Organizations are Beyond Budgets - Assignment Example

? Organizations are Beyond Budgets Organizations are Beyond Budgets Budgeting is essential for financial management, and every successful organization develops a financial plan that guides its operations. Budgets tell the organization what it has achieved, where it is going, and the mechanisms of reaching its goals from a financial angle. Creating a budget can be an uphill task for an organization and a well-thought-out budget are a key to financial growth, stability, and fulfillment of the organization’s mission. The organization achieves its goals through stringent timing of financial resources by controlling the rate of spending. However, over the past years, top managers and controllers have expressed their dissatisfaction of the budget as an instrument of planning and controlling. Since the 1990s, researchers have been developing alternative and systematic concepts to traditional budgets. These concepts aim at replacing the traditional budgeting process and still remain realistic, flexible, consistent, and measurable in order to manage the financial resources effectively. A survey of European enterprises conducted by Boeson (2000) showed managers agreeing that their planning and budgeting processes were inefficient and ineffective in controlling financial resources. Several respondents believed the budgeting process resulted to small benefits relative to the large amounts of resources at their disposal. This led to firms changing the budgeting process or abandoning it all together. Controllers think of new ideas such as balanced scorecards, operational performance measurement, and investment risk portfolios and so forth. These aspects make the budgetary processes complex and make business management a complex process. This complexity is evident in the fixed, costly, detailed, and unnecessary annual budgets of organizations. The changing business environment created by computers and standardized software has a lot of information that makes managers overburdened with the business processes. According to Cokins (2001) current managers are less informed about the company’s operations than managers operating 30 years ago. The beyond budgeting concept has been introduced in several organizations as a replacement for the traditional budget making process. One significant contributor to this shift is the transition in the internal processes that have shifted from the seller’s market in the industrial period to the buyer’s market of the high-tech age (Welch and Byrne, 2003). Organizational processes involving purchase, production, and sales involving division of labor in the industrial age have shifted to processing chains that link supplies to customers. The linear relationships between input and output have led to dynamic customer-oriented business combinations facilitated by technological inventions. This has limited the applicability of traditional budgets in the high-tech age since they are products of the industrial society. Post-industrial business managers require controlling instruments that are flexible so as to compete in the dynamic business environment. The concept of Beyond Budgeting focuses on greater flexibility in the transition of transitional management model of production and sales to a model of market preview and production. The new model of management is based on customer demand. Self-optimization in the new financial management model is attainable by decentralizing responsibility and decision making to empowered and motivated employees. The budgeting process was based on a hierarchical management system that relied on decisions from top management levels. In this regard, executives used the budget as a foundation for outmoded and fixed performance in the organization (Boeson, 2002). The performance of an organization was gauged by budgetary allocations and stipulations achieved within a specified time. This made managers and employees do anything to reach budget goals (Jensen, 2001). This process concentrated on the functional areas and departments for cost reduction and short-run profits instead of the long-run, value-oriented strategy implementation. The Beyond Budgets concept addresses the dynamic regional or global market characterized by rapid changes, an area ignored by traditional budgets. A shift from the budgeting process optimizes the performance of individual managers and employees eliminating the unethical behavior of working to attain budget goals. An enterprises’ planning and controlling system can be reformed by abandoning budgets and concentrating on leadership principles that improve the firm’s culture and performance. Managers and employees are liberated from the dissatisfying control system and motivated using shared values (Kanter, 2006). This is crucial for enabling a company motivate the innovative potential within managers and employees. Creating profit centers allow subordinates more latitude for making decisions. This decentralizes responsibilities for producing results and acts as an instrument for self-control. Decision making encourages managers and employees to engage in innovative entrepreneurship ventures. These are essential for realizing long-term organizational goals and increasing the productivity of employees (Bowditch, 2002). Organizations can create customer oriented network organizations by decentralizing decision and performance responsibilities from management to operational levels. This will enable managers and employees engage in self-controlling activities. The traditional multi-divisional model of management placed top management as the fountain of knowledge, resource allocator, and strategic planner. Control was performed by middle managers while implementation was done by front-line managers (Graham, Harvey & Rajgopal, 2005). This method coped with complexity by placing activities of product lines or regions in separate management compartments. This method stifled sharing and innovation by concentrating on hierarchy rather than customers. Managers and employees had to adhere to the budget plan. Control reports were fed up the hierarchy, and new directives would be issued if performance veered off the track. Budgets and plans created by operational managers increased productivity and division of labor and were effective in the industrial age. The current business system puts more emphasis on market trends driven by customer preferences rather than the organizational production system. All activities ran by an organization such as productions have to conform to the market trend that varies in different parts of the world. The current competitive climate is uncertain, and many people are required to take decisions, increase innovation, and respond to market pressures. In the traditional model, the market was stable, and competitors were well known (Jensen, 2003). The management would easily predict the actions of competitors when creating budgets as a strategy to maintain competitive advantage. Currently, business units are accountable for customer outcomes and the information economy requires networks of autonomous business units. The targets and plans of the business units change with the dynamism of the business environment, which may surpass the previous allocated resources. The market is flooded with similar goods from different manufactures, and organizations have to respond to different sources of competition. This calls for flexible resource allocations strategies that enable operational managers respond to emerging sources of competition. Coaching and supporting leadership in an organization makes top management an intervention branch that responds to operations in a subsidiary way. This occurs when decentralized managers are unable to solve a problem within the organization. Managers are able to coordinate the operations of the organization and control both the internal and external markets (Jones & George, 2011). Organizations relying on external and internal markets do not require budgets since production is determined by market trends. Coaching leaders helps improve employee abilities on participating on development activities and improves their decision making abilities. This liberates business activities from the traditional budget controlled processes to dynamic activities relying on decisions of business units. In this way, an organization has the ability to develop several leaders who can participate in setting the goals of an organization and developing dynamic ways for their achievement. The organization can control its activities in a more flexible manner compared to control mechanisms dictated by the budget. Organizations have to shift their focus from budgetary goals to planning and control for non-monetary performance indicators. The organization can utilize self-adjustment and performance enhancing benchmarks oriented towards internal and external competitors instead of relying on internal revenue and cost targets (Bogsnes, 2009). This helps an organization extend the controlling perspective from the principle functions to the deeply embedded reporting levels of sales, regions, customers, and product channels (Cavico, and Mujtaba, 2009). These reporting levels have greater response to competitors than the entire firm as a whole. Market changes may affect a single level making rearrangement possible without affecting other levels. Budgets are input oriented cost strategies that control business activities. Organizations require control systems that are output oriented. This is necessary for responding to market changes and regulating the inputs to the desired outputs. Control dictated by the market help reorganize the enterprise to fulfill the output demands that in turn reshape the financial condition of the organization. Integrating strategic planning and operational budgeting ensures adequate funding for activities implementing the strategies (Moeini, 2007). This isolates strategic planning from firm operations, which increases the efficiency of the organization. Budgets are created once a year and determine business activities to be undertaken by the organization for the following 12 months. A dynamic rolling approach in strategic planning is necessary for reshaping business activities quarterly or monthly, which enables the organization to coordinate its activities continuously. The business activities can be changed to conform to the business demands for the current quarter or month. This shifts investment levels from the entire firm to individual divisions. Budgets allocate capital resources centrally, and the firm makes investments as a whole. Investments in the business units are made according to their requirements, and the units are coordinated centrally from a determined return on investment plan. An anticipative information system helps an organization detect and respond to the early warnings. Relying on historical financial data makes an organization blind to the impending danger in business activities and financial trends (Zhang and Gimeno, 2010). Non-financial data permits continuous updates in the business strategy, investment, and operations dictated to the changing environmental changes. This allows for team-based incentives, which award workers equal and moderate rewards as a way of encouraging teamwork and cooperation. Team based incentives improve the performance of the organization by placing more people on the lookout for impending dangers and threats to the organization. These teams are also essential for developing response strategies that mitigate the dangers faced by an organization. These strategies are essential for realigning the operational and financial obligations of the production teams. Flexibility in operations as per the information contained in the business systems helps lower costs in terms of manpower, time and money consumed when reviving the business after a disaster has occurred. Goal setting has been proven to be instrumental in improving performance and productivity instead of the budget. According to Jones and George (2011), employees with challenging and measurable goals are more productive than employees lacking these goals. Managers provide feedback to employees to gauge their goal attainment levels. Self-efficacy is an important concept for effective goal setting, planning and controlling expenditure. Self-efficacy refers to the perception that someone can accomplish a particular task. Employees with concrete goals accept or believe that they have the ability to do the job and feedback from the manager acts as a self-monitoring technique. This increases the level of motivation within the employee compared to cases where these variables are non-existent. Goal-setting is also notable for creating a work culture that focuses on performance and for promoting better planning and control mechanisms. Goal setting helps maintain an organizational culture centered on continuous learning and proper communication (Williams and Mujtaba, 2010). Organization troubles usually start at the top of the hierarchy. In the budget process, difficulties can originate from external investment analysts. The work of investment analysts is to evaluate stocks and issue recommendations to investors. The analysis incorporate earnings forecasts to justify their recommendations thereby issuing executives with performance targets. These forecasts have optimism and biases and pressure executives to undertake any possible way of achieving the expectations. This makes them optimistic over their results rather than the procedures, leading to unethical behavior. This optimism originates from the desire to advance career and increase trading commissions and maintain the relationship with the executives (Cowen, Groysberg and Healy, 2006; Hong and Kubik, 2003). Analysts come under pressure to protect their careers by providing forecasts that are bold and pleasant to the executives. This eliminates the necessary ethics for goal-oriented business processes by an organization. Improving the attractiveness of an organization enables it recruit more talented employees in order to increase the potential and financial performance of the organization (Hope and Fraser, 2003). This involves value management where the organization focus on long-term decision making processes that increase the firm’s earnings. This contrasts operational budgeting that focuses on the short-term profit maximization. Value management helps managers and employees develop long-term business plans that target the intended customers. These plans usually have room for adjustment and improvement depending on the market conditions. Controllers are also to invoke benchmarking that allows comparison between the firm and best-practice organizations outside the industry (Gahagan, 2003). In most cases, operational budgets regulate the performance of an organization with respect to internal standards. A successful organization expands its comparison scope from the internal standards to industry competitors and high-performing organizations beyond the industry. An organization is then able to gauge its abilities according to performance levels of competitors and other organizations. The concept of Better Budgeting simplifies the traditional budgeting process b y improving its institutional and functional aspects (Kaplan and Norton, 2001). It budgets for business processes that are crucial for operating the business. This is essential for reducing the number of planning objects incorporated in the budget making process. Better Budgeting helps controllers analyze main business processes thoroughly and plan for them by allocating the necessary financial resources. Operating budgets concentrate on historical data as the basis for setting current expenditure limits. Focusing on key concepts also plays a role in the process of setting organizational goals by helping employees focus on the main business processes. Funding the main business activities is essential for maintaining a competitive advantage over rival business organization within the industry. This yields high financial gains in the long term compared to traditional budgets that have short-term financial goals. The concept of Advanced Budgeting constitutes the middle road between Beyond Budgeting and Better Budgeting. It incorporates strategy and market orientation to define clear goals for planning and budgeting. The process used in Advanced Budgeting is clear and puts emphasis on the necessary and meaningful constituents (Neely, Bourne and Adams, 2003). This simplifies the budgeting process and improves the planning process through goals specification. This increases the flexibility of budgets by allowing for self-correcting goals incorporated through rolling planning. Self-regulating processes reduce the time utilized when reviewing a budget and the number of iterations involved. Rolling forecasts are reviewed regularly and help the budget to adapt to shifting market conditions. Adaptation improves the efficiency and efficacy of the budget relating to market conditions and the business process. Advanced Budgeting also helps managers eliminate resource wastage and rewards managers for improving the bottom line of returns. The budget was a tool utilized to allocate financial resources and develop organization goals that were based on financial gains. Top executives would develop the budget and middle class managers acted as controllers. Operational managers implemented the budget and device mechanisms of achieving the goals stated in the budget. The budget would be created by inspecting historical financial achievements and internal production limits. This method was remarkably effective in the industrial age that constituted minimum market dynamism, and it was easy to forecast strategies of competitors. In the current market, organizations are faced with a rapidly changing market that is determined by consumer purchasing trends. Organizations have eliminated the use of the budget to set their goals and instead consider external market forces. Employees participate in goal setting and decision making processes that make the business process self-regulating depending on the demands. These activities help the organization develop long-term financial goals. References Boeson, T. 2000. Creating Budget-less Organizations with the Balanced Scorecard. Balanced Scorecard Report, 6. Boeson, T. 2002. New Tools for a New Corporate Culture – The Budget-less Revolution. Balanced Scorecard Report, 1. Bogsnes, B. (2009). Implementing beyond budgeting: unlocking the performance potential. Hoboken, N.J., John Wiley & Sons. Bowditch, N. (2002). The American Practical Navigator. Bethesda, MD: National Imagery and Mapping Agency. Cavico. F. and Mujtaba, B. 2009. Business ethics: The moral foundation of effective leadership, management, and entrepreneurship (2nd edition). Pearson: United States. Cokins, G., 2001. 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Academy of Management Journal, 53(4), 743-768. Read More