Budgeting & Management
The book “Beyond Budgeting” by J. Hope and R. Frazer analyzes and give advice to managers and accountant how to organize their work and respond to changing environment. The book consists of four parts and ten chapters which discuss and illustrate different aspects of budgeting and management. A special attention is given to techniques nad tools used by managers to overcome “performance” trap.
The first part “the promise of beyond budgeting” overview possible problems and troubles faced by managers. In this chapter, authors interpret and explain the main concepts used in the book. They explain that the budget is the formalization of an action plan for the future. Making it a formal document, publishing it, and presenting it to a governance group for review and approval establish an upper-level commitment to the actions, events, and values contained in it. In exercising its responsibility to control, management uses the budget as a yardstick to measure actual performance.
To accomplish this, the data contained in the budget must be expressed in the proper terms or units of measure. In managing the sales departments, for example, management will be handicapped if the actual output is expressed in CAP workload units while the budgeted output is
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As the information needed to prepare a budget properly is gathered, a clear picture will develop of the resources at hand and the added resources that will be required to achieve stated objectives (p 22). This resource “shopping list” becomes the topic of discussion and/or negotiation during the budgeting process. It can result in a reallocation of available resources or modification of the underlying goals and objectives.
The second part, “The adaptive process opportunity” gives examples of organization budgeting and effective use of resources available for budget evaluation. Also, this chapter includes adaptive process of budgeting which can be applied to different settings and circumstances. For instance, some budgets can be a straightforward set of calculations that determines the gross amounts to be generated by charging patients for the institution’s services. As an adjunct, budgets are prepared for discounts to insurance companies, free care, and bad debts.
A separate budget is prepared for other operating revenue like coffee and gift shop proceeds, parking lot profits, and so on. Other budgets can be for the quantities and types of workers needed to achieve the objectives of the plan. Again, the budget should be as detailed as possible. The task of the manager is to choose the best one and apply it to organizational settings. In this chapter, the authors illustrate that the operating expense budget preparation continues with a compilation of supply and service budget amounts.
This involves a listing of the various types or categories of supplies to be consumed and services to be utilized during the budget year, along with the dollar amounts to be expended for each category (p. 71). Again, it is important to build as much detail as possible to aid in controlling costs. Budgeting of more than token amounts for “miscellaneous” or “other expenses” is unwise.
The third chapter, “The radical decentralization opportunity” evaluate the role of change management in budgeting and possible solution to implement change process. The authors claim that change management should be a core of effective management and budgeting process in violate business environment. After all of these budgets are put together, the question arises whether to use a fixed or variable budgeting system for the operating budget. The authors underline that the essential difference is that a fixed budget is not changed during the year, while a variable budget takes into account changes in the volume of service and adjusts the revenue and expense budgets up or down accordingly.
This provides a better management yardstick under all operating circumstances (p.148). Under “decentralization” the authors mean different systems of budgeting used for planning and forecasting. It is important to keep in mind any other budgets being prepared simultaneously so that proper communication can take place and the budgets can be integrated appropriately.
If the budget for the upcoming year calls for new and expanded evening and weekend hours, there should be communication with the department so its budget can reflect the need to plan for additional resources to cover the cost of the necessary supplies, equipment, and staff to support the expanded operation. Change often involves risk and often places a strain on the organization. Many times, it is resisted. Consequently, change must be carefully planned and implemented if it is to be successful.
The forth chapter, “Realizing the full promise beyond budgeting”, include tools and techniques which help managers to think beyond numbers and calculations. This process includes industry trends and current data, competitors and market analysis, market fluctuations and economic indices. This chapter unveils the concept “beyond budgeting” showing that a manager’s knowledge must be updated periodically by management information reports that indicate what is happening with all of the resource elements for which a manager is responsible.
The characteristics of any item and data to be dealt with must be comprehended fully (p.181). What makes an expense item go up or down? What influence can management have on such behavior? Further, how the behavior will change under a variety of possible circumstances must also be understood. The authors explain that budgeting should be based on both operations and strategic planning, and must be employed to develop and implement courses of action to support successful activities, remedy poor performance, or reposition for the future. To be successful, managers must constantly strive to improve performance-essentially to do more with less.
I would recommend this book to top- and middle managers, project managers and those who is interested in management process and effective planning. Thinking ‘beyond Budgeting’ is important for strategic business analysts and managers of different levels because with the reimbursement environment changing as it does, even successful operations must be modified or changed from time to time to assure their continued success. Change, too, is involved in actions designed to remedy or reposition.
- Hope, J., Frazer, R. Beyond Budgeting. How Managers Can Break Free from the Annual Performance Trap. Harvard Business School Press.