Introduction to Finance for Managers - Essay Example

Budgeting, Business Planning, motivator and de-motivator of employees Budgets are a useful tool for planningan organization’s expenditures keeping the future targets in mind. When managers use budgets to ensure they are meeting their plans, budgets also are a control technique. As a control device, budgets are reports that list planned and actual expenditures for cash, assets, raw materials, salaries and other resources. In addition, budget reports usually list the variance between the budgeted and actual amounts under each heading. The budget should be created for each department and division within an organization no matter how small so long as it performs distinct project, program or function. Top managers use budgets for the company as a whole while middle managers traditionally focus on the budget performance of their department or division. Normally the types of budgets used in different units pertain to expense budget, revenue budget, cash budget and capital budget. And expense budget focuses on anticipated and actual expense for each department. When actual expenses exceed budgeted amounts, the difference signals the need to managers to identify whether a problem exists. It could highlight inefficiencies or leakages or in retrospect if expenses are below budget, it could signal exceptional efficiency or failure to meet some other target, e.g. sales. Revenue budget lists forecasted and actual revenues of the division and / or the organization. Cash budget estimates receipts and expenditures of money of a daily or weekly basis – it shows the level of funds flowing through the organization and their nature. Cash budget is very important for liquidity management of the company for daily business activities. Capital budget is for planned investments in major assets. It not only have large impact on future expense, it is for investments designed to enhance profits of the organization. Capital budgets needs to be monitored in order to evaluate whether the assumptions made about return on such investments are holding true. Many traditional companies use top down budgeting which means that the budgeted amounts for the coming year are literally imposed on middle and lower level managers. The managers set departmental budget targets in accordance with over all company revenues and expenditures specified by top executives. Although there are some advantages to the top down process, the movement toward employee empowerment, participation and learning encourages the adoption of bottom up budgeting – a process in which lower level managers anticipate their departments’ resources needs and pass them to top level management for approval. A top down budgeting approach has been predominant in business world in the past. However in a lot of cases the budgeting targets that were communicated and misused by managers a number of time. The targets communicated by the headquarters may be achievable but when the filter down to lower level managers and workers a cushion is added at each level making the target difficult and in some cases unachievable. When the unrealistic targets that have not been achieved the ground level employees and/or lower level managers are penalized while middle and top level management is rewarded. Such a process creates an environment where employees – even if they have stretched themselves to the limit – are demotivated and don’t trust their management for long haul. In the modern business world it is strongly advocated that bottom up budgeting process should be adapted. In a top down budgeting process, the lower level manager act more as simple processors and lack the vision of bigger picture. Such an employee would soon lose the sense of belonging and will not be working hard enough to meet the budgeted targets, especially if they were dictated by top level management. A bottoms up approach also enables the employees to take ownership of the budget communicated by them. Taking ownership of the targets will entail pro-active decision making where people try to be more innovative and productive. The budget when decided by a manager will instill the sense of responsibility and when achieved, brings with it the sense of achievement. An exercise by the lower level managers for business planning and ownership of the plan will greatly help in grooming future managers for the company which will benefit the company in the future. All of the factors, making employees feel part of the company, empowering them with decision making, ownership of the business and sense of responsibility along with sense of achievement directly contributes in improved employee motivation. However a simple bottoms up budgeting is not sufficient for growth of the company, as discussed by Welch (2005). Welch discussing the draw back of such a dry approach. In a bottoms up approach, people try to minimize their risk and maximize their bonus, i.e. they try to come up with targets that are absolutely achievable since companies reward for hitting the budget. However at the same time, top level management at headquarters are also prepare their business plan. Since they are rewarded for increase in earnings, therefore they are aiming for significant growth in sales and profits. The division represents their most conservative approach while top management demands best case scenario figures. Both sides negotiate a settlement somewhere in the middle and everyone is happy. In a similar scenario, a division takes weeks to develop a business proposal and present it to the top management. Later on top management raises the revenue targets and reduces the budget allocation for the proposal. In the first scenario, employees are more motivated to negotiate than to deliver their best while in the second scenario, the whole division is demotivted due to lack of budgetary allocation. In both scenarios budget is not exactly linked with the company’s strategy and top level management has not asked the important questions such as how can last year’s performance be beaten? What has been the performance of the industry and where do we stand? And what is out competition doing and how can we get ahead (or remain ahead)? The bottoms up approach is not discounted by the above mentioned criticism, but it goes to explain that bottoms up approach needs to be refined and proactively managed in order to be successful. According to Welch (2005), budgeting process should be refined to such an extent so as to “… ferret out every possible opportunity for growth, identify real obstacles in the environment and come up with a plan for stretching dreams to the sky.” Such a focus changes the budgeting process to an operating plan where both sides of the table come up with a business plan that is not negotiated or trimmed down, but is focused on growth and stretch goals. Unlike a conventional budget, the operating plan can change with the business environment. A division can have more than one operating plan adjusted according to business challenges faced. In such an environment, reward plans will need to be re-aligned also. According to Welch (2005), when budget is developed as a dynamic operating plan with stretch goals, compensations for individuals and business units should not be linked with performance against the budgeted figures. It should be decided against the performance against the prior year, compared with performance of competition and general business environment. The suggested system requires a radical change in how business is done and ‘candor’ needs to be a corner stone of every business discussion. In today’s highly competitive global environment, companies need to continuously re-evaluate their methodologies in order to remain successful. It is strongly recommended that our company adopts a bottoms up approach in budgeting process and make it dynamic so as to increase employee involvement and motivation for making our company more successful. Works Cited Daft, R. 2000, Management, Dryden Press, Florida Welch, J. 2005. ‘Winning’, HarperCollins Publishers Inc. New York. Read More