Beyond Budgeting | Managerial Accounting – AVIMA 11 | | Henrique Antunes de Souza | Jan/2013 |
Contents Introduction: 2 The Traditional Budgeting 2 Beyond Budgeting: The Concept 4 Beyond Budgeting: The Benefits and a Comparative Analysis 5 Implementation 9 Conclusion 10 Bibliography 12
Introduction:
A concept may go through changes over time, being reconsidered, reviewed, improved or even forgotten. In an environment where changes happen often, it’s usual to observe concepts and models being worn out and new or adapted approaches being introduced.
In the field of business administration, the budgeting process has proved to be fundamental and highly recommended as a successful way of planning and controlling.
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Therefore, the authors disapprove of many beliefs that trigger the traditional budgeting process such as the one regarding fixed financial targets to maximize profit potential. They affirm that one cannot predict external factors nor could control them. Any strong external influence could turn the target into a pointless effort. Moreover, such belief is an obstacle towards creating capability to react fast to new circumstances. The authors consider this to be one main reasons of the traditional budgeting fallacy (Hope & Fraser, 2003).
Additionally, Daum (2002) states the massive amount of time a budget requires. Some studies have proved this statement, as KPMG sustains that the budgeting process may take up to 20 to 30% of the management’s time. Moreover, consultants at Horvath & Partner affirm that 50% of the controller’s capacity is directed to planning and budgeting (Daum, 2002).
As a consequence of a long and a slow process of elaborating a budget, Hope and Fraser (2003) mentions the high costs involved. Some companies have tried to come up with a cost of elaborating such a tool and it is surprising how high it can get. As an example pointed out by the authors, Ford Motor Company revealed an annual cost of 1.2 billion dollars with the creation and use of the budget (Hope & Fraser, 2003).
One may also highlight the possibility of manipulating numbers when dealing
The purpose of this paper is to describe the budget process, variances and the major reasons of the variance to make all the financial decisions of the firm properly. This paper would also be helpful to explain that “make” or “Buy” decisions also play a significant role to improve the efficiency of the firm. In addition, the paper would also be useful to clarify that non-financial performance measure may be unsafe for the image of the firm.
Budget management analysis is used by mangers as a tool and helps determine that all resources available are being used efficiently. The budgets are determined yearly and are based upon the previous year’s budget and variances. This paper will discuss specific strategies to manage budgets within forecast, compare five to seven expense results with budget expectations, describe possible reasons for variances, give strategies to keep results aligned with expectations, recommend three benchmarking techniques, and identify those that might improve budget accuracy, and justify the choices made.
Budgetary control system is an essential management tool that communicates management’s plans throughout the organization, allocates resources, and coordinates activities. Besides, unwise system can have the negative effects on the performance of the company. Thus, it is vital to develop a compatible budgeting system which can assist managers in fulfilling long-term goals and strategic plans.
This research paper is a brief discussion of budget management analysis. Budgeting is the key to financial management, and is the key to translates an organization goals or plan into money. Budgeting is a rough estimate of how much a company will need to get their work done, and provides the basis for evaluating performance, a source of motivation, coordinating business activities, a tool for management communication and instructions to employees. Without a budget an organization would be like a driver, driving blinded without instructions or any sense of direction, that’s how important a budget is to every organization and individual likewise (Clark, 2005).
Budgets should not be a managers task only. The whole organization should be involved in the budgeting process.
Budgeting systems turn managers’ perspectives forward and by looking to the future and planning, managers are able to anticipate and correct potential problems before they arise (Horngren, Foster & Datar, 2000). Through budgeting, management can plan ahead and maintain enough cash to pay creditors, to have adequate raw materials to meet production requirements, and to have sufficient finished goods to meet expected sales (Kieso, 2002).
A budget is an instrument used to help managers ensure that the resources used effectively and proficiently toward the goals of an organization. A budget projection can be made on a yearly base depending on previous year or existing one. They can further be broken down quarterly or monthly depending on it use. Generating a budget is complex undertaking, and for a budget to be effective the organization ought to follow it strictly. However, no matter how closely a business follows their guidelines there will always be some form of variances. The organization should expect a few variances and be able to work these discrepancies in any budget
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Budgeting is the systematic method of allocating financial, physical, and human resources to achieve an organization’s strategic goals. Budgets are utilized by for-profit and non-profit organizations to monitor the progress towards the goals, assist in the control of spending, and help predict cash flow for the organization.
In conclusion, every major company in the world uses budgeting and there is a good reason for that. It is an important component of financial success. Budgeting makes easier to achieve financial goals. It keeps track of all expenses and help to avoid crisis. It also helps companies to control their growth and provide them with realistic idea where business is going.
Budget formulation and use are tools that guide many decision making strategies in business. The measures that are least effective could create an avalanche of catastrophic events that can negatively impact the decision making strategies. It is in the best interest of the pertinent parties to draft an operating budget based on a collective set of information relating to organizational vision and mission. Ineffective measures can be catastrophic based on the foundation for measures used in creating the budget. Among the many issues organizations face that relates to creating an effective operating budget results from poor
Budgeting is crucial in the well-being of a company especially the financial health status of a company. In fact, no professionally managed firm would fail to budget, since the budget establishes what is authorized, how to plan for purchasing contracts and hiring, and indicates how much financing is needed to support planned activity. It is routine for a company to budget for its expenses. Expense budgets act as a guideline of how much revenue a company would require keeping the activities running. It is used to set the company’s targets for a certain period.
(Libby and Lindsay, 2010) decided to investigate budget managers’ overall perceptions, views and control uses of budgeting as well as their plans for budgeting in the future.
“It’s clearly a budget. It’s got a lot of numbers in it” (George W. Busch 2005). This definition of a budget can be supplemented using the Oxford dictionary, which states that a budget is an estimate of income and expenditures for a set period of time. Nowadays almost every business uses budgets and managers use them as a tool in order to set targets. In other words managers can, with the use of budgets, explain in a financial way what are the
Budget and budgetary control practices are undeniably indispensable as organizations routinely go about their business activities and operations. These organizations are constantly on the alert on how actual levels of performance agree with planned or budgeted performance. A budget expresses a plan in monetary terms. It is prepared and approved prior to a particular budgeted period and explicitly may show the income, expenditure and the capital to be employed by organizations in achieving their goals and objectives.