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18/06/2018 04:18:47 PM

ADVANTAGES OF BUDGETS

A budget is (a) the quantitative expression of a proposed plan of action by management for a specified period and (b) an aid to coordinate what needs to be done to implement that plan. A budget generally includes both financial and nonfinancial aspects of the plan, and it serves as a blueprint for the company to follow in an upcoming period. Underlying these financial budgets are nonfinancial budgets for, say, units manufactured or sold, number of employees, and number of new products being introduced to the marketplace.

Budgets are an integral part of management control systems. When administered thoughtfully by managers, budgets do the following:

  • Promote coordination and communication among subunits within the company
  •  Provide a framework for judging performance and facilitating learning
  • Motivate managers and other employees

Coordination and Communication

Coordinationis meshing and balancing all aspects of production or service and all departments in a company in the best way for the company to meet its goals.

Communicationis making sure those goals are understood by all employees. Coordination forces executives to think of relationships among individual departments within the company, as well as between the company and its supply chain partners. Consider budgeting at Pace, a United Kingdom-based manufacturer of electronic products. A key product is Pace’s digital set-top box for decoding satellite broadcasts.

The production manager can achieve more timely production by coordinating and communicating with the company’s marketing team to understand when set-top boxes will be needed. In turn, the marketing team can make better predictions of future demand for set-top boxes by coordinating and communicating with Pace’s customers.

Suppose BSkyB, one of Pace’s largest customers, is planning to launch a new highdefinition personal video recorder service. If Pace’s marketing group is able to obtain information about the launch date for the service, it can share this information with Pace’s manufacturing group. The manufacturing group must then coordinate and communicate with Pace’s materials-procurement group, and so on. The point to understand is that Pace is more likely to have satisfied customers (by having personal video recorders in the demanded quantities at the times demanded) if Pace coordinates and communicates both within its business functions and with its suppliers and customers during the budgeting process as well as during the production process.

Motivating Managers and Other Employees

Research shows that challenging budgets improve employee performance because employees view falling short of budgeted numbers as a failure. Most employees are motivated to work more intensely to avoid failure than to achieve success. As employees get closer to a goal, they work harder to achieve it. Therefore, many executives like to set demanding but achievable goals for their subordinate managers and employees.

Challenges in Administering Budgets

The budgeting process involves all levels of management. Top managers want lower-level managers to participate in the budgeting process because lower-level managers have more specialized knowledge and first-hand experience with day-to-day aspects of running the business. Participation creates greater commitment and accountability toward the budget among lower-level managers. This is the bottom-up aspect of the budgeting process.

For most organizations, the annual budget process is a months-long exercise that consumes a tremendous amount of resources. Despite his admiration for setting challenging targets, Jack Welch has also referred to the budgeting process as “the most ineffective process in management,” and as “the bane of corporate America.”

The widespread prevalence of budgets in companies ranging from major multinational corporations to small local businesses indicates that the advantages of budgeting systems outweigh the costs. To gain the benefits of budgeting, management at all levels of a company should understand and support the budget and all aspects of the management control system. This is critical for obtaining lower-level management’s participation in the formulation of budgets and for successful administration of budgets. Lower-level managers who feel that top management does not “believe” in a budget are unlikely to be active participants in a budget process.

Budgets should not be administered rigidly. Attaining the budget is not an end in itself, especially when conditions change dramatically. A manager may commit to a budget, but if a situation arises in which some unplanned repairs or an unplanned advertising program would serve the long-run interests of the company, the manager should undertake the additional spending. On the flip side, the dramatic decline in consumer demand during the recent recession led designers such as Gucci to slash their ad budgets and put on hold planned new boutiques.


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