Budgets are a major feature of most control systems. When administered intelligently, budgets (a) compel planning, (b) provide performance criteria, and (c) promote communication and coordination.
Compelled planning
"Plan ahead" is a redundant watchword for business managers and for any individual as well. Yet too often, everyday problems interfere with such planning; operations drift along until the passage of time catches the firms or individuals in undesirable situations that should have been anticipated and avoided. Budgets formulate expected performance; they express managerial targets. Without such targets, operations lack direction, problems are not foreseen, results lack rneaning, and the implications for future policies are dwarfed by the pressure of. the present. The planning role of all levels of management should be accentuated and enlarged by a budgetary system. Managers will be compelled to look ahead and will be ready for changing conditions. This forced planning is by far the greatest contribution of budgeting to management.
Budgets have direct or indirect influence on strategies. Strategies are the relatively general and permanent plans that change as conditions or objectives change-for example, when new products are added, old products are dropped, organizations are revamped, or production methods are changed. Budgets affect the formulation of overall organization strategies and then help to implement such strategies. Thus, strategic planning (long-range planning) is often affected either directly by budgetary information or indirectly by the thinking that has evolved from dealing with budgets.
Framework for Judging Performance
Despite the existence of complex computers and automation, individuals still run organizations, from the president down to the supervisor of the smallest department. Employees do not like to fumble along not really knowing what their superiors anticipate or to see such expectations vary with, for example, the conditions of the superior's sinus trouble. The budget helps meet this difficulty by letting employees know what is expected of them.
As a basis for judging actual results, budgeted performance is generally viewed as being a better criterion than past performance. The fact that sales are better than last year's, or that direct-labor costs are lower than last year's, may be encouraging-but it is by no means conclusive as a measure of success, For example, the news that a company sold 100,000 units this year as compared with 90,000 units in the previous year may not necessarily be greeted with joy. Perhaps sales should have been 112,000 units this year. A major weakness of using historical data for judging performance is that inefficiencies may be buried in the past performance. Furthermore, the usefulness of comparisons with the past may be hampered by intervening changes in technology, personnel, products, competition: and general economic conditions.
Compelled planning
"Plan ahead" is a redundant watchword for business managers and for any individual as well. Yet too often, everyday problems interfere with such planning; operations drift along until the passage of time catches the firms or individuals in undesirable situations that should have been anticipated and avoided. Budgets formulate expected performance; they express managerial targets. Without such targets, operations lack direction, problems are not foreseen, results lack rneaning, and the implications for future policies are dwarfed by the pressure of. the present. The planning role of all levels of management should be accentuated and enlarged by a budgetary system. Managers will be compelled to look ahead and will be ready for changing conditions. This forced planning is by far the greatest contribution of budgeting to management.
Budgets have direct or indirect influence on strategies. Strategies are the relatively general and permanent plans that change as conditions or objectives change-for example, when new products are added, old products are dropped, organizations are revamped, or production methods are changed. Budgets affect the formulation of overall organization strategies and then help to implement such strategies. Thus, strategic planning (long-range planning) is often affected either directly by budgetary information or indirectly by the thinking that has evolved from dealing with budgets.
Framework for Judging Performance
Despite the existence of complex computers and automation, individuals still run organizations, from the president down to the supervisor of the smallest department. Employees do not like to fumble along not really knowing what their superiors anticipate or to see such expectations vary with, for example, the conditions of the superior's sinus trouble. The budget helps meet this difficulty by letting employees know what is expected of them.
As a basis for judging actual results, budgeted performance is generally viewed as being a better criterion than past performance. The fact that sales are better than last year's, or that direct-labor costs are lower than last year's, may be encouraging-but it is by no means conclusive as a measure of success, For example, the news that a company sold 100,000 units this year as compared with 90,000 units in the previous year may not necessarily be greeted with joy. Perhaps sales should have been 112,000 units this year. A major weakness of using historical data for judging performance is that inefficiencies may be buried in the past performance. Furthermore, the usefulness of comparisons with the past may be hampered by intervening changes in technology, personnel, products, competition: and general economic conditions.
Communication and Coordination
Coordination is the meshing and balancing of all factors of production and of all the departments and functions of the organization so that its objectives are attained- that is, the interests of the individual managers are subordinated for the benefit of the organization as a whole.
The concept of coordination implies, for example, that purchasing officen integrate their plans with production requirements, and that production officers use the sales budget as a basis for planning personnel needs and utilization of machinery.
Budgets help management to coordinate in several ways:
Coordination is the meshing and balancing of all factors of production and of all the departments and functions of the organization so that its objectives are attained- that is, the interests of the individual managers are subordinated for the benefit of the organization as a whole.
The concept of coordination implies, for example, that purchasing officen integrate their plans with production requirements, and that production officers use the sales budget as a basis for planning personnel needs and utilization of machinery.
Budgets help management to coordinate in several ways:
- The existence of a well-laid plan is the major step toward achieving coordination. Executives are forced to think of the relationships among individual operation, and the company as a whole.
- Budget help to restrain the empire-building efforts of executives. Budgets broaden individual thinking by helping to remove unionscious biases on the part of engineers, sales managers and production officers.
- Budgets help to search out weaknesses in the organizational structure. The formulation and administration of budgets isolate problems of communication, of fixing responsibility, and of working relationships.
The idea that budgets improve coordination and communication may look promising on paper, but it takes plenty of intelligent administration to achieve in practice for instance, the use of budgets to judge perforrnance may cause managers to wear blinders and concentrate more than ever on their individual worlds. We shall examine this problem in more detail later in the posting.
The cost-conscious, cooperative attitudes toward budgetary control must permeate all levels of management. A skeptical top-management attitude will trickle down to the detriment of the entire company. Top management must understand and enthusiastically support the budget and all aspects of the control system.
Administration of budgets must not be rigid. changed conditions call for changes in plans. The budget must receive respect, but it does not have to be so revered that it prevents a manager from taking prudent action. A department head Prepares and accepts his budget; he commits himself to the outlined performance. But if matters develop so that some special repairs or a special advertising outlay will best serve the interests of the firm, the manager should leel free to request permission for such outlays, or the budget itself should provide enough flexibility to permit a manager reasonable discretion in deciding how best to get his job done.
The cost-conscious, cooperative attitudes toward budgetary control must permeate all levels of management. A skeptical top-management attitude will trickle down to the detriment of the entire company. Top management must understand and enthusiastically support the budget and all aspects of the control system.
Administration of budgets must not be rigid. changed conditions call for changes in plans. The budget must receive respect, but it does not have to be so revered that it prevents a manager from taking prudent action. A department head Prepares and accepts his budget; he commits himself to the outlined performance. But if matters develop so that some special repairs or a special advertising outlay will best serve the interests of the firm, the manager should leel free to request permission for such outlays, or the budget itself should provide enough flexibility to permit a manager reasonable discretion in deciding how best to get his job done.
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