Behavioral Aspects of Budgeting - Essay Example

Behavioural Aspects of Budgeting Introduction This paper tries to discuss the Southeast Asia Olympus Marketing Incorporated and the issue on its budgeting process. Furthermore, this paper discusses the behavioural aspects of budgeting and their impact on employee and the said company’s performance. According to Innes (2005), ignoring the behavioural aspects that are link with budgeting may only result to undesirable behaviour that prevents the achievement of organinisation’s objectives. This idea is further expounded in this paper and it is in this regard that it is important to understand first the company’s corporate goals and how it performs its budgeting process. However, before anything else, it is a good idea to understand something about the chosen company. Company Background The Southeast Asia (S.E.A.) Olympus Marketing Incorporated is one of the affiliates of S.E.A. Olympus Group of Companies, which was founded in the Philippines in 1983. The other affiliates are SPARKO, distributor of imported surface coatings and SCADE Industrial Corporation, a manufacturing plant of stainless water tanks such as storage water tanks and hydro pneumatic pressure tanks. The S.E.A. Olympus Marketing Incorporated is both a trading and manufacturing company which operates nationwide in the Philippines. It has branches in the three major islands of the Philippines. The S.E.A. Olympus Marketing Incorporated is responsible for the distribution of products produced by other affiliates. Originally, the company was a distributor of composite materials such as resin and fiber glass to the fishing and fashion industries. Today, the S.E.A. Olympus Marketing Incorporated is having a link with its main suppliers in Singapore, Taiwan and China. This year, it is planning to expand in the entire country and later in the Southeast regions in Asia. As of the moment, it has sub-business units (SBU) in the major cities in the Philippines as part of its strategic positioning. This year, its goal is to expand, but part of it is to carefully manage its finances. The following are the vision and mission of S.E.A. Olympus Marketing Incorporated. A. Vision: To be a Strong Player in the National Market by 2011. B. Mission: a.) We will attain a Significant Market Share through the enhancement and expansion of our customer and client base. b.) We will be among the top 3 Brands of Choice through the quality of our Products and Excellent Customer Service. c.) We will be the Employer of Choice of competent, satisfied and well-rewarded Human Resources. Organizational Framework At the national level, the S.E.A. Olympus Incorporated might appear to have a very complicated organizational working structure of working departments. For the purpose of looking at the micro level of the organization’s activity, this paper examines the working business units in the country. S.E.A. Olympus Marketing Incorporated is composed of sub-business units working together for one goal. Each of this sub-business unit is composed of general support group and frontline group. The general support group is composed of the Accounting Department, Research and Development Department, Marketing Department, Logistic Department and Engineering Department. The frontline group is the Sales Department. In theory, the Sales Department must be under the coverage of Marketing Department. However, the S.E.A Olympus is a sales-driven company placing more saturated emphasis on sales activities. The mere functions of Marketing Department are focused on research and other related promotional activities which are far from what are purely done by the Sales Department. Considering that the company has been departmentalised, each department has specific budget and this is being managed using a strategic management system, the balanced scorecard (BSC). The Balanced Scorecard Figure 1. The Balanced Scorecard Strategic Flow The balanced scorecard is a tool used to solve challenges the moment strategies are on the process of execution (Nair, 2004). The balanced scorecard sees to it that it has all the standards needed by the company because according to Shim and Siegel (2005), they are used to assist the measurement of effectiveness and efficiency. The S.E.A Olympus Marketing Incorporated sees to it that it has properly addressed the main four perspectives in the balanced scorecard: financial, internal business process, learning and growth and customer. All of these four perspectives serve as definite guidelines on what exactly has to be implemented prior to successful strategic management of corporate goals. It might be complicated to think about but one of the most significant issues being controlled by the balanced scorecard at S.E.A Olympus Marketing Incorporated is its budget. Another purpose of the company about its balanced scorecard is to be transparent on its budgeting process. The company adheres to the principle agreed by Kopits and Craig (1998) which simply mean that when engaging in practices that tend to hide something, the pressure seems to reach an upward spiral in the event of tension. Financial Perspective Under the Financial Perspective, the Accounting Department is able to program the following strategies to finally come up with measures, targets and initiatives in achieving its corporate objectives. The Accounting Department has to do this because the liquidity of cash is very important for the company to sustain its operation. Strategic Budget and Cash Management At the start of the year, it is the usual practice of the company and its individual department to present its entire budget for the whole year. The Accounting Department has specific budget for its department in the year. However, its task can be more complicated than that. The Accounting Department has to constantly monitor if the other Departments were still able to meet within the limit of their budget considering some budgetary constraints. If for instance, a certain program does not entirely work for a certain department and it spends more than what is programmed, then corrective measures have to be initiated so as to adjust the programs and strategies next month, quarter or even a year. On the other hand, the 0% bad-debt strategy ensures that the company will not incur a significant amount of financial wastage under aging of accounts receivables and new accounts receivable. Thus, the Accounting Department has to perform daily collection. This is done on a regular basis and the Accounting Department is in-charge and to monitor the cash collections and collectibles with the assigned personnel. This has to be implemented on a regular basis so as to maintain a healthy flow of cash which then be further used for other related activities that need another budget for the company’s expansion program. As a result, the daily activities of daily collection result to weekly reporting of accounts receivable and aging of accounts receivable. This has to be implemented so that in every weekly departmental meeting, the issue of accounts receivable will be brought up and its corresponding and specific action plan will be discussed and will be implemented on a timely manner. Eventually, the weekly reporting of accounts receivable and aging of accounts receivable becomes the basis of monthly reporting of accounts receivable and aging of accounts receivable. This monthly report becomes the basis of quarterly report which then the whole budgetary process will also depend on. In the first place, in order to prevent from incurring bad debts in the future, the Accounting Department has to insure that the customers who are being catered are of good credential and excellent credit standing. With this comes the birth of Credit Investigation Program. With the credit investigation (CI) program of the Accounting Department, the management will have enough confidence of to whom should be given the opportunity for a good credit opportunity. This is to simply say that the company is so strict about giving credit terms while it also ensures strict implementation of its cash collections. Another way of saying this is that the company is simply tight with money which not only cuts costs while on expansion program but ensures as much as possible cash transactions most of the time with its customers. Internal Business Processes Perspective Under the Internal Business Process Perspective, the Accounting Department is able to program the following strategies to finally come up with measures, targets and initiatives in achieving its objectives. The Accounting Department has to do this because it is very important to organize its working structure knowing that all departments in the company are working hand on hand in achieving their corporate goals. Benchmarking of Good Practices Quarterly, the Accounting Department has to make a report indicating all good practices it has for the benefit of other Accounting Department in other branches nationwide. This is to ensure that the entire business process can come up with a unified approach for the benefit of the whole organisation and certainly one action is to ensure the budget limit for each operation is obtained. One of the most important aspects in benchmarking of good practices is that the Accounting Department learns to maintain a strong coordination with other departments. This makes it a strong back support group of the company. Every department is relying on the Accounting Department to continue their operation especially on the budget-related activities. Not only that, with the help of fast and accurate Accounting Department, each business transaction with customers both loyal and new is ensured to be fast and efficient at the same time. Thus, this minimises delays and other possible substantial financial loss of the company. However, everything seems to rely on the budget since every transaction needs to have cash ready. Customer Perspective The programs of Accounting Department under this perspective are of course, aligned with the corporate missions: a.) We will attain a Significant Market Share through the enhancement and expansion of our customer and client base. This without question needs to be on the budget considering that it involves marketing promotions and other marketing-related activities. After all, one of the most expensive departments aside from the Research and Development Department and Sales Department is the Marketing Department. The main task of the Marketing Department is to target an outstanding market share which is definitely in line with the company’s main corporate goal. b.) We will be among the top 3 Brands of Choice through the quality of our Products and Excellent Customer Service. This again is another activity that most of the time will make use of the Marketing Department’s line of expertise. With the above mission of the company, the Accounting Department learns to formulate the following strategy. Strong Back-Support System This strong back-support system will ensure that all items are delivered on-time to the customer. This prevents any related loss. All requisitions of other departments are on a timely manner so as not to delay future transactions with the customers. However, every sales person in order for him or her to move fast and on time, requires to have sufficient amount of budget. The assurance of this strong-back support system is a strategic accounting system that can work fast at all times. As of the moment, the Accounting is still at its start on this. Learning and Growth Perspective Product Knowledge Enhancement Since the S.E.A. Olympus Marketing Incorporated is a company bringing different line of products, Product Knowledge Enhancement program is very important for the Accounting Department. This ensures that proper recording system of items is accurate and at least, the department will have an idea on how to relate with other departments which are more proficient with the products. Not only would the Accounting Department need a product enhancement program, but other department as well which would also include other skills-related competency enhancement programs. Training and Enhancement Strategy From time to time, the company is changing policies and procedures for its Management and Information System (MIS) Department. From time to time on, the MIS Department implements new programs that aim at improving efficiency of the operation. For instance, introduction of new accounting policies which are tied up with the MIS Department implies new and important training for the Accounting Department. These are all matters in line with latest development in Technology and Information System such as for instance, MYOB System (Mind your own business) and others. This would also require another form of budget and it is sort of demanding considering that it has to be undertaken right away at a very short period of time. After all, every individual who needs to learn something needs to have it very soon as far as the operation is concerned. Thus, as much as possible, there should always be a constant or regular training and enhancement program for all concerned. The Bad Thing About Departmentalisation Perhaps, one of the best things to manage an organisation or company is to departmentalise it so as to clearly see the level of individual performance. There is no question about it that it is good for the purpose of evaluation and monitoring performance of each department. The problem sets in considering that the S.E.A Olympus Marketing Incorporated is on its expansion program but it is sort of so tight with money. This means that each department has to budget whatever is only provided. This further means that each department has to take the initiative in maximising whatever available resource there is. For instance, each department most especially the R&D Department needs more paper for it uses it more than the other departments do due to consistent trainings and various researches and other related activities. However, the R&D Department most of the time would end up having a scarce supply for papers. The management decided that the R&D has to consume wisely what only has been provided. In reality at S.E.A Olympus Marketing Incorporated, every department has been competing for the available resources. With this, some employees learned to do their own initiatives but there are others who are not much willing to do so and ended up saying something bad against the company. At management stand point; this is very critical after all, according to Premchand (1984), success of budgeting relies on organizational factors and paying attention to vulnerable areas. Thus, the management has to clearly see the point here that some employees are now simply being demotivated due to the working condition the company has provided them. This should not be the case, in fact, as stated by Oliver (2000), budget can be used to evaluate managerial performance in effective way but it has to be used in caution so as to work in a way it can motivate employees to follow corporate directions. Fast Turnover Rate Another indication of highly demotivated personnel is the fast turnover rate especially at Sales Department. Every sales agent is dependent on budget provided to them by the company. They cannot move right away without it due to financial constraint affecting the country. So they have no other choice but to strongly rely on what the company can provide them. Every sales agent has sales call allowance but most of the time, there is a delay of giving it making them inefficient at some point for they cannot move right away for field works such as quality sales calls. The bottom line, many of them ended up tendering their resignation letters effective as soon as possible for they do not want to stay any longer at the company. As can be observed here, the management needs to clearly enhance its budgetary system. The budget is centralised for the company is composed of many business units. This means that the budget can be possibly delayed at some point. This entirely agrees with the idea of Bruns and Waterhouse (1983) emphasising that the budget is a source of pressures in organisations which are centralised and lack autonomy. That is why Bruns and Waterhouse argued that interpersonal control has the chance to predominate in a centralised organisation or which lacks autonomy. Not only that, Gorcum (1968) believed that the budget pressure will just most likely to unite employees to stand against the management creating more tension that will lead to inefficiency, aggression and failure of the supervisor. The Accounting Department and Sales Department Clash In reality at S.E.A Olympus Marketing Incorporated, there is always a clash or even cold war between the Accounting Department and Sales Department. Due to the fact that the Accounting Department is budget oriented, it always finds mistakes on the usual process made by the Sales Department which is totally sales oriented. This clearly agrees with the finding on the exploration of socio-psychological implications of budgeting which states that in finding fault from the people, finance staffs would really feel they are successful (Gorcum, 1968). Marketing Budgetary Constraints Aside from the Sales Department which suffers too much on the effects of budgetary constraints, the Marketing Department at S.E.A. Olympus Marketing Incorporated is also under pressure when it comes to following its balanced scorecard strategic programs but when it fact it lacks enough budget to implement them all. Budget for Enhancement Programs The problem with the lack of budget, each department tends to selfishly obtained budget for their enhancement program so as to achieve its strategic programs in the balanced scorecard. This clearly shows that what Gorcum (1968) presented was of great importance considering that supervisors with the use of budget would only mind the problems they have with their departments. Not only that, Gorcum added that budgets most likely end up being blamed when supervisors fail because they can be used as patterns of leadership. It is clear that the process of budgeting is a way to achieve corporate goals and encourage employee to cooperate and be one with the company (Agamata, 2009). Agamata clearly pointed out that the uses of budgeting process involved communication, motivation, standards, planning, organizing and directing, controlling and performance evaluation. Budgets according to Agamata are considered plans in quantitative forms which make them objective, understandable and measurable. These budgets can be clearly defined such as sales budget, production budget, raw materials budget, direct labor budget, factory overhead budget and more. What clearly makes budgeting essential is due to the fact that it can create goals for future operations and it can also compare actual results with the goals (Fess and Warren, 1984). Thus, it is clear enough that it has to be efficient and effective so as to allow companies achieve corporate goals. It is therefore due to this reason that Fess and Warren believe that a budget should be entirely based on careful study, investigation and research. References Agamata, F. T. (2009) Management Advisory Services: A Comprehensive Guide. Philippines: GIC Enterprises & Co. Inc. Bruns, W. J. and Waterhouse, J. H. (1983) ‘Accounting Control Systems: A Behavioral and Technical Integration’, in J. Bell (ed). Budgetary Control and Organization Structure. USA: M. Weiner Publishing Inc. Fess, P. E. and Warren, C. S. (1984) Accounting Principles. 14th ed. USA: South-Western Publishing Co. Gorcum, K. V. (1968) The Game of Budget Control. London: Tavistock Press. Innes, J. (2005) Handbook of Management Accounting. CIMA Publishing, Elsevier. Kopits, G. and Craig, J. (1998) Transparency in Government Operation. Washington: IMF. Nair, M. (2004) Essentials of Balanced Scorecard. Canada: John Wiley & Sons Inc. Oliver, L. (2000) The Cost Management Tool Box: A Manager’s Guide to Controlling Costs and Boosting Profits. USA: AMA Publications. Premchand, A. (1984) Government Budgeting and Expenditure Controls: Theory and Practice. USA: IMF. Shim, J. K. and Siegel, J. G. (2005) Budgeting Basics and Beyond. 2nd ed. USA: John Wiley & Sons Inc. Read More