“Identify and describe the key features that a budgetary process should achieve to achieve managerial goal congruent behaviour. However if budgets are over emphasised myopic behaviour may be observed where a manager (or groups of managers) takes action(s) that improve budgetary performance in the short term but may cause long term harm to the organisation” Discuss.
A budget is a short term, often one year, business plan, usually expressed in financial terms (Atrill, Mclaney, 2011, p.314). There are three broad functions of budgeting, these are: quantification of plans, help in financial planning, and monitoring and controlling scarce resources through performance measurements. Throughout this essay I shall be discussing these three areas, breaking them down into seven more specific features of budgeting. Furthermore I shall discuss how myopic behaviour can cause long term harm to an organisation. Goal congruence means developing and maintaining the various activities within the enterprise in proper relationship to each other (Welsch, Hilton, gordan, 1988 p.50). From a managerial point of view this is better explained by making sure they are aware of the different goals set by multiply departments within the organisation; as well as making sure their own goals are in line with the organisations overall plans. There are seven key features that a budgetary process should achieve in order to achieve managerial goal congruent behaviour. The first key feature is authorization, this makes managers accountable for their actions/spending and helps prevent fraud in an organisation (Atrill, McLaney, 2011). For an organisation it is important to make the right choice between a centralised control of the budget, where the organisations overall aspirations are at the heart of any decision making, or to delegate the responsibility to subordinates who will have a better understanding of their local environment. Usually a mixture of centralised and delegated control is chosen, giving some responsibility to subordinates to maintain motivated (Berry, Broadbent, Otley, 2005 p.108). Goal congruence is best achieved by using authorization in the budgetary process to keep Managers / Subordinates clear on what is expected of them from a financial point of view. The next four functions come into effect when planning a budget. Forecasting is critical in preparing an organisation for what is to come in the future, “looking ahead must be better than moving forward with eyes closed” (Garrett, 2010). It involves calculating many variables in order to predict future economic conditions as well as how governments and competitors will behave. On top of this, the company needs to forecast how the relationship between price and demand will change.
Planning links in closely with forecasting as both use secondary data to help organisations determine what to do next. Drury (2004) states that managers are encouraged to plan whilst preparing the budget so that they can consider what changes may occur and how they can respond. An organisation needs to plan out how they are going to treat upcoming circumstances, for example seasonal changes, trends in the market and the likely hood of the company incurring growth or decline. A combination of forecasting and planning enables managers to remain goal congruent as they are aware of what is expected from them and what is expected to happen to the market or organisation in the future. This allows them to have a better understanding of how they are going to achieve their goals and helps keep them focused and in line with the organisation. Berry, Broadbent, Otley, (2005) states the budgetary process provides, in different ways, a focus for forecasting and planning, whilst serving as a channel for communication and coordination. Communication is a critical part of the budgetary process as it is vitally important that each area of the organisation is given a budget that is relevant to the overall goals of the...
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