Budgeting Hope and Fraser - Essay Example

Over the years, a widely used device for managerial control is the budget. Budgeting is the formulation of plans for a given period d in numerical terms in the future. Budgeting is plans converted into money availabilities. In real sense, budgeting is at the hearth of the administrative process. Budgets are statements of anticipated results, as in revenue and expenses and capital budgets. The primary purpose of budgeting is to state plans in terms of numbers and breaking them into parts. The manager sees clearly what capital will be spent by whom and where, and what expenses, revenue, or units of physical input or output the plans will involve. After ascertaining this, the limits of the budget follows. A budget, to be useful to a manager at any level, must reflect the organization pattern. When plans are complete and coordinated very well to fit into the departmental operations, the department budget becomes useful as an instrument of control. Budgeting, Hope and Fraser (1997:22) argue, should be dispensed with because it: "strengthens the vertical chain of command and control rather than empowering managers. It constrains rather than increases flexibility and responsiveness. It reinforces departmental barriers rather than encouraging knowledge-sharing across the organization. It makes people feel undervalued as 'costs to be minimized' rather than assets to be developed. And it is bureaucratic, internally focused and time-consuming." That is quite a diatribe. Yet, it seems from anecdotal and other evidence that budgeting remains 'alive and well' in most organizations. As stated by Hope and Fraser, budgeting involves several risks that there are managers who prefer to eliminate the use of budgeting in an organization. Budgets are used for planning and control. It is common practice that some budgetary control programs include the minute details that consequently become cumbersome and virtually expensive. First, there is a risk of overdoing the budget by way of spelling out minor expenses in detail that deprive managers of the needed freedom in managing their units. For instance, a department head in a poorly budgeted company was hampered in a very important sales promotion because expenditures for office equipment exceeded budgetary estimates. Such being the same, the new expenditures had to be limited, even though his total expenses in his unit where within the budget and he had funds to pay personnel for writing sales promotional letters. In another case, a department's expenses were budgeted in such less important details that the actual budgeting cost of many items exceeded far the controlled expenses. Another risk may lie in allowing budgetary goals to become more important than the organizational goals. As mentioned by Fraser, budgeting strengthens the vertical chain of command and control rather than empowering managers. Managers, in their desire to keep within limits, might forget that they owe loyalty to the organization's ideals and objectives. In one organization with a budgetary control program, the sales department could not get needed information from the medical department on the ground that the latter's budget would not stand such expenses. This conflict exists perhaps because there is no proper coordination; and normally, these are symptoms of inadequate management. Plans constitute a supporting and interlocking network and every plan should be clearly in a budget. It is interesting to note that it is often common for managers to say that an idea is good but it is rejected because it is not within the budget. Sometimes, budgets often control the wrong things. They measure inputs but ignore outputs such as the quality of the product or customer satisfaction. These items may be difficult to measure; yet they may be the key to success or failure of the enterprise. Some managers may no invest in research and development or invest in activities that will result eventually in greater market share because these investments normally do not show immediate results. It is wiser strategy to include these items in a long-range plan rather than in a one-year budget. Real savings may come from more efficient machines, new products or other innovative and creative ideas. Managers must always remember that budgets are designed only as tools and not as replacements for managing. There are certain limitations that must be tailored to each project if budgetary controls are to work well. The managers are the persons to administer the budgets inasmuch as they are responsible for budgeted programs. He staff officer assists in the preparation and use of the budgets. Hiding inefficiencies is also a disadvantage of budgeting. Budgets have a tendency of developing some precedents. The fact that a certain expenditure was made in the past can be a reference of its reasonableness in the present. If for a unit was once spent a given amount for supplies and equipment, this cost becomes a minimum for future budgets. It may be noted that some managers sometimes learn that budget requests are likely to be pared down in the course of final approval; and naturally, they ask for much more than they need. It is, therefore, necessary that budget-making should be accomplished by constant and deliberate standards and conversion factors by which planned action is translated to numerical terms. It may be inferred that the greatest risk in budgeting is inflexibility. "It constrains rather than increases flexibility and responsiveness", according to Hope and Fraser. The reduction of plans to numerical terms often gives some kind of misleading definiteness in budgeting. It is always possible that appropriation will prove that a big amount should be spent for this kind of material and smaller amount for another. These differences may make a budget obsolete almost as soon as it is formulated. If managers stay within the straight jacket of their budgets, the usefulness may be reduced or may be nullified. This is usually the case when budgets are made for long periods in advance. Budget preparations, working and administration must receive full support of top management. To be effective, top management should require division and department senior officers to defend their budgets. Active participation in budget-making is necessary to ensure success in the implementation. Some top executives believe that the best budget is to give managers in lump sum the amount of all their allowable expenditures for a period of time into a single amount in accordance with the goals and objectives of the enterprise. This kind of arrangement may be a good idea by giving department managers a reasonable degree of freedom in changing their budgets and in shifting funds, as long as they meet their total budget. Budget was also described by Hope and Fraser as "bureaucratic, internally focused and time-consuming." The budget is concerned with how budgets are actually formulated and implemented in an organization. Many conventional companies use top-down budgeting, which is in line with the bureaucratic approach. The budgeted amounts for the coming years are literally imposed on middle and lower level managers. The top-down process has certain problems such as lower managers often are committed to achieving budget targets. They are excluded from the budgeting process and resent their lack of involvement in deciding the resources available to their departments in the coming year. The bottom-up budgeting is one which is in line with the plan approach control. While this type of budgeting has its own advantages, this approach also has some problems. Managers' estimates of future expenditures may be inconsistent with realistic economic projections for the company. A university accounting department, for example, may plan to increase the number of faculty by ten percent which may be too much if the university plans to increase accounting students enrollment by only five percent. Many companies adopt joint process. Top managers define economic projections and financial forecasts and then inform lower managers of the anticipated resources available to them. Once overall targets are made available, department managers can develop their own respective budgets. Each department can take advantage of special information, resource requirements and opportunities. The budget is then passed up to the next management level where inconsistencies across departments can be removed. Budgeting is also considered to make people feel undervalued as 'costs to be minimized' rather than assets to be developed as mentioned by Hope and Fraser. Procedures are manners of presenting a rewarding area of planning and control to which a systems approach can be applied. These are the desirable tools for efficiently getting things done in a given way. Procedures are designed to implement plans and to respond to change. It should be noted that effective planning and control of procedures depend largely on recognizing that they are inherently systems. Procedures extended into various departments of the organization. For example, the accounting department tends to regard their procedures as concerned purely with their function; and yet, a simple payroll or expense account procedure reaches every nook of the company and affects many accounting activities. Purchasing, personnel and other functional department procedures do the same. Some procedures get out of control because of the specialized approach of each organization function in setting them up for its particular operation. Accounting procedures may conflict with purchasing procedures; differ slightly from personnel procedures; and in some instances, may duplicate sales department procedures. Duplication and overlapping are usually elusive; different forms and records are commonly called for in spite of the fact that they use the same subject matter. This, in effect, can be very expensive. Procedures may also get out of control when managers try to use them to solve problems instead of solving the problems through better policies, clearer delegations and improved directions. Primarily, procedures are instituted to correct mistakes that might be made again. A major reason why procedures get out of control is that managers are often not clear as to what procedures they should follow; how much they cost; when they are duplicated; how to overhaul them; and finally, how to control them. Standards are keys to successful budgeting where programs can be translated into needs for labor, operating expenses, capital expenditures, space and other resources. Many budgets fail for lack of standards, and some upper level managers hesitate to allow subordinates to submit budget plans for fear that they may have no logical basis for reviewing budget requests. The superior managers can review such requests to justify their approval or disapproval of the said budgets. In order that budgetary control would work well, it is necessary that managers have the needed information about actual and forecast performance under budgets by their respective departments. These pieces of information must be carefully designed to show them how well they are being utilized. In some cases, however, it is unfortunate that, sometimes, such information is usually not available unit is too late for the manager to avoid deviations. Operational auditing, in the broadest sense, is the regular and independent appraisal by staff and internal auditors, of the accounting, financial, and other operations in the organization. Although, it may often be limited to the auditing of accounts, it is also another effective tool of management control which includes appraisal of operations, weighing actual results against planned results. Operational auditors assure themselves that accounts properly reflected the facts, appraise policies, procedures, use of authority, quality of management, effectiveness of methods, special problems and other related phases of operations. Program budgeting is a systematic method, for allocating resources of an organization in a way that will most effectively help organization to meet its goal and objectives. By way of emphasizing the objectives of the programs to meet them, it overcomes the ordinary weakness of all kinds of budgets. This may be that of being too closely tied to the timeframe of accounting periods. By concentrating on definitive objectives and programs in the light of available resources, it stresses the desirability of assessing cost against benefits when selecting the best course toward accomplishing a program goal. In government agencies, program budgeting has not been the best tool in practice. There may be a number of reasons why it has not. First, many government executives, particularly at the middle and lower level of management do not understand the philosophy and the theory of the technique. They might have been given directives, forms and procedures, but they have not really known what the system entails. Second is the lack of clearly defined goals and objectives and the perennial difficulty is the absence of attention to the planning premises. Third, is the long government line of budgeting, where most legislators are accustomed to line budgets, often will not tolerate other budgets unless they are recast in a line-item form. It may also be inferred that many government budgetary divisions and staff personnel have been reluctant to make the change from their practice and procedures of annual budgets to long range program budgets. Other problems include accounting data that are seldom consistent with program budgeting; the lack of information about some areas to make meaningful cost effectiveness analysis, and the political problems of reorganizing government departments to improve concentration of program responsibility. REFERENCES: Atkinson, Robert. 1980. 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