The annual budgeting process has been criticised
The annual budgeting process has been criticised as a cumbersome process which occupies considerable management time; concentrating unduly on short term financial control; having undesirable effects on motivation of managers; emphasising formal organisation structure.
Introduction
A budget is a quantitative measurable long term plan with specified corporate goals set to be achieved within a specific time period. The annual budget is usually divided into sub-plans usually quarterly and is based on an annual strategic business plan. It is formulated by following a process that requires careful analysis and evaluation of organizational objectives, alternatives, strategic options, decisions and actions and implementation of objectives as well as monitoring of results. The comprehensive nature of the budgeting process thus require participation of managers and executives who are responsible for the planning of actual operations, coordination of activities, communication of plans to responsibility centres; motivate managers to achieve budget goals; controlling activities; and evaluating performance. In all of these processes and activities, one notices the conflicting roles of budgets that involve planning, motivation and performance evaluation (Drury 2004). Due to these conflicting roles of budgets, in the recent years critics are of the opinion that the annual budget process is merely a waste of resource and a burden to management rather than enabling them to control their management environment. In the following discussion the researcher shall discuss the factors concerned and offers some recommendation for improvement of the annual budget process.
Discussion
a. Management time consumption
Conventional annual budget process is a quantified plan prepared and approved to define the course of action and activities to be carried out during a specified time period utilizing certain amount of resources to achieve given objectives (Drury 2004). The process deals with projection of activities, contingencies, strategies and interaction of processes within an organization. Budgets are also controls in the planning process to ensure the organization does not deviate from its financial and operational goals. These activities and processes require extensive analysis of organizational processes; plans for targets to be achieved by individual departments and by the overall organization; and results expected to be achieved etc. Consequently, one observes that the annual budgeting process is a complex and tedious process that requires top management directives and participation of lower management and staffs. Not only this but according to Jeremy Hope and Robin Fraser (2003) the traditional budget process require four to five months for completion and efforts of 20 to 30 percent of the manager’s time.
Furthermore, traditional budgeting is based on incremental budgeting whereby expenditures or revenue estimations are based the increments on the previous outcomes, and does not necessarily reflect the need of the environment in which the firm operates resulting in unachievable targets and undesirable outcomes. To resolve modern day organizations are focussing more on rolling forecasts and driver based budgeting models which are concentrated on participation and usage of drivers that operate the organization (Hunt 2003).
b. Short financial control
Another aspect of the annual budget process is that it is divided and based on quarterly objectives and results. Whether the organization is segmented into profit centres; cost centres; revenue or investment centres, the basic premise is that each of these centres are responsible for the designated outcome set by the annual budget. The overall outcome is estimated based on the quarterly results. The objective for quarterly results is to enable management to estimate expected results at the end of the year and also to use budgets as financial controls to counteract deviation, if there are any before the situation proliferate out of hand. Yet this very factor not only takes up a lot of management time but it also forces managers to dedicate significant time to target achievements, financial objectives and compliance with the process therein instead of concentrating on management excellence.
c. Undesirable effect on manager motivation
The pressure to deliver as Hope and Fraser (2003) note force managers and their teams to concentrate on sales targets; customers order of goods whether they want it or not; and achieve financial objectives. There is less and less time for managers to concentrate on team building; motivation; performance level; evaluation; or even time for designing effective and productive departmental structure to achieve better results. For this reason budgeting process tend to motivate managers to set their objectives to financial objectives and deliverables rather than on working as a team. The managers are thus the gatekeepers while the team members are forced to become dissociated from the organization’s structure.
d. Emphasis on formal organizational structure
Given the emphasis on extensive and detailed planning at the departmental level, it is imperative that organizations have formal structure so that budgeting process can be integrated into the forecasting and goal achievement activities. Formal organizational structure is also required for building and approving budgets through communication and coordination. Managers are therefore expected to align day to day activities with organizational strategies and budgets in order to achieve the desired objectives. Without a formal organizational structure, it would be difficult for the management to have a control over operational activities and financial consequences therein.
Conclusion
Given the above discussion, the researcher deduce that the annual budgeting process is a tedious process that eats up the time of management and lower staff alike without much productivity. The reason for this low productivity despite well planned budgeting is because of the long process that entails and the nature of the budgeting process. Budgeting from a top down approach is usually an imposition rather than participation. In modern day organization participation of team members, managers and supervisors with the top management is imperative for efficient operation. Dictated objectives and plans do not help in this regard. For this reason many organizations are changing their approach to budgeting by focussing on operational outcomes and inputs to fixate targets reinforced by incentives rather than outlined targets to be achieved without any motivation. As McGregor indicate in his Theory X/Y human beings are liable to work better if their desired motivation are in place (2005) and they are satisfied. Similarly, effective organizational planning in the form of budgets should be based on firm’s ability to respond to change and more importantly on the satisfaction of those who are responsible for carrying out the plans. Increased participation not only encourages responsibility but also makes accountability easier as individuals feel they are responsible for the operational outcomes. They are not bogged by the imposed accountability (Hunt 2003).
References
McGregor, D. 2005, The Human Side of Enterprise, Annotated Edition. McGraw-Hill.
Drury, C., 2004, Management and Cost Accounting, London: Thompson Business Press, 6th Edition.
Hope, J. and Fraser, R. Feb 2003, Trash The Budget. Optimize, Issue 22.
Hunt, S. Aug 2003, Budgets Roll With The Times. Optimize, Issue 22.
