Analysis of reforming budgetary system

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Budget management is a modern enterprise management mode. It includes various policy options, which is the enterprise managers implement to achieve the production and operation goals in a future specific period. Based on the coordination of all sectors, budget management realizes a series of goals, such as rational resources allocation, effective strategic implementation, continuous improvement and increase of business value. With the extent of the market economy gradually improved, enterprises are facing to a variety of risk difficult to control. In recent years, many famous enterprises destroyed because funding strand breaks, which makes more and more enterprises realize the importance of improving the budget system. The essay takes a car manufacturer for an example and analysis the enterprise's problems of budget system management. In particular, the essay researches and discusses the issue on budget slack, ultimately offers the methods on reforming budgetary system and brings the positive sense.

Manufacturer X's budget implementation of prior year

The background of X

X is a manufacturer as the main business of producing car. In 2009, it is the first year when the enterprise practised three-year development strategy planning. With the financial crisis and the rat race, it is also the hard year. The enterprise operated hard when the increasing rate of automotive market is slowdown. With the efforts, the enterprise achieved production of 25,036 cars and selling 25,062 in the whole year, completing 83% of annual sales plan and increasing 21.4%. The sales revenue achieved 220.04 million dollars, completing 101.26% of annual plan. At the same time, the sales profits achieved 3.98 million dollars, exceeding10.34% of the whole plan and increasing 92.27%.

Compared with the same period in 2008, the enterprise's sales revenue and sales profit grow with a certain degree in 2009. However, in 2009 there is a most prominent issue in the financial management, which is the budget management and cost management systems are out of control. In addition, the budget system is imperfect. Therefore, it brought loss of profits and a waste of resources to enterprise with high costs and expenses. The specific reasons are as follows:

The budget institution and system are not established.

In 2009, X is in the transition period from a refitting factory to a car manufacturer. After the increase in size and personnel, the budget institutions and responsibilities are not clear, combining with the inadequate participation and training of business sector. Therefore, the financial statements of the budget department have a serious lack of integrity and standardization from the content to form. In addition, because of the absence of strict budgeting processes and systems, the budget goals fail to converge well with the enterprise's development strategy.

(2) The budget management and operation mechanism have not been established.

X lacks of budget management institutions and responsibility and the budget rigidity is also not enough. The supervisor and control of data feedback are not timely. The assessment of budget implementation is not in place. The above conditions lead all the expenses of enterprise are basically out of control. There is no cost management system with a long-term period in X. The enterprise stays in a low-level that audit and evaluation are after the matter. Moreover, the enterprise also lacks of cost estimates mechanisms and cost information is incomplete and inaccurate. Again, the process of monitoring and evaluation methods is ineffective. These factors resulted in cost levels continued to rise.

(3)There is an issue of budgetary slack within the system.

The most important problem of budget management in X is budgetary slack within the system. The two above factors further contribute to the issue on budgetary slack. Solving the slack problem can also largely improve the budget management institution and system. The budgetary slack in X brings a certain risks on the operation, leading to the enterprise budget management inefficient. Meanwhile, the budgetary slack reduces the level of staff's effort and the overall performance on businesses. Therefore, as a criteria of performance evaluation, the budget losses its objectivity and distorts enterprise resource allocation.

This year budget of X

At present, facing to above problems, X is operating a budgetary system and reforming the budgetary management. The reform is based on incremental adjustment to figures in 2009. In this year, X is mainly to avoid the issue on budgetary slack and to reform roundly a budgetary system on establishing, performing and checking.

The reasons and reform measures of budgetary slack in X

The concept of budgetary slack

Since Low & Shaw (1968) found that there is 'budgetary slack' in practice and Schiff & Lewin (1968) found: budgetary slack is a universal phenomenon. It can be said that budgetary slack is an important issues on budget management and control, which has not yet resolved. (Ronald A. Milne, 1987) In the business practice of budget management, budgetary slack are also very prominent. For example, through empirical study of 886 samples, the data found that the budgetary slack is also widespread among the listed companies in China. In addition, the larger corporations may have more possibility of budgetary slack.

The performance of budgetary slack is deliberately exaggerating the amount of expected resource consumption in operational activities and operating difficulty degree or deliberately compressing expected level of output. Moreover, budgetary slack lead the various levels of managers for self-interest to overestimate cost or underestimate revenue, in order to control its management performance. However, it also results in the efficiency of enterprise resource allocation decreasing and causes the budget management becoming ostentation. The act of budgetary slack directly affects effectiveness in the overall budget management. It can be seen that the negative effects of budgetary slack cannot be ignored.

The performance of budgetary slack in X

Budgetary slack lowers the efficiency of enterprises. Slack budget brings a large number of invalid costs, resulting in a waste of time and energy. Because cost is not minimization, the profit is also not optimal. The efficiency of enterprises has been greatly reduced. In addition, budgetary slack covers up errors in the work. Budgetary slack, in a certain extent, covers budget difference of the implementation, affecting objective evaluation of performance. Therefore, due to the issue on budgetary slack, X cannot reach the real purpose of budget management.

The reasons of budgetary slack

Some cases can urge to produce budgetary slack. Such as, through lowering output budget targets managers increase the actual performance to seek higher pay and opportunities for promotion. Or through establishing the budget targets with enough flexibility, principals prevent the risk that the uncertainty operation leads to the budget without completing. Through increasing budget target of resource consumption, managers compete for the limited scarce resources and reduce difficulty of completing a comprehensive budget index in the own departments. Onsi found that the slack manipulation, slack practices, slack found, the attitude to senior management control system, the attitude of subordinates, pressure, budgetary autonomy, budgetary participation, the budget use of boss, attitude on the norm, attitude on the relativity of budget and performance evaluation, the general attitude of the budget and the budget relativity, the 13 kinds of factors affected the budgetary slack in a certain extent. The essay believes that the reasons of budgetary slack in X are mainly in the following areas:

The budget system lacks of strategic orientation and the budget target suns short of clarity.

X doesn't realize the importance of corporate strategy and corporate strategy goals, strategic choice and decision become mere formality. The core competence development in X stops and drops behind. In the absence of a corporate strategy, budgeting will lead to focus on economic activity in a short term and ignore the long-term business objectives, so that there is a conflict between short-term budget targets and the future long-term business development strategy and the convergence and validity of budget targets in the different stages are poor. At the same time, the budget more difficult, the specific implementation will bring a greater burden to the principals. They will worry that they cannot achieve the goals so that reduced personal reward or punished. So they had to make budgetary slack in the department or subordinate branches as the measures to meet budget targets difficult. Ultimately, it is difficult to achieve the desired results and cannot eliminate the presence of budgetary slack.

Anisomerous information and incompatible reward plan lead to inconsistent budgetary participation.

As a common means of management and control, budget plays two major functions: encourage function and plan function (Dunk A, 1993). In normal circumstances, there is information asymmetry between the budget principals and superiors, that is the budget information about preparation and implementation known by the budget principals is more than their supervisors. The information asymmetry is in the following areas. Superior does not know or know as not fully as the budget principals on the capacity and preferences of budget principals Therefore, participation in the budget (the budget principals participate in budget establishment) is good for playing the plan function of budget. On the other hand, because the remuneration of the budget principals closely related to the level of budget, the budget principals may also proceed from the self-interest, using the budget to determine the level of budget, which is good for them, ultimately budgetary slack will appear. So, if lacking of proper incentive program match with budget participation, the budget could lose the benefits.

Specifically, budgetary slack includes the slack of budget preparation and budget execution process. If the reward of the budget principals will increase with the budget difficulty reducing, the budget principals may use the budget participation to determine a relatively easy level, which also causes budgetary slack (Cooper,R,Kaplan,R.S, 1992) In the execution of the budget, the budget principals have two acts. The first one is when he can complete the budget target; he will operate in accordance with the budget, no more than the budget. The second one is when the budget cannot be completed, he will not find ways to maximize performance, but let matters drift. Both acts don't pay all of the effort in the budget implementation, which can be called the budgetary slack in the budget implementation.

(3)There is lack of organization system of budget management to protect. Whether budget management can be done well or not, it depends on the organization guarantee. X lacks organization system of budget management to protect, leading to the generation of budgetary slack. The finance department is responsible for budget in X, so business budget management organization doesn't set in place, and in particular lack of the highest governing body of budget management --budget management committee. Therefore, board of directors is almost impossible to effectively realize kinds of rights in the overall budget management. Most of the powers fall into the hands of the financial sector such as the control of budget management, supervision and so on. The Board cannot effectively control rights, responsibilities and benefits for each level department, which reduces the roles of integration, resource allocation and control of the budget management. In the end, the issue on budgetary slack is universal in X.

The measures of reforming budgetary slack

(1)The budget goal must be with stratagem and high-definition aim.

It should be emphasized that the focus on the enterprise business strategy in the budget management process in order to establish budget objective based on enterprise strategy. At the same time, it should be through the use of financial and non-financial information to build a strategic budget index system. In addition, to build a strategic budget index system, there are two issues that must be clear: at first, the business strategy must be instructive and feasible. At second, the connection relationship between corporate strategy and the business budget must be clear, that is, goals of the budget management should be set in the high definition. In other words, when the importance of budget target is clear and the setting is professional and clear, it will play an impeditive role on budgetary slack. At the same time, if the companies own the harmonious internal communication atmosphere and scientific and rational reward system, it will good for increasing clarity of the budget target. In the end, it will play an important role on reducing or eliminating the negative impact of budgetary slack.

(2)It should be increased budget transparency to establish the key evaluation system.

On the one hand, establishing a fair environment in the budget management process can ease the negative impact of budgetary slack which caused by information asymmetry. Such a fair environment mainly reflects in two aspects: One is procedural justice in the budget management process. The other is the fairness of interpersonal communication within the enterprises organization in the activities of implementing budget management. In the enterprises organization where budget process is fair and budget contacts are also equitable, as the gap between higher and lower levels is small, the negative impact of information asymmetry factors will reduce. On the other hand, it should be established the key performance evaluation system to form the combining mechanism of responsibilities, rights and benefits. According to the overall budget target and responsibility, rights and benefit of all levels leadership positions, using the principles of value decomposition and the objectives management methods , from top to bottom, enterprise should analyze the overall budget target to level by level. At the same time, it will be important that setting specific targets for key performance targets and forming the mechanism arranging the post by institution and determining staff according to positions. Therefore, each post can achieve clear responsibility and the boundaries between posts will be clear. In the end, the overall budget management platform will establish that enterprise can find the appropriate responsible persons when any department appears problems. In addition, linking the remuneration of all levels positions with the completion condition of key performance target, all of the workers will be effort for achieving the budget goals.

(3) The advice is to use the advanced budgeting methods.

We can see that people are the budget-makers who use budget information and carry out the budget. In the other hand, they will be examined by budget system. Therefore, budget management should implement the idea about the people-oriented and concerning about the budget moral. The approach is reducing budgetary slack from the staff value. In my opinion, it can be used to solve budgetary slack problem. The budgeting includes flexibility principle and rigidity principle. Combining and determining base method is to bring the base of establishing overall budget to a game program between the principal and agent. When the agents automatically make their actual capacity or resources consumption equal to the actual number, they will obtain the highest performance award. According to the practical case, the method achieved significant results after some enterprise applied. The method is advanced and practical in the area of solving the budgetary slack and improving the effectiveness of budget target.

(4)The enterprise should perfect budget organizations and strengthen efforts of controlling budget.

Improving the budget structure and strengthening the budget control are good for easing budgetary slack in a maximum degree. Specifically, the budget management organization includes budget management committee, the budget department and budget responsibility network. Budget management committee is the highest management organization to implement the budget, which is responsible for annual budget preparation, adjustment and evaluation and is responsible for coordinating and solving major problems in the budget management. Budget department is a function department to handle the daily affairs of the budget management, which works under the direct leadership of budget management committee. Budget management responsibility network is based on the organizations and divided by the responsibilities. The enterprise subordinate branches are the main execution unit of the budget and the main person is in charge of the enterprise's budget performance results.(Kim Langfield-Smith,Helen Thorne,2006) Once budget has been established, it owns legal effect in the enterprise management. Therefore, subordinate branches should act accordance with the budget and operate around budget organization. Budget management committee will hold the meeting quarterly and track to implement budgetary control and management through analysing the implementation of the budget target.

Budgetary system's reform alternatives

Budget management is under the guidance of the strategic objectives, forecasting and planning future operations and the corresponding financial results, which includes a series of activities such as budgeting, execution, control, evaluation and incentives. The essay believes that administering budgetary slack in X will improve corporate management and operational efficiency, which is very important significance for maximizing the value of enterprises. According to the problems of budget system in X, the essay mainly reforms the entire budget system from three aspects. There are budgetary establishing reform, budgetary implementation reform and the reform of the budget examination.

4.1The reform of establishing budgetary system

Establishing budget is the first part of the budget management, which is directly connected with the success of budget management. First of all, the enterprise wants to get a long-term and stable development, it inevitably must have a long-term strategic objective. Corporate budgeting is based on the long-term strategic goals. Business strategy is an overall planning to seek long-term survival and continued development in the complex and intense operating environment. It is a concentrated expression of corporate strategic thinking and also makes a scientific definition of business scope. Business strategy is a base on constituting various plans. Therefore, as the main business plan, budgets must also be coordinated with business strategy. Radically, enterprise budget is from corporate strategy, guided by the corporate strategic direction. But currently, X is unclear to their business strategy, which directly affects the budget, especially the long-term budgeting.

Secondly, the budget system should set up a budget committee to take method of top-down, bottom-up and combine of up and down. Because the budget system is not a simple standard system or index communication process, it should carefully study a variety of data of previous year before establishing budget to analyse which expenses are necessary and what expenditure is unnecessary. Based on a reasonable forecast to the year budget competitive environment, the budget should be established and the targets must be scientific. However, in the process of budget indicators formulation the number of discussions with subordinates should minimize in order to avoid influence by subordinates, and the game between each other of subordinates. Therefore, in the budget preparation process X needs to coordinate the relationship among business strategic objectives and budget targets, the total station and the various subordinate departments, the department heads and staff relations, and so on. These relationships imply a cross of responsibility, rights and interests. If all aspects of the relationship are not coordinated in the preparation, then the budget implementation would bring conflict by the subordinate, which will affect the smooth realization of strategic objectives.

Thirdly, the method of establishing the budget should be adopted different ways according to different areas of the budget. The traditional budget management model is built on the basis of the standard cost system and profit-oriented, whose purpose is the cost control. It is not applied to the management of research using the traditional method. Because the research activities are highly uncertain and own the characteristic of non-standard, the budget standard is difficult to be determined. Longer the development cycle is, more affecting factors are. The appearance of new circumstances will lead to budget variances. Therefore, establishing a dynamic research of budget management is essential, which adopts a phased budget approach with its characteristics and takes the idea of dynamic management. The research dynamic budget management method is a budget management based on prediction, rolling optimization and feedback correction. X can use research dynamic budget management method in the progress of establishing the budget system.

Again, according to the argumentation and consultation by up and down, after determined by budget management committee and the administration, the budget will become the constitution of the enterprise. No matter who, as long as a member of the enterprise, he must comply with this Constitution. There are no privileged people in front of constitution. The view should be deeply rooted in the minds of each employee. Each employee's words and deeds must be consistent with the budget. Unless there are exceptional cases, the budget should not be amended easily.

4.2 The reform of performing budgetary system

The budget implementation is an important part of the budget management process. During the session, the rigid constraints should be strengthened. The first step is to review whether the project within budget. In general, in the development of the budget process, it has come to consider all possibilities in the circumstances, so it is not examined if without the budget. Except when the situation is significant but not considered, the financial officer should remind the executive of the budget preparation, after approval it can be reimbursed. At second, it should be strictly implemented authority standards of the budget management. When the procedures are incomplete, projects should be reimbursed after completion procedures. Thirdly, in order to strengthen budget management, it can make full use of modern means. Especially near the end of the year, enterprise should strengthen accounting real-time control. Accounting real-time control is in the IT environment, accounting personnel use the modern techniques and three-volume information (the amount of time, physical quantity, monetary amount) to real-time compare and real-time analyse business activities.(Pauline Weetman,2006) In the end, through guidance, regulation, restraint and other sectors, accounting real-time control interferes with business operations to achieve increased operational efficiency and effectiveness. It can help to achieve the ultimate goal of value-added. Accounting real-time control is a new concept of accounting control. In the budget implementation process, this view does not break the budget, which is very important. Fourthly, the advice is to maintain the rigidity of budget management. In the previous section of preparation, it have already been said, the budget cannot be changed once confirmed, unless there is the special major events to occur. It is important to emphasize because if the budget is not rigid, it will become a dead letter.

4.3 The reform of checking budgetary system

The check of budget and reward and punishment is the ultimate goal of budget management. The effectiveness of budget management ultimately reflects assessment and incentive on the budget. The checking budget result is the basis for rewards and punishments. There are some assessment issues in the budget we should be pay special attention. At first, it should be established a kind of atmosphere based on evaluation of the budget. This kind of atmosphere based on evaluation of the budget includes the clarity of corporate reward system, the budget understand and the attitude of corporate executives to the budget examination. It means that people all over the enterprise should understand the budget and support the budget. It is the only way to have a good target to complete the budget good environment. At second, the advice is to identify which indicators are controlled indicators in the sector and which indicators are not-controllable indicators in the sector. The controlled indicators should be primarily analysed which projects are within budget, which projects are over the budget target and why they are over budget. The reason is the current operating environment and the preparation of department budget has caused a greater change, or because of ineffective control in government departments cause. To the not-control targets, whether or not over the budget, they are nothing to do with the department, so they should be seen as the sector's contribution to the group. In addition, these not-controlled indicators assessment of the certain department should be checked by the other departments.

5. The impacts of implementing new budgetary system on the firm management

5.1The reformed budget system is useful to make business development goals clear and promote the implementation of corporate strategic planning.

In the economy market, extensive collecting of information and seizing the opportunities is a key that help companies to control the market and occupy the market. According to the business characteristics, through establishing the comprehensive budget plan development, combining the development directions of enterprises and economic practices step by step will help business always clear to their development goals and motivate every employee in the enterprise to participate in the success of business objectives. On the one hand, the reformed budget system can promote all levels of management to constitute appropriate stage of corporate strategy plan under the enterprise development strategy. Establishing and implementing a comprehensive budgeting system is a process that the enterprises continue to use quantitative indicators to make their own business environment, economic resources and the strategic objectives to maintain the dynamic equilibrium the process at any time. On the other hand, as a link between strategy and performance tools in the company, budget can be established to quantify the form of adoption of the budget to facilitate the implementation of corporate strategic planning. Through the reformed budget system, the philosophy of enterprise can be unified and the goal will clear to stimulate the power of management and strengthen the adaptability of management, in order to ensure to increase the core competitive power and the implementation of strategic management.

5.2 The reformed budget system can help companies to identify potential market opportunities and determine the direction of enterprise resource integration.

Market development of business survival is diversified in the market economy. The relationship of supply and demand in the market affects the enterprise's decision making and operation. Whether exploring the potential business opportunities in the competitive market is the key to winning. Under the traditional management concepts, in order to maintain a more stable income, business managers tend to form stable and conservative management. But the relatively static management allows companies slow to market changes and response to fluctuations. So it is difficult to seize the opportunity in the market competition. Because of its specificity, the reformed budget system could promote enterprise managers at all levels always pay attention to market changes and respond accordingly. In the end, the enterprise can strengthen the grasp of the extent of market opportunities and be superior compared with the competition. The development is endless for an enterprise. But the enterprises' resources are very limited, which determines the company must adequately use their own limited resources, in order to achieve the development goals of each stage. The reformed budget system mainly studied business resource allocation in the short term. The reformed budget system can combine the company's long-term strategic development plans with short-term business objectives, through the strict budgeting mechanism, efficient operation system and clear evaluation system. The budget system can systematically plan internal and external resources for enterprise application integration. Therefore, it can determine the direction of enterprise resource integration and improve efficiency of resource use.

5.3 The reformed budget system can provide basis on the internal performance assessment.

The lifeline of budget system is assessment, reward and punishment. The budget is a performance of the number and monetization with enterprise phase plan. Therefore, the budget provides a standard for the performance evaluation. Budget assessment is to evaluate the enterprise units and individuals at all levels of budget performance. All levels of budget execution are the main object of its evaluation. Budget target is assessment criteria. Through comparing budget performance with budget targets, the budgetary system can evaluate the performance of enterprise and individuals and ultimately offer the corresponding rewards and punishments. The improved budget system can fully mobilize enthusiasm of the responsible units and individuals, and also promote the improvement of their overall effectiveness. Scientific assessment and reward system will not only norm enterprise departments and their employee daily activities to adjust the business activities with the following standard, but also strengthen the incentive and control to their staff.

5.4 The reformed budget system can enhance market competitiveness ability to withstand risks.

The reformed budget system through the forecasts of financial management to the business income, costs, expenses, monitor the kinds of aspects next year, including actual operating level, cash income, expenditure, capital requirements, cost control and others. When the company's revenue, cost, costs and the level of others deviate from the budget, managers can take the necessary improvements to improve the problems reflected in the report. Therefore, the development of enterprises will be more competitive. The reformed budget system requires full participation and seeks to make every employee understand the company's development goals and identify their responsibilities, making the direction and development of enterprise clear in the overall business environment. The budget system greatly increases the company long-term and stable continued viability. In addition, the reformed budget system can also reveal the company initially anticipated operation about next year, which can predict the risks in order to take timely preventive measures in risk control. Ultimately, the purpose of avoiding and resolving risks will be achieved.

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