Budgeting as a Burden on Many Managers - Essay Example

No, I don’t agree with the idea that budgeting is an unnecessary burden on managers. Needless to say that budgeting exercise takes up quite a lot of time of the managers and there the story does not end. Since budgeting is a controlling and planning tool even therefore, a considerable amount is required to compare the budget against the actual and find out the resultant deviations and reasons for the variances that occur. Moreover, in times of today budgets are not to be considered static, over a period of time they need to be reviewed and rolled over.

There is no denial of the fact that ‘failing to plan’ results in ‘planning to fail’. Budgets prepare organizations to anticipate the future and plan accordingly, which eases their anticipation for the future and day-to-day needs are already planned earlier. Not planning earlier can bring up capacity issues; cash flow issues etc. for the organization.

An estimation of costs and revenues is required to know the estimated profit. The profit is not attained in a single day. All days need to be planned to achieve those profits, daily operations are therefore needed to be managed; budgeting prepares the managers for the whole day decisions, which they cannot act to on a single day basis. Clear thinking and understanding is developed.

Budgeting in advance also helps determine the borrowing requirements, early relationship building with the lender, communicating earlier the borrowing needs. And reasonable budgets and forecasts to repay can build up credibility in the eyes of the lender. Once the borrowing needs are determined and committed in the pipeline, the spending timing and needs are allocated as and where required.  

The budgeting exercise can become hectic and set accountability for the managers. This leads to driving their focus away from the day to operations but not really. It builds up coordination and integration among the cross-functional areas and within everyone in different functions of the organization. Everyone is considered accountable for his or her actions; a sense of ownership develops amongst the employees and hence a company would want its employees to be motivated enough to achieve their and company’s goals. This only happens when the objectives of both are aligned and employees are motivated enough to achieve the same. These overall benefits in day-to-day affairs.

Major inputs to the master budget and usefulness of each

The major inputs to the master budget are operating and the financial budget. The master budget also helps create a linkage between the two aforementioned budgets. Each of these budgets has its own importance and none can succeed without the other. The operating budget comprises the sales budget, production budget, the direct materials budget, the direct labor budget, the factory overhead budget, the inventory budget, cost of goods sold budget, selling and administrative expense budget, and the budgeted income statement, which is the snapshot of the operations of the organization for a period. Whereas, the financial budget comprises the cash budget, the capital budget, and the budgeted balance sheet.

All these inputs on a standalone basis do not have any meaning until seen within the full picture. The sales budget will determine the top line for the company and the production budget support sales because it has to be determined how many units are to be produced to support that level of sales. Materials, labor, and overhead determine the costs, similarly the selling and administrative expenses. The inventory budget helps in knowing how many units are carried from the earlier period and how many will fulfill the demand for the period.   The financial budget takes care of the funding aspect.

Why would a company want to create a master budget?

There are many purposes that a company can serve by developing a master budget. Owing to its comprehensive nature it acts as an integration tool amongst different functions of the organization. It integrates the aims and targets of the procurement, with that of production and manufacturing and ultimately to sales and marketing. In short, it helps bridge the gap and develops coordination from rock to ring in the organization.

This coordination and integration require communicating with everyone across different functions of the organization. Everyone is considered accountable for his or her actions; a sense of ownership develops amongst the employees and hence a company would want its employees to be motivated enough to achieve their and company’s goals. This only happens when the objectives of both are aligned and employees are motivated enough to achieve the same.

The master budget sets the targets for many actions that managers have to take. Outlook on sales might require capacity expansion, bulk amounts of raw material procurement, managing labor, etc. This would require incurring a huge amount of capital expenditure; for which funds would be needed. Hence the acquisition of funds timely payment of funds etc. all needs to be timed and matched. Hence the budget guides the acts and the performance and their timings.
Advantages and disadvantages to a Master Budget

            A master budget is a planning tool for the organization. It communicates the aims and objectives of the company to the functional level employees and management, which notifies them in which direction are their efforts needed. Since it is a master budget, it integrates the performance of each individual, function, and department to that of the company goals.

            But the disadvantages of a master budget include the extensive time required in preparing the budget; moreover, in this era of uncertainty master budgets need to be regularly and continuously monitored and reviewed. To act as a control and monitoring tool, it needs to be accepted by everyone across the organization, since how it is perceived by everyone is the key to its success. And hence, one of the disadvantages is that behavioral biases may arise.