Budgets are one of the most widely used tools for planning and controlling organizations. Majority of world's most successful companies have attributed a large part of their success to reliance on traditional budget systems. The budget prepared planning purposes, as a part of the strategic planning process, is quantitative plan of management's belief of what the business costs and revenues will be over a specific future period. It is important to recognize that budgets do not exist in a vacuum; they are an integral part of planning framework that is adopted by well-run businesses (McLaney and Artill, 2002). Buckley and McKenna (1972) describe budgetary control as consisting of planning, controlling, co-ordinating and motivation through money values and departments within an organisation. It is a plan, in quantitative terms, usually for 1 year.
Roles of budgetary control in organization and controlling
First of all, the main concern of researcher trying to understand role of budgeting and its importance in the organizations. The roles most often quoted are: intend strategy operationalization (Anthony and Govindarajan, 2003, Merchant and Van der Stede, 2003, Hongren, et al, 2002, Simons, 2002) allowing assessment of the strategy and resource allocation(Mintzberg, 1983,Hansen and Van der Stede, 2004, Walker and Johnson, 1999, Merchant and Van der Stede, 2003, Hongren, et al, 2002) coordination and communication (Anthony and Govindarajan, 2003, Merchant and Van der Stede, 2003) learning and strategy creation (Simons, 1990, 2000, Shield and Young, 1993) performance evaluation (Mintzberg, 1983, Hongren, et al, 2002, Anthony and Govindarajan, 2003) and motivation ,mainly through reward system based on budgeting(Govindarajan and Gupta, 1985, Walker and Johnson, 1999, Mintzberg, 1983).These crucial roles of budgeting can help managers to position their company in a better way in the market place. As a result of better positioned in a market place, it can attract new investor and increase market share because it is financial plan for a future period of time. However, bear in your mind that budget is a plan, not a forecast. Therefore, we can easily say budgetary control in a changing operational environment that recognize both the importance, internally, of the organisation members and their contribution to continued growth-and externally the growing influence of shareholders on business operations. In other words, it is not just only important for manager (internal) it can help stakeholder (external) in many different ways particularly to shareholders. It can also provide a framework to shareholders for evaluating manager's performance in meeting individual and departmental goals. Take an appropriate action where there is deflexion from the budget and try to make necessary adjustments.
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Budgetary control can be suitable for the organization of the future. Nowadays, there are many uncertainties in the business environment, managers and stakeholders must be balanced and prepared to compete under these rapidly changing conditions. In order to survive and expand under environmental complexities and uncertainties managers and stakeholders of the organizations need tools, proven management techniques to predict the crucial changes which are more likely to affect the business while they choose future direction and dimension of resources needed to achieve selected goals. Budgetary control as proven management tool (Chandler, 1990) helps organization management, and enhances improved performance of any economy in different ways. We can say budgeting is most useful when done as an integral part of organisation's strategic analysis. Strategy can be organization matches its own capabilities and resource with the opportunities in the marketplace to achieve its overall goals. We can also say budgetary control is communicative because it says every single stakeholder in the organization what needs to be done in order to attain their selected goals. Communication is getting those objectives understood and accepted by all departments and functions. In addition to being the managers' planning tool, budgeting is also one of the most effective tool of communication and integration. It shows how each part of the organization relates to the end and needs of the whole. Budgeting therefore requires that the manager in charge of the whole and each person in charge of parts discuss the budget jointly in order to arrive at better result (Adedeji, A.O. 2004).It is very useful tool for stakeholder particularly to shareholder sand managers to asses financial performance of the organization and a quickly identify overspending and potentially loss making situations. The sooner this is done the less money that is lost. As I mentioned above, business conditions are always changing rapidly, it is necessary to see and understand the budgeting process as a guide to future action, rather than a rigid plan which must be followed by irrespective of changing circumstances.
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To achieve its ambitious five year master plan, the Unilever Group states that "Our strategic objectives and the imperative for change are clear. To translate strategy in to action, we must align the entire company and all our employees behind our strategic aims". If the employees feel that top management doesn't believe in the budget, these employees are unlikely to be active participant in the budget process. This shows that it is an integrative and communicative management tool to evaluate organizations' performance. Having stated task can motivate managers and staff in their performance. Managers will be better motivated by being able to relate their particular role in the business to the overall objectives of business. Since budgets are directly derived from corporate objectives, budgeting makes this possible (McLaney and Artill, 2002).Put in this way, it influences the behaviour of people in the organizations so that efficiency maximised and corporate goals are achieved. It is necessary that the evaluation of performance doesn't degenerate into a blame culture. It follows that motivation is an important underlying factor in ensuring that achievable budgets are set and that the managers with the responsibility for each of the elements of budgets have a very good chance of achieving their targets. In addition, if company doesn't meet a planned performance, manager can use a flexible budget and variances. Because they help mangers gains insights into why the actual result different from planned performance. Furthermore, manager can use variances and flexible budgets to measure specific of type of performance goal such as continuous improvement. In view pint of shareholders, budgetary control can be a sharp tool to maximise its profit. In other word, doing everything in proper order will lead to increase profit. As I mentioned above, it can asses good morale and create harmony in the organization.
The importance and role of budgetary control mentioned earlier in the assignment have been widely recognized and, indeed, the vast majority of companies still use a budgetary control to evaluate performance. However, there is a critical issued in today's highly dynamic and competitive environment, budgets may actually have an adverse effect on the ability of business to compete effectively. Many companies believe that that traditional annual budgeting system is unsuitable and irrelevant in rapidly changing markets. They even think that budgets fail to deal with most important drivers of shareholder value such as intangible assents like brands and knowledge. The main problem about budget is based on a lot of guesswork. In other word, you cannot exactly know what will happen in the near future but you can only guess or predict. In a fast-changing and dynamic business environment it may not help to managers because it cost extra money and consume time to change your budgetary control in couple of months. Also, modern economic environment demands that organization adapt new and in structure practices. To position your company in a better way in the marketplace, managers need to be flexible and adaptable to budgetary planning and control system which has the ability to quickly respond to environmental changes and complexities. A good budgetary planning and control system must involve not only an analysis of capital allocation requests when the project is executed, but also an analysis of all the capital needed to generate information such as market research, prior to investing in the project. In addition, preparing very accurate and detailed budget can takes enormous amount of management time that could be better utilised. In, practise, budgeting can be a lengthy process that may involve much negation, reworking and updating. As a result of enormous time spent on budgeting, it may add little to achievement of business goals. Ole Johannessson, VP finance at Volvo Cars explains, "the budget and long-range planning systems are no longer efficient when the business environment is changing more and more rapidly. Today we need a process that enables us to react not only immediate but even before hand". In some business managers' focus on too much on achievement of short-term financial targets (budget).Instead, managers should focus on the things that add value to business such as building brand loyalty, innovations and analyse your competitors. For example, Volvo Cars reckoned that its previous planning, budgeting and control process absorbed around 20% of total management time in early 1990ths. By abandoning these process and mange in different way, manager have not only saved significant costs but they now have more time to focus on strategy, action planning and beating the completion. Budgets can also lead to dysfunctional management. In other word, employees in one department of the business may achieve their goals against their budget and employees in other department don't achieve their targets. For instance operation & production department achieve their target output level but sales department don't sell enough to cover all costs. According to McBain, budgeting is not a substitute for effective decision making. Most budgets provide only for finances and specify where and how it should be spent, they do not provide for people (Mcbain, 1999). In recent time, training outlays are typically treated as expenses rather than investments (Hope and Frazer, 2003). If the most sophisticated budgetary planning and control system is put in place, absence of the necessary investment in upgrading those involved in budgeting, will only result in expecting to win a battle by sending in people with unfamiliar guns, which all together amount to total failure of such budgeting system (Adedeji, 2004).
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In conclusion, there are clearly different views as to whether or not budget is an effective and essential business tool. Large number of successful and big companies still uses a budget as a part of their strategic planning process. However, companies like Volvo, IKEA and Ericsson, have already considered annual budgets as being an inefficient tool in an increasingly changing business environment.