FINANCIAL
PERFORMANCE
What do you know about Managing
Budgets?
A budget is a working plan, setting out projected performance levels over a specified
period of time. Thus an effective budget will enable management to:
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Compare forecast with actual performance
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Identify variances
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Identify the causes of variances
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Initiate remedial action.
In essence a budget should provide a routine synthesis of what Horngren terms
`scorekeeping', `attention-directing' and `decision-making' information, although it may
be necessary to acquire additional non-routine information before decisions can be
taken.
There are a variety of tests which may be applied to budgetary control procedures to assess their effectiveness. Some important factors to consider will be the degree to which existing procedures:
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Facilitate the control of all resources: by highlighting current resource management issues; by providing a clear picture of organizational performance against targets; and by helping to foresee future difficulties
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Prescribe limits and purposes for organizational expenditure, thus providing clear lines of authority and preventing waste
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Focus effort towards achievement of objectives
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Incorporate mechanisms for timely review and appraisal of both forecast and actual figures
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Provide an objective measurement of corporate, departmental and functional performance, as well as a source of realistic data to support future forecasts and costing exercises
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Involve managers and staff in budgetary control, in proportion to the influence they have over performance against targets
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Trigger remedial action through timely analysis of variances.
The effectiveness of an organization's procedures for budgetary control will, to a large extent, be determined by the accuracy and timing of data collection and presentation. Presentation formats will also have significant impact: the system should be devised to match the level of information provided with the status of the
receiver(s).
A final consideration concerns organizational culture. Routine budgetary control mechanisms make a crucial (and potentially stressful) contribution to the prevailing atmosphere and behaviour within a company. For instance, one contemporary approach is to encourage budgetary ownership at all levels of organization by devolving authority and responsibility, and involving junior staff in review meetings. With
this approach often comes a culture where all staff are constantly challenged over forecast, performance figures and variance, with the intended result that remedial action where required will be swift and appropriate.
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