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Abandoning budgets Essay

From the readings that were given, I believe that a company would be better off abandoning budgets. Instead of stating budget targets which the employees should make or break to receive target rewards, corporations should be more focused on objectives. With the changing market conditions, corporations should be flexible in answering to customer demands and in forming strategies to achieve greater profits.

One disadvantage of budgeting is time. Computing financial projections and the corresponding details is very meticulous. Managers will be veered away from their supposed tasks of creating strategies to improve performance. They will be taking so much time in thinking how much a target they can achieve so getting that target reward would be easy.

When employees are focused on certain budget targets, they will do anything to reach that even if it means manipulating data. This is evident in some companies especially if reaching or exceeding a target corresponds to a monetary reward, commendation or promotion. Jensen (2001, p. 96) mentioned an international heavy-equipment manufacturer as an example. To hit their quarterly revenue targets, they shipped off unfinished products to Netherlands. As it came out, the assembling of the goods and the additional labor required only caused the company

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more money to spend than the profit that they were expecting.

Having budget expectations also limits the flexibility of a company to conform to present market conditions. Market conditions are always changing. By focusing on objectives rather than on achieving numbers, managers can work on forming strategies to better sell a particular product, for example. They can adjust to what presently a customer wants – to convince him in purchasing based on his current need or interest. Companies, especially those producing a number of products, can also gauge the supply that they need to release to the market based on demand trends. This will prevent losses from unsold products or surplus. When objectives have been met, bigger profits are sure to reflect.

References:

Jensen, M.C. (2001). Corporate Budgeting is Broken – Let’s Fix It. Harvard Business Review, 95-101.

Hope, J. & Fraser, R. (2003). Tool Kit: Who Needs Budgets? Harvard Business Review, 108-115.

Weber, J. & Linder, S. (2005). Budgeting, Better Budgeting, or Beyond Budgeting. Cost Management, 19(2), 20-27.

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