able to take the financial risk and leap into small business ownership. Now as a small business owner, it is budgeting that assists in planning out the workload for the year and helps this writer to reach professional as well as personal goals for both self and family. In conclusion, budget and the associated stages and processes surrounding are of the utmost importance and value to companies all over the world. From the validity of detailed assumptions to using budgets as an analytic tool or to reduce operational inefficiencies -- budgets play an extremely important role in determining the success of an organization. References Cingoranelli, D. (2006). The Lowdown on Budgets. Broker Magazine, 8(6), 6-6. Retrieved January 26, 2007 from the Business Source Complete database. Governmental Accounting Standards Board. (2006). 1700 -- The Budget and Budgetary Accounting. In Codification of Governmental Accounting and Financial Reporting Standards (as of June 30, 2006). Retrieved January 26, 2007, from Accounting & Tax with Standards database. Marshall, D., McManus, W. & Viele, D. (2004). Accounting: What the numbers mean. 6th ed. NewYork: McGraw-Hill Companies. Peterson, P., & Fabozzi, F. (2002). Capital budgeting. New York: John Wiley & Sons Inc. Unknown. (Fall 2002). Budgeting serves as your companys benchmark. Leading Edge Alliance. Retrieved January 24, 2007 from world wide web: http://www.leadingedgealliance.com/issues_old/2002/fall/budgeting/. Burriesci, J (2005) An Affordable Escape From Spreadsheet Hell. Intelligent Enterprise; 5/1/05, Vol. 8 Issue 5, p23, 2p. Retrieved July 7, 2005, from Gary, L (2003) Breaking the Budget Impasse. Pg 3, Retrieved July 7, 2005, Marshall, (2004) Accounting: What the numbers mean (6th ed.). New York: McGraw-Hill Nissim, A (2004) Budgeting Instrumentality, Participation and Organizational Effectiveness. Journal of Management Accounting Research; Sep90, vol 2, p67, 11p. Retrieved July 7, 2005 Read More