Sequence Of Budgetary Process And Behavioural Aspects Of Budgeting Process

Investigation of the sequence of budgetary process

With the increasing competition and technologies in the global marketplace, it has become necessary for all types of business organisations to make proper planning strategies so that they could maintain their competitive position in the market. Moreover, predicting sales and controlling expenses are other integral functions to ensure smooth running of the business operations. This has increased the use of the budgetary system in the context of the global business organisations. A budget could be described as a formal statement of projected income and expenses depending on future objectives and plans. More precisely, a budget is a document, which the management of an organisation uses for anticipating the expenses and revenues for an upcoming year depending on business goals (Anessi-Pessina et al. 2016). This paper would investigate the sequence of budgetary process and relevance issues in its behavioural aspects.  

Budgeting is deemed to be a detailed procedure having various intricate steps resulting in effective understanding of the same at large. The budgetary process is followed in a certain sequence, which is enumerated briefly as follows:

Updating budget assumptions:

Certain assumptions are always made at the time of preparing budgets (Booth 2018). These assumptions might be associated with sales trends, environmental conditions or cost trends. Before developing the budget, it is necessary to review these assumptions thoroughly based on the existing environmental conditions.

Noting available funding:

If adequate funding is not available, the growth prospects of the business could be hindered greatly. Hence, in budget preparation, considerable attention needs to be provided to the available funding, since the availability of investable funds would ascertain the introduction of feasible projects.

Step costing points:

The business environment is highly subject to dynamism. The organisations have to encounter challenges daily, which might modify their cost structure completely (Eldenburg, Krishnan and Krishnan 2017). Hence, in the budgeting procedure, various factors influencing business costing needs to be considered carefully. It is necessary to identify these influential dynamics well ahead of time for making the budget realistic.

Developing budget package:

In this step, the past standards associated with budgeting process are considered for budget formulation for the existing period. The past standards are updated in accordance with the existing environmental conditions. Thus, budget package serves as an outline based on which budget needs to be developed.

Obtaining revenue forecast:

In the words of Grossi, Reichard and Ruggiero (2016), sales budget is deemed to be the most crucial budget, since all budgets would be prepared depending on sales budget. In addition, it ascertains whether the organisation is earning adequate revenue essential for survival. Hence, the management needs to provide adequate importance in preparing sales budget by estimating accurate demand.

Obtaining department budgets:

With the help of department budgets, it is possible to arrive at a budgeted expenditure for a specific year. All the departments need to prepare their own budgets after which they would be combined together for becoming a portion of master budget.

Validating compensation:

Compensation plans are an important element of the budgeting process. Since compensation increases annually, it needs to be developed with utmost care. The approval for rise in compensation needs to be taken from the higher authority and after this, it requires to be augmented in the budgeted compensation plans (Hall 2016).

Critical examination of the issues of relevance in behavioural aspects of budgeting process

Validating bonus plans:

For maintaining the morale of the staffs, the workers are provided with bonuses frequently and thus, bonuses serve as an appraisal technique. The bonus declarations not taken into account in the budgetary process could result in havoc in business profits. Hence, any bonus plans require consideration beforehand. Consultation with the top management is necessary for bonus plans.

Obtaining capital budget requests:

The business expansion is ensured by capital expenditure, as it assists the organisations in availing opportunities essential for business growth. If there are capital expenditure plans, they need to be considered beforehand and hence, inclusion in the budgeting process is crucial.

Updating the budget model:

If there are any modifications made to the budget model assumptions, they need to be updated so that the final budget could be developed accordingly. Any delay could result in glitches and over time, it might lead to confusion.

Reviewing the budget:

Continuous review of the budget is critical once it is developed for correcting any deficiencies. If a little decimal is placed inaccurately, an imbalance could be formed in the budget sheet (Järvinen 2016).

Obtaining approval:

After completion of review, the budget is required to be represented in front of the top management. It would evaluate whether the budget has been developed by adhering to all requirements and hence, approval could be provided, if no changes are required.

Issuing the budget:

It is necessary to issue the budget formally after approval. All business operations would take place accordingly based on the developed budget.

By effectively and diligently following the above-mentioned steps, all individuals in a business organisation could gain an overview of the ways to work efficiently over time. Moreover, it assists them in obtaining experience in expense and enables them the margin to know in terms of savings and overspending. Therefore, it could be said that budgetary process is an effective tool at the time any organisation is struggling with overspending and receiving lower income (Klychova, Faskhutdinova and Sadrieva 2014).

At the time of drafting and planning a budgeting system, certain behavioural issues need to be considered, since budgets could have implications in relation to human behaviour and the effects would be adverse on performance. Certain issues of relevance are inherent in the behavioural aspects of the budgeting process and they are demonstrated briefly as follows:

Dysfunctional behaviour:

Sometimes, there might be improper budget implementation and unrealistic expectations of the management due to which negative reactions are deemed to be observed among the subordinate managers. This, in turn, has negative effect on accomplishing the goals of the organisation (Langfield-Smith et al. 2017). This negative behaviour could be identified as dysfunctional behaviour, which is described as an individual behaviour in basis conflict with the organisational goals. For dealing with this issue, feedback needs to be sought frequently on performance and standards should be set realistically.

Participative budgeting:

There are some adverse consequences of participative budgeting, which require to be avoided. Initially, when the higher-level management has complete control of the budgetary process and it asks for superficial involvement from lower-level managers, there exists pseudo participation in the process (Malmi 2016). This type of participation is thought of as a deceit and it could minimise the motivation level of the employees. This is because the top management is not seeking the actual input from the lower-level managers. Moreover, excessive involvement and discussion could cause delay in preparing budget. Finally, this type of budgeting could result in easy budget targets or the ones not aligning with the goals and strategy of the organisation.

Additional pressure created by budget:

If the budget standards and goals are excessively high, there would be fall in motivation and unable to accomplish the same might frustrate the managers, which would result in poor performance. Conversely, if they are accomplished easily, the managers might lose interest and a decline in performance is obvious. Therefore, it is necessary to tighten the standards and goals within a certain range and the employees should be provided with the opportunity to give clear feedbacks for adjusting levels of aspiration and striving to accomplish desired rewards (Miller 2018).

Budgetary slack (cushion):

This situation arises at the time any manager intentionally underestimates revenues, asks for more funds than required and overestimates costs for supporting the budgeted activity level. In all kinds of business organisations, a tendency could be observed in terms of introducing cushion or slack into the budget. For example, the subordinate managers based on their previous experiences could know that the senior managers would minimise their budget proposals and hence, they would pad certain expenses or make low-revenue projections (Miller-Nobles, Mattison and Matsumura 2016). Conversely, the senior managers having prior knowledge of the habits of the subordinate managers might raise the expected revenue level and minimise budgeted expenses. In a similar manner, the sales managers tend to underestimate sales projections and the controller initiates slack by maintaining additional cash balances. For dealing with this additional slack, the higher-level management might initiate strenuous measures to cut costs along with putting additional pressure on minimising the slack.

Inter-departmental conflict:

The budgetary process is effectively deemed to be a formal and technical one. However, in practice, this process becomes an informal bargaining procedure or where the managers of various departments compete for scarce resources of the organisation (Otley 2015). This might result in dilution of actual goals, as the managers intend to fight for recognition and power. Departmental conflict takes place mainly due to the fact that various departments tend to blame each other when they are unable to accomplish their targets. In addition, conflicts are deemed to be observed between the accounting department and the other departments of an organisation due to varying perceptions. The reason is that the success of the budget staff is the failure of another (Shields 2015). For instance, the success of an accounting in identifying an unfavourable variance signifies the failure of another staff in accomplishing the budget. For dealing with this issue, adequate training needs to be provided in human relations while enhancing communication systems.

Support of the top management:

The top level managers need to develop an environment and provide impression to the subordinate managers regarding their support and commitment to the budget objectives and goals by their actions. In opposition, planning and control function would be damaged, if the subordinate managers believe that their immediate supervisors are not diligent while developing and using budgets (Van Helden and Uddin 2016). Hence, for dealing with this issue, the top management needs to exhibit a positive attitude towards engaging lower management levels in the process.

Conclusion:

Based on the above discussion, it could be stated that budgeting is deemed to be a detailed procedure having various intricate steps resulting in effective understanding of the same at large. With the help of budgetary process, the managers could obtain experience in expense and enables them the margin to know in terms of savings and overspending. Therefore, it could be said that budgetary process is an effective tool at the time any organisation is struggling with overspending and receiving lower income. Moreover, it has been evaluated at the time of drafting and planning a budgeting system, certain behavioural issues need to be considered, since budgets could have implications in relation to human behaviour and the effects would be adverse on performance.

References:

Anessi-Pessina, E., Barbera, C., Sicilia, M. and Steccolini, I., 2016. Public sector budgeting: a European review of accounting and public management journals. Accounting, Auditing & Accountability Journal, 29(3), pp.491-519.

Booth, P., 2018. Management control in a voluntary organization: accounting and accountants in organizational context. Routledge.

Eldenburg, L.G., Krishnan, H.A. and Krishnan, R., 2017. Management Accounting and Control in the Hospital Industry: A Review. Journal of Governmental & Nonprofit Accounting, 6(1), pp.52-91.

Grossi, G., Reichard, C. and Ruggiero, P., 2016. Appropriateness and use of performance information in the budgeting process: Some experiences from German and Italian municipalities. Public Performance & Management Review, 39(3), pp.581-606.

Hall, M., 2016. Realising the richness of psychology theory in contingency-based management accounting research. Management Accounting Research, 31, pp.63-74.

Järvinen, J.T., 2016. Role of management accounting in applying new institutional logics: A comparative case study in the non-profit sector. Accounting, Auditing & Accountability Journal, 29(5), pp.861-886.

Klychova, G.S., Faskhutdinova, ?.S. and Sadrieva, E.R., 2014. Budget efficiency for cost control purposes in management accounting system. Mediterranean journal of social sciences, 5(24), p.79.

Langfield-Smith, K., Smith, D., Andon, P., Hilton, R. and Thorne, H., 2017. Management accounting: Information for creating and managing value. McGraw-Hill Education Australia.

Malmi, T., 2016. Managerialist studies in management accounting: 1990–2014. Management Accounting Research, 31, pp.31-44.

Miller, G., 2018. Performance based budgeting. Routledge.

Miller-Nobles, T.L., Mattison, B. and Matsumura, E.M., 2016. Horngren’s Financial & Managerial Accounting: The Managerial Chapters. Pearson.

Otley, D., 2015. In Management Control. Critical Perspectives in Management Control, 14(6) pp.27-35.

Shields, M.D., 2015. Established management accounting knowledge. Journal of Management Accounting Research, 27(1), pp.123-132.

Van Helden, J. and Uddin, S., 2016. Public sector management accounting in emerging economies: A literature review. Critical Perspectives on Accounting, 41, pp.34-62.