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Role of budgeting as a management tool
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Budgets has been widely used by a lot of organizations since it was first introduced, because it can helps managers to properly plan and control the business’s resources. Successful control mechanisms as Schick believes are the essential to budgetary development (Gray, Jenkins, and Segsworth, 2002, p.11). However, recently the use of budgets to control organizations has been the subject to criticise and debate (Hansen et al., 2003 cited in Libby and Lindsay, 2010). In this era that full of unpredictable environments has make it even harder for a business to achieve the targets set in the budgets. In fact, European surveys also reported that there has been a growing dissatisfaction among organizations about their budgeting system (Neely et al., …show more content…
There are some valid examples from literatures as to why budgets are may be unnecessary tool in a company. The problem with budgets is that the managers may be rewarded when the planned budgets are achieved. This system may lead a poor quality of budgets, because the managers would most probably only focus on achieving the target and will try to set lower goals. Jensen (2003, p.381) stated that people is getting rewards for lying in the budget-based system; as a matter of fact, the reality is that in most organizations would use budget system that rewards people for ruining important information and punishes anyone who does something that give benefit the organization. This type of activity is certainly unhealthy and completely misused the budgeting system. Other than that, if a company have a fixed-performance contract, may lead the managers into fear that if they do not spend any left overs in the budgets by the end of the year, their funding in upcoming years will be cut down (Gary, 2003). Based on Hackett survey, it showed that between 60 per cent and 90 per cent from the top 2000 global companies implement this type of contract. Hence, these practices are not that practical and may drag down the company’s performance. As stated by Welch (2005 cited in Libby and Lindsay, 2010, p.56) that budgets may conceal any opportunities and stunt growth of the
...hould be clearly outlined. Goals and Objective must be discussed, and the implementation process. If I were to side on this budget, it would be Janet Dobbs’s. I believe she had clear financial plans as to how much money should be allocated and where on behalf of the organization. Her only downfall, I would say is not keeping the mission in mind. She only had one goal in mind and that was to eliminate the debt, once the debt was eliminated, what other goals would the company strive to obtain. I understand the board members are not worried about the debt at the moment, but to only focus on touching the public through art, and not the finance of the organization as well, will result in the company eventually closing.
Operating budgets are budgets that deal mainly with the day-to-day operations of a facility. This may include wages, utilities, rent, and items purchased that have the intent of lasting less than a year (Johnston, n.d). This type budget provides the needed information regarding the cash on hand needed to operate the facility during a fiscal year. Capital expenditure budgets deal with more long term items such as equipment or property. As stated by Johnston (n.d.), it is necessary to have a capital budget for continued growth of the business. You complete this task by purchasing assets that produce an income. Capital expenditure budget have the potential to cover a five- to ten-year period (Baker & Baker, 2014, p.174). Items included in the capital expenditure budget may also include loan interest and bondholder's interest. The operating budget and the capital expenditure budget interact with one another. To demonstrate an example: a healthcare facility purchases a chemistry analyzer for its clinical laboratory. The chemistry analyzer is placed in the capital expenditure budget, but the maintenance for the analyzer is placed in the operational budget. The capital expenditure expense is the chemistry analyzer, but the materials used to maintain the chemistry analyzer are operational expense.
According to Argyris (1953), “budgets frequently serve as a basis for rewarding and penalizing those in the organization” (Argyris, 1953, p. 97). Further, Argyris (1953) describes a budget as a measuring instrument, which sets goals which mean that people can be measured in this way (Argyris, 1953). People tend to have a problem with this and complain about this part of the budget as no one wants to seem as inefficient. For supervisors, budgets can be a way to put things in writing, and thus vent other unrelated issues (Argyris, 1953). Also, budgets can be considered to be pressure devices to keep employees on track and motivated, while also being pressured (Argyris, 1953).
Corning’s resource allocation process shows another ill fated effort towards an organized and objective budgeting and planning process. The inefficiencies and disorganized implementation of the plan that resulted plague company performance. The underlying problem of inadequate communication dissemination of Corning has led the managers, workers and committees to focus on different goals. The Resource Committee and Business Committee through the splitting of a previously larger group, which was believed to be slowing down innovation due to conflicts of interest between two subgroups (cost reduction and innovation). However, by just splitting the two groups, nothing was effectively put into place to arbitrate the issue, and once again the resource committee (known for having only accountants) focused mainly on cost reduction while the business plan focused on which projects had innovative ideas.
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Participative Budgeting is the situation in which budgets are designed and set after input from subordinate managers, instead of merely being imposed. The idea behind this sort of budgeting is to assign responsibility to subordinate managers and place a form of personal ownership on the final budget. Nearly two decades of management accounting research has resulted in equivocal findings on the consequences and effects of participative budgeting (Lindquist 1995). Participative budgeting certainly has various advantages, these include the transferral of information from subordinate to superior increased job satisfaction for the subordinate, budgetary responsibility and goal congruence. Its disadvantages include budgetary slack and negative motivation, however it is the conditions in which participative budgeting takes place determines whether the budgeting process is successful. The conditions are dependent on various factors such as the level of participation, level of subordinate influence, the extent to which budgetary slack takes place, volatility, job related information, and the complexity of the budget.
Traditional Budgeting is still a very popular technique and is widely used by the organizations across the globe.(Dugdale & Lyne, 2006).Environment is changing and hence the budgets should promote the innovations and keeping key employee need rather than restricting them (Daum, 2002).
A basic budget plan is knowing how much income you will have, how much money you will spend, and how much money, if any, will be left over. The definition of budget is an estimate, often itemized, of expected income and expense for a given period in the future. A total sum of money that is set aside or to be used for a specific purpose. The budget is a financial plan that incorporates assumptions based on personal or business conditions. It is an extremely important tool which serves as a plan of action to achieve objectives, a standard for measuring performance, and a device for dealing with unexpected situations. By allocating resources, monitoring and reporting the results against the budget, businesses have the necessary details to make informed decisions and any necessary adjustments. No matter the size whether is it personal or for business, budgeting is essential for financial management. As a Financial Analyst at Cornell University, the institutional priorities, policies, and metrics related to the University’s core mission are used for operational planning and financial management. The key is to strike a balance between mission requirements and the resources available.
Budget participation is another factor that is important in evaluating and determining the firm’s performance. Sharing of information among organizational members is crucial in the budgeting process. Research has found that if the opinions of the employees are collected and reviewed in the budgeting process, then the firm will have a higher possibility of achieving the goals and targets compared to budgets which are set up by the directors. However, this is only considered effective if the employees value their membership in the committee and think of the targets of budgeting as a common desired goal. Hence, participation by individual members can improve group interaction.
Capital budgeting is one of the primary activities of a company. Most of the company uses capital budgeting for decision making process of selecting and evaluating long-term investment. The company have to make a right decision with respect to investment in fixed asset such as purchasing of new equipment and delivery vehicles, constructing additions to buildings and many more. The decision must be right because of the project involve huge amount of cash outflow and it is committed for many years.
I learned that school budgets not only inform us of priorities, but they can also serve as a communication tool for the whole district. I feel as if our school could use the budget as an opportunity to discuss progress as well as our strategic plan, but they don’t. Teachers and parents rarely hear about the budget’s educational and operational objectives and accomplishments. This is definitely something my school could improve on, since the school budget should reflect the community and their values. I also think there is a skewed public, and even faculty, perception regarding the school budget. Some of these views include that the school budget is wasteful, administrators are overpaid, administrators are not forward-thinking, and money is spent in the wrong areas. These adverse perceptions of the school budget are often heard during difficult economic times, such as when our school district recently went on fiscal distress. However, I have learned that without meaningful involvement of the community, educators, and staff, these perceptions will never
A budget is a plan of action set by resources required to implement the plan. Simply, budget plans are put in place to help fix most of the fiscal damages that a company and or an agency would face. A recent study by Walther and Skousen (2009, pg. 10) indicated that, “A budget is a detailed financial plan that quantifies future expectations and actions relative to acquiring and using resources. Budgets don 't guarantee success, but they certainly help to avoid failure”. Although, there is no promise of success, a budget plan tends to predict the spending and can show the fiscal path of an entity. Hence, it also allows room for avoiding excess spending that can cripple a business. In this easy, the New York City-Department of Consumer Affairs’-(NYC, DCA) budget reports will be used as an example to better understand budget practices. This report sets out to give some possible recommendations on how to solve the current budget predicament faced by that the NYC, DCA. Based on the analysis of NYC, DCA’s current budgeting process discussion of the budgeting literature will evaluate the advantages and limitations of the current budgeting process. Suggestions on the implications of the actions will be offered so as to meet the budget requirements.
It requires an adequate and sound organizational structure, that is, there must be a definite assignment of responsibility for each function of the enterprise. Budgeting compels all the members of management, from the top to bottom to participate in the establishment of goals and plans. Budgeting compels departmental managers to make plans in harmony with the other departments and of the entire enterprise. Budgeting helps the management to put down in figures what is necessary for a satisfactory performance. Budgeting helps the management to plan for the most economical use of labor, material and capital. Budgeting tends to remove the cloud of uncertainty that exists in many organizations, especially among lower levels of management, relative to basic policies and objectives. Budgeting promotes an understanding among members of management of their co-workers' problems. Budgeting force management to give adequate attention to the effects of general business conditions. Budgeting aids in obtaining bank credit as banks commonly require a projection of future operations and cash flows to support
Comparing the performance with the plans, a manager can make necessary adjustments to minimize discrepancies from the projected goal. In this way, the firm not only controls operations, but also can delegate authority without the loss of control. On the other hand, the preventive aspect of budgeting encourages management to stay within the allotted financial boundaries that have been set my management. Many times this can cause animosity and hostility among managers and employees because there is a consensus that these budgets are used as control mechanisms, which sometimes invoke fear.
An advantage of performance budgeting would be transparency; this type of budgeting allows stakeholders the ability to ascertain the amount of service delivered for the funded cost. Basically it measures to what extent does government agencies getting what they paid for. This type of budgeting also provides an avenue by which management and line staff can contribute feedback for the enhancement of a program’s success.