Budgeting As an Adequate Tool for Planning Essay

Excerpt from Essay :

Budgeting as an Adequate Tool for Planning and Control in Organizations:

A budget apart from being a coordinated and comprehensive financial plan for the resources and operations of a given future period is also intended to promote the managerial functions of control and planning. Over the years a budget has been perceived as a tool for forced planning as it constitutes the most important and basic management functions since other managerial functions such as staffing, organizing, controlling and directing are dependent on effective planning. Planning entails aligning company goals and objectives and finding out means in attaining these. Besides, decision making being at the heart of planning, effective strategies and policies must be able to contribute to the objectives and plans. (Talal, 1986)

A proper budgetary system must be able to underline and extend the planning role of all levels of management. Managers will be under obligation to look into the future and prepare for the changing situations. This forced planning concept till date is the largest contribution with regard of budgeting towards management. Budgeting assists in formulating short-term actions aligned with every long-term goal. Hence long-term planning or strategic planning is frequently impacted directly by budgetary information. Budget as a control mechanism is used in two ways viz: (i) Reporting Mechanism: First of all budget reports, comparing actual with budget plus analyses of variances, an explanation of the causes of variances, an explanation of any remedial action being undertaken as also a current annual forecast are used to keep the management information regarding the happening in the various divisions of a business enterprise. Budgetary control also acts as an early warning system so that management is able to take suitable action whenever required. (ii) Performance Appraisal: Budgetary system is used for assisting the top management appraise the performance of the individual manager. (Talal, 1986)

Consideration of alternative approaches: For decades together, most companies have formulated a centralized and rigid approach to budgetary forecasting & planning. But with changing times, companies are beginning to think and act in a different manner. Budgetary planning is assuming more of a company wide initiative with a far greater number of managers and employees contributing to the whole process. Several firms are trying to blend the conventional bottom-up approach to preparation of budget wherein functional department chief submits budget request that are prepared as a corporate budget with a top down approach in which budgets are prepared adhering to the strategic objectives summarized by the top management. (Whiting, 2000)

Whereas the annual budgets which were once rigid, the corporate world presently view budgets as documents which are open to revision on a continuous basis across the year. These changes will accelerate the pace of budgetary preparation process and lend budgets which reflect a company's finances and goals with far greater precision. Hence companies are on the look out for shorter processes largely fuelled by a new phase or enhanced budget planning and forecasting applications. Interestingly majority of the companies are shifting to strategic or top-down planning thereby adopting new budgeting and forecasting processes and practices. While budgetary planning normally kick starts with the figures of last year, strategic budget planning initiates with the objectives of the organization e.g. increasing sales by 15% and preparing a budget crafted to attain those goals. As an alternative approach, businesses are increasingly using budgets more for planning and control and link the budget back to the real outcomes. (Whiting, 2000)

2) Key factors related with a budget and the relationship between strategy and budgeting:

As opposed to conventional budgeting, strategic budgeting refocuses the budget from an annual plan angle for spending inputs into a multi-year plan to achieve policies. This is crucial as it assists in achieving the desired policy objectives in a more effective manner and ensuring that difficult decisions can be made within a strategic framework. The building blocks of strategic budgeting entails: (i) Aggregating fiscal discipline (ii) Allocation of resources based upon strategic priorities (iii) Efficacy & effectiveness of services & programs. The six critical components of strategic budgeting are (i) Medium-term budgeting shows the reality of operations. (ii) Fiscal discipline is indispensable for good economic management (iii) an efficient budget makes sure that every stakeholders discharge their respective responsibilities (iv) The best approach to budgeting is to blend judiciously top-down strategic decisions with bottom-up operational planning (v) Results are such that what get measured gets executed (vi) Active assessment of execution of budgets guarantees that the top management is able to fine tune budget estimates early. (Cartac, n. d.)

Strategic budgeting constitutes a top-down approach, initiating with the outcomes the organization desires to achieve and allocating resources proportionate to priorities. The various steps of strategic budgeting are (i) Development of concise objectives & goals for the meeting (ii) Prioritizing those objectives & goals (iii) Determining the manner in which the plan aligns with the overall strategic plan (iv) Chalking out tactics/elements for implementation of the objectives & goals (v) Budget elements & tactics (vi) Monitoring, reviewing and analysis. (Professional Convention Management Association, 2007)

Options beyond budgeting which may be used for planning and control in organizations:

Budgets are increasingly losing their importance and appear to be outdated by the reality that renders them to appear to be more questionable. Further while budget as the central entity of the corporate management system until the present, focuses controllers and managers on keeping budget limits and targets which were agreed once, in the present era's dynamic economic climate more and more the opposite is expected from businesses. Through operational measures and plans, managers and their businesses must be able to respond speedily to changes in the market dynamics. This is because compared with companies that existed half a century back, the responsibilities of the present day companies does not remain confined only to merely produce and sell. At present, companies are required not only to compete successfully in a seller's market but also in a buyer's market. (Daum, 2002)

The conventional corporate management instruments i.e. monthly and budgeting target/actual comparison have proven to be very inflexible. It is pertinent to note that the induction of the new management instruments like Balanced Scorecard that focuses upon improved internal coordination of important targets & of their realization and Value-Based Management which focuses on improved orientation of the company to external outlook has crafted the framework towards a performance management which is flexible and equipped towards strategic capital market. The thing which is missing is a change to measure management and operational planning which is flexible. (Daum, 2002)

The Beyond Budgeting -- BB model aims to fulfill this gap. BB as "managing and controlling without budgets" paves the way for new types of possibilities for important enterprise management with the move over to resource allocation which is flexible. Svenska Handelsbanken -- a bank having branches all over Europe has proven that is possible to manage without budgets and yet outperform its peers on key metrics like RoE, Cost to income ratio and of course client satisfaction. The two fundamental elements of the beyond budgeting model are new leadership principles focused on the belief of empowerment of employees & managers and novel and management processes which are adaptive. The new leadership principles must be capable of unlocking the complete potential of employees & managers to enable the organization to respond in a proper way and very fast. (Daum, 2002)

BB is built on the edifice of Adaptive Management processes which are not focused on resource plans & fixed targets. Operational plans which are flexible, rolling forecasts and continuous performance assessment comprises the controller's arsenal to provide support to this. BB puts forth a radical approach, the execution of which needs the dedication and support of the entire management team. A BB management team should typically comprise of HR personnel, controlling specialist,…

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