Purpose
The objective of preparing the paper is to critically evaluate the relevance and the challenges of the budgeting systems adopted in the organization by conducting a review of the literature. For this purpose, a peer reviewed journal article is required to be selected on “Use of Budgeting as a management technique for managing resources”. The chosen article for evaluating the system of budgeting adopted in any particular organization is “The Influence of Budgeting Participation on Managerial Performance in Service Companies: An Evidence from Indonesia”. The paper presents the critical assessment of the selected article by citing the examples on the type of budgeting practices adopted by the organization and whether such practice fulfils the purpose of planning and controlling and also whether it helps in evaluating the performance. Furthermore, the concept of traditional budgeting has been criticized on the ground of such practices creating constraints on innovation and creativity in the organization.
Budget forms an important component of the functioning of every organization and it can be defined as the quantitative statement focusing on the financial figures of organization such as expenses, revenue, assets and cash flow that aids the resource allocation and activities coordination. The process of budgeting can be defined as the detailed procedure that results in accounting for the availability of the funds, assumption updating, budget package creation and forecasting of revenue. It is the way a budget of the organization is built. Organization enables the streamlining of their expenditure by deciding upon the future expenses and income. That is, budgeting process refers to the systematic business activities encompassing implementation, development and evaluation of plan for the provision of capital assets and services (Tarigan 2016). Organization should be able to measure their performances and finance the plan of the business used in the process of budgeting. A need for the future profitability plan ensuring the availability of the particular amount of earnings is incorporated in the budgetary process. Therefore, the process of budgeting can be discussed in terms of the activities involved in the planning and completion of the budget. It includes budget submission and preparation, approval and execution and lastly, there is auditing and evaluation. By the adoption of proper controlling and planning mechanism in the business, organization is able to keep a record of the expenses in terms of the cost incurred and income generated. In simpler words, the budgeting process assist in the financial planning by determining the organization goals and using the technique of forecasting so that they support the rising income and lowering down the expenditure. The budgeting planning is helpful for the entity in identifying any existing potentiality of danger and controlling the expenditure proactively (Berland et al. 2018). In a nutshell, the budgeting process intends to achieve the designated or the set targets of the firms by allocating the capital in an optimum and adequate manner.
Journal Article Critique
The reason for the creation of better budgeting process in the organization is well knows to the financial professionals. Process of budgeting should be kept on improving due to the changing and dynamic environment in which the business operates. Construction of budget requires the managers to establish the financial objectives and identify the ways that should be undertaken for the accomplishment of the set objectives (Popesko et al. 2017). Budgeting process needs improvement due to the competitive business environment and this can be done by adopting few steps. These requires aligning the strategic plan of the company with its budget, creation of work flow and clear process, using devise based planning accessibility to the users, testing simulations and scenarios, explaining wit support, reforecasting and automating reports. Reforecasting forms an important component of improving the budgeting process as it is done to gain accuracy in the financial figures determined. It is also important to automate and improve the budgeting process so as to reap the benefits in the dynamic and ever changing business environment (Chen 2017). A properly processed budget benefits the organization in numerous ways. Moreover, any unexpected development in the business requires the budgeting process to be revised as the managers are required to closely monitor the progress from the time table and budgeted goals.
This section requires to evaluate the process of budgeting and its usage as a planning and controlling tools. For this purpose, the chosen peer reviewed journal article is inspected by analysing the process of budgeting adopted by the organization taken as a case study in the article. The article talks about the service industries and the dynamic changes being faced by the industry requires them to implement the appropriate management techniques. Budgeting has been identified as one of the important management techniques which the companies operating in the service industry can utilized. In the research paper or the journal article, emphasis has been one on the involvement of the managers in the budgetary process and therefore the main focus of the article is on participative budgeting. Budgeting participation is described as the process that influence, involves and contributes to the process of budgeting (Astuty 2015).
Manager’s role in performing different activities in the organization is incorporated in the process of controlling and planning. The planning and controlling aspects of budgeting has been explained in the article in terms of generating job relevant information and the controlling aspect is measured in terms of performance of managers. This is, the participation in the budgeting impacts the performance in terms of determining controlling and planning activities of the managers. The planning activities is associated with budgetary plans such as the financial plan prepared in a detailed and definite way. In this regard, the financial objectives are established for the coming year and enhances the process of planning further by imposing deadlines and disciplines. Control aspect is served in the form of management control function where the benchmark is established for comparing the actual performance with the budgeted performance. This helps in achieving the established financial objectives by keeping the business scheduled.
Budgeting Process in Organizations
Performance evaluation aspect of budgeting process is explained in the article in the context of participation of the managers and the impact of the budget participation on their performance. Managers can effectively evaluate the alternatives and successfully complete his job because of the adequacy of the information possessed by him. With the help of information availability, the possession of such information is reflected on his action and work and consequently results in the performance improvement (Tarigan 2016). Managers is provided the opportunity to make negotiations on the achievable budgeted targets due to their participation in the planning of budget. Budgeted targets can be achieved easily by the manger when he has a better understanding of the budget due to participation (Becker et al. 2016). Managerial performance is measured easily using the budgetary aspects because the performance of managers is rated good when they are able to deliver effective and efficiently managing the gaols of the company. Performance measure is done by the effectiveness of the managers in working towards the achievement of goals. Therefore, budget process provides a guideline to the company to assess and evaluates the performance of managers.
It is observed from the findings of the article that for the achievement of the budgeted targeted, it is important for the organisation to involve the managers in the process of budgeting. The required information should be provided to the managers regarding the budget to facilitate optimal decision making in the organization (Davila and Ditillo 2017).
It is identified from the analysis of the article that the service companies of Indonesia has employed the participative budgeting and has assessed the impact of participative budgeting on the performance of managers. Preparation of budget in the organization is done either by adopting the top dons or bottom up approach. Under the approach of top down budgeting, budget is prepared by the top management and is executed by the employees when the information is pass on to them. Employees becomes a part of the budgetary process when they are required to participate in. They generate a sense of belonging to the budget and provides them a sense of commitment when they form the part of budgetary process. Encouraging employee’s participation in the budgeting process generates various benefits by reducing the conflicts within the organization, lowering down the resistance level to the budget and increasing motivation. The findings of the article says that the job relevant information and performance of managers is positively influenced by the budgeting participation.
Importance of Improving the Budgeting Process
The behavioural implications of the participative budgeting adopted in the service companies of Indonesia can be identified from the behaviour of managers and the impact it creates on their performance. Assessment of human behaviour in performing the roles in the organization helps in evaluating the performance. Budgeting creates impact on the behavioural and psychological responsibility of the managers. It is evident from the results obtained that the employees are motivated due to the participation in the budgetary process. Managers are provided with the opportunities to communicate, interact and influence the target and goals of the company. Sense of responsibility of the managers emerges from the direct involvement of managers in the process of budget to achieve the optimal budgeted target. Managers are able to arouse a respect towards the company and his jobs. Participative budgeting results in setting of the goals and standard on joint basis that helps in stimulating the feeling of responsibility to determine the gaols and standard that is required to achieve the objectives. The participation process of budgeting facilitates the utilization and acquisition of job relevant information. With the help of such information, managers are able to attain the desired goals or the targets by developing the appropriate and effective strategies. The employees are able to perform better by the development of decisions concerning budgeting in the process of budgeting participation by using the job relevant information.
Performance of managers improves by making high use of job relevant information as using such information, they are able to select the best action. Furthermore, in the situation of the uncertainty of task, managers highly using such information in the decision making process enhances their performance. Therefore, it is identified from the results of the research paper that the participative budgeting influences the behaviour of the employees that can be assessed from the evaluation of the performance.
In this section, the traditional budgeting practices imposing constraints on creativity is critically evaluated based on the findings of literature. The process of traditional budgeting system has some inherent flaws as the budgeting system is considered to consume much time and is regarded wasteful. The system of traditional budgeting does not account for uncertainty which is the inherent factor to the innovation. A binary controllability division is presumed in the traditional budgeting, where the cost item for which they are held accountable are fully controlled by the managers and do not control other cost items for which the others are held responsible (Ravelomanantsoa et al. 2019). Such practice might discourage the managers from working beyond their designated areas due to the fear of erosion of degree of control exerted by them on the outcomes. Innovation in the organization might be dissuaded and results in the dysfunctional behavioural due to such controllability. One of the main arguments abandoning the traditional budgeting practices is the increasing uncertainty of the environment. Such budgeting system was developed when the business environment was less competitive and more stable and in the increasing complex environment, the traditional budgeting system has become obsolete and therefore obstructs innovation (Nguyen et al. 2017).
Relevance and Challenges of Budgeting Systems
The budgetary controlling and planning method used under the traditional practices provides an inaccurate representation of the goals which the organization intends to receive. The possibility of the business getting hindered to the extreme because of the manipulative changes introduced by either the managers or the owners of business. The annual budget prepared using the traditional system is criticized as being the performance of fixed contracts and this suggest the replacement of the existing practice with the adaptive model that is based on the new techniques of management accounting such as non-financial performance measures, relative performance evaluation and rolling forecast (Irfani et al. 2019).
Critics of the traditional budgeting system says that it exclusively focus on the financial output instead of providing an adequate insight into the requirements of operations. The abandonment of the traditional budgeting practice has been advocated in many studies as such practice is regarded as an obstruction to the flexibility and changes that is needed in the innovative and fast moving environment. The time gap between the business planning and reality is not addressed by the traditional practice and this calls to be replaced by some other improved budgeting system (Radoni? 2018). Some of the critical factors contributing to the success of the organization in the competitive business environment cannot be measured by the traditional methods. The most frequently cited limitations of the traditional budgeting that obstruct innovation and creativity within the organization is the absence of relevance and timeliness. It is so because the relevance of budgeting is impacted by the timelines of information and frequency of budget revisions. The traditional budgeting practices is not considered appropriate for generating a highly organic structure and emphasizing on the innovation and learning (Asogwa and Etim 2017). Localized Variance analysis is considered to be problematic because it tends to generate behaviour that is short sighted. This calls for bringing change in the operation and design of the budgetary system.
The literature review and its findings are evident of the fact that integrating budgeting contributes to the effectiveness of the system of management control that helps in sustaining the business. Budgetary process helps in facilitating various management functions such as controlling, planning and coordinating the activities. The empirical findings from various studies suggest that budgeting is considered as the most effective tool of controlling activities and planning within the organization. Budgeting system determines the relationship between the innovation and the financial performance of the organization. The operational requirements of the business in terms of costs incurred can be tracked by setting the targeted cost based on forecasting and the actual costs incurred in the business (Franco and Otley 2018). Despite the usefulness of budgeting in the organization as controlling and planning measures, the importance of budgeting in the contemporary organization is dilemmatic because the budgeting roles as quoted is not usually fulfilled.
Participative Budgeting and Its Effects on Managerial Performance
Some of the interesting explanation relating to the budget is presented by the critics of research using the institutional theory. Budgetary analysis on theoretical basis is essential for assessing the benefits of the budgeting to the contemporary organization as the findings of the literature is in contrary to some latest findings on the budgeting. Budget can actually be regarded as the waste of time, efforts and resources in the changing and difficult to predict business environment. Budgeting should not be substituted for the strategic planning by the contemporary organizations. It might be possible that the profitable and the required outcome to the organization of the process of budgeting might not get delivered. A new and changed process of budgeting should be adopted by the contemporary organization as the process would help in controlling the process of decision relating to the allocation of resources. Organizations with the help of budgetary process should be able to traverse through the ever changing threats and opportunities of the business (Avwokeni 2016). When the usage of budgeting is done to commit to the financial resources generating the financial control mechanism, it can be considered as the wrong instrument to deal with it.
The use of budgeting as the controlling and planning tool was suitable in the environment when business was stable. However, using it as the tool of controlling and planning in the current and dynamic business environment might not generate successful results. It is required by the business to use the budgeting system for capturing the relationship between innovation and creativity. If the budget contributes to the innovation of the business, it can automatically be tuned to the planning and controlling activities and thereby facilitating the development (Weigel and Hiebl 2018). Therefore, the recommendation of budgeting to the contemporary organization is done when the budgeting techniques can fulfil the gap between the prevailing necessities driven by the competitive business environment.
Conclusion:
The paper discussing about the review of literature identifies the fact that the organization in the earlier days adopted the management control system to seek competitiveness. It is so because a positive relationship has been found between the performance of the firm and its management control system by employing budgetary methods. Sustaining of competitive advantage and creation of innovation in the organization can be facilitated by the budgeting techniques when a changed approach is adopted to tackle with the ever changing requirements. However, when it comes to evaluate the performance, budgeting assist in enhancing the performance of the employees by motivating them and improving their performance reflected from their actions and commitments. From the analysis of the article, it is ascertained that the adoption of participative budgeting has resulted in improving performance of managers by providing them job related information and creating impact on the performance. Therefore, it is essential for the organization to deploy an innovative method of designing the budgets so as to deal with the unpredictable changes.
Conclusion
References:
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