Budgetary Control of Profit and Non-Profit Organizations - Essay Example

How do the differences between profit and non-profit organizations affect the way in which they should employ budgetary controls? The main objective of almost all business organizations is to make profits. However, there are some business establishments whose main aim is not to realize profits (Kaplan, 2001). These groups of business establishments are mainly comprised non-governmental organizations, such as the Goodwill and government establishments, which aim at providing basic services like health care to the public at low rates. Such business establishments charge low fees for their products just to meet the operating costs hence they offer goods and services at low cost. Budgetary controls involve regulating the operations of an organization by establishing targets and standards with regard to expenditure and income. This regulation is done to ensure performance of a business institution. It incorporates various methods of applying financial values to financial forecasts in the management of a business organization. These values are usually compared to actual estimates. Irrespective of whether business is profit or non-profit oriented, having budgetary control is essential since it makes sure that the organization realizes success. However, non- profit organizations usually use budgetary control methods that are different from those used by profit oriented business establishments (Kaplan, 2001). Budgetary control methods used by business establishments usually involve management accounting (Lanskroner, 2002). Management accounting refers to the process whereby the management of a business establishment uses accounting information that is provided to them in order to make decisions concerning the future of the company. For companies whose main intention is to realize profits, the accounting information is fundamentally future oriented and not past oriented. The information is also model based and not case based. The information is also intended for managers and not the company’s stakeholders. This type of accounting is done on request by managers, and it is usually treated with a lot of confidentiality. In profitable organizations, the objectives of budgetary control are: 1) to ensure that an organization studies themselves are carefully applied in all of its aspects; 2) to ensure that the whole management system comes together and formulates how the business organization should be run in order for the company to realize maximum profits; 3) to promote planning in order for everyone in the establishment to have a sense of direction; 4) to ensure that a business establishment’s policies are clearly defined and that their main aim is to realize profits; 5) to maximize the effect on how both capital and staff are employed; 6) to reveal areas in the company that can be improved in order for the company to realize maximum profits; 7) to facilitate the comparison of the business establishment with external environments with the view of increasing its revenue; 8) to coordinate and direct activities in the business to ensure that they lead to achievement of the company’s goal which is maximum profits; 9) finally, allowing and supporting the control function of management by analyzing actual results with the expected results (Jiambalvo, 2009). This information about the performance of their staff is provided to the managers. Managerial accounting is basically designed for companies whose main aim is profit maximization. However, the use of some managerial accounting concepts is beneficial to non-profit business organizations because by adopting such techniques managers of non-profit organizations are able to set benchmarks or measurements that are appropriate for controlling, planning, and decision making. There are various techniques used when it comes to managerial accounting in a non-profit business establishment. One technique used is where the cost of raw material, labour and total overheads will determine the health of the business establishment. This is very different from the typical managerial accounting concepts used by profitable business establishments. This is because the health of a business establishment is primarily determined by how much profit the organization is making (Balakrishnann & Sivaramakrishnan &Sprinkle, 2008). Non-profit organizations use incremental analysis technique to determine the success of programs and operations. For example, if a non profitable organization deals with selling various products, then it can determine which business venture is more successful by evaluating the response they receive from their customers. This is very different from what profit realizing companies normally do. Profit realizing companies usually determine business ventures which are successful by evaluating the amount of revenue which they get from the different business ventures a company undertakes. Finally, non-profit business establishments usually use concepts of managerial accounting simply as a tool to determine whether the activities the organization is undertaking are successful or not. The word “success” in profitable organization usually depends on the factions of the organization hence it has no clear definition, unlike profit realizing companies whose definition of success is to realize maximum profit. Irrespective of a company being non profit or profit, budgetary control methods are applied in the everyday activities of a business establishment (Young, 2003). Budgetary control is used by companies to determine which business establishments are to be given priorities and which activities in the business should be paused for a while. For example, in a non-profit business organization it is essential for the business entity to have enough revenue to meet its operation costs such as paying rent and wages for employees. If its activities do not bring back enough revenue to ensure that it is meeting its operation cost, then the management of the organization will determine on what operation cuts to make through budgetary control (Mayers, 2004). This is different from how a profit realizing organization would apply budgetary control in its functions. Such an organization if presented with the same dilemma, would cut back on business activities that are generating no profits before considering cutting on operational costs (Mayers, 2004). In conclusion, management accounting concepts used in non-profit organizations do not differ a lot with those used by profit realizing organization. The main difference occurs in the application of such concepts. This is due to the fact that non-profit organizations focus mainly on delivery and not profit maximization. Other factors such as tax also influence the techniques which the non-profit companies use. This is because most governments usually offer tax holidays for non-profit business organization. References Balakrishnan, R & Sivaramakrishnan, K & Sprinkle G. 2008. Managerial Accounting, John Wiley & Sons, New Jersey. Jiambalvo, J. 2009. Mangerial Accounting, John Wiley & Sons, New Jersey. Kaplan, R.S. 2001. Strategic performance measurement and management in non-profit organizations, Non-profit management and leadership Vol 11(3) p353-364. Lanskroner, R. 2002. The Nonprofit Manager's Resource Directory, John Wiley & Sons, New Jersey. Mayers, R. 2004. Financial Management for Nonprofit Human Service Organization, Charles C Thomas Publisher, Spring Field. Young, D. 2003. Techniques of Management Accounting: an essential guide for managers and financial professionals, , McGraw Hill Professional, New York City. Read More