The companies & targets
A well planned and developed budget can increase a manager’s motivation, however if the budget is not very well designed then this can cause the opposite effect, meaning that managers become de-motivated as the budget may not be achievable. If the budget holder has not had any input into the budget then poor human relations may develop between the budget holder and the senior managers, which again will de-motivate the budget holder.
If a budget is not achieved then it is not necessarily through poor management performance, other factors could be the reason of the underperformance. For example if targets are set using forecasts which are inaccurate then this obviously will make the targets set less achievable and less realistic. The budget holder however may have been performing to the expected level but the initial target may have become less obtainable over time. This again shows that budgets cannot solely be used as a way of judging performance.
It can sometimes be very difficult for a company to adapt to a new budget with a number of new plans and ideas. If the budget set is very different to past targets set, then it can be very difficult to change the way
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Although a budget is commonly used to set targets within an organisation and is the most formal way of controlling expenditure, it is possible for a company and therefore senior managers not to use a budget, this however would require a very large amount of trust. If the senior manager has enough trust in all of the budget holders, and believes all are fully committed to the interests of the company then the budget holders could be left by management to spend money when and where it is required.
However, there would still need to be a limit on the amount of money that could be spent as a large sum of money could be spent on a relatively small purpose. Obviously if expenditure is free flowing and there is no limit to the amount of money that can be spent, senior managers could allow this to happen. Nevertheless the company does need to agree on common company targets so that the budget holders all have a general idea of the needs of the company.
If the budget holders are all left to spend money on whatever they feel is needed without a set of common company targets, each budget holder would believe the company has different needs and requirements and this would mean the company would not collude into a whole. “The process of budget preparation directs a manager’s attention towards the corporate objectives of the firm and therefore requires that departmental objectives are subordinate to corporate objectives thus leading towards goal congruence.
” (Peter Sneyd, 1994) Therefore in affect to have a number of budget holders who are all fully committed to the companies needs and requirements, requires some kind of budget to be set, maybe not in terms of expenditure but in terms of common targets and goals. To allow all of the budget holders within an organisation to undertake full responsibility of expenditure the senior managers would need to have total faith in these workers which realistically is far too risky and is very unlikely to occur.
It is apparent that the use of budgets are widely used within a number of companies and organisations, this occurs because a budget control system restricts the amount of expenditure within different sections of a company or organisation. Therefore this ensures that budget holders cannot over spend the companies money and can also be used as a control system throughout the organisation. It draws together a number of targets within the company, which can be seen as the companies common targets and goals and therefore allows the company to collude.
Budgets do not necessarily need to be used but this requires a large amount of trust from senior management, which means a very large amount of responsibility is delegated from senior managers to the budget holders (managers). However, even if the budget holders are very trustworthy and are going to spend the companies money in the correct manor, a set of tasks and goals need to be established for the company. Some kind of budget is also required as unlimited amount of expenditure within a company rarely occurs.
Therefore if control of expenditure is to be delegated within an organisation, It can be argued that a budget is required as it ensures that expenditure is confined to the companies financial situation and it has many other benefits which have been mentioned before. It also reduces risk within the company as a budget sets rules as well as targets that budget holders and employees have to obey, if a budget is non existent then it can be seen as very risky.
However a budget is not only required if managers are delegating the control of expenditure, because if the senior manager was held responsible for all of the expenditure of a company, some kind of budget would have been thought of, even if it is just a master budget. When implemented correctly a budget is a great benefit to the organisation and has many advantages, however there are a number of factors that can cause a budget to be less useful and this can cause problems within the organisation like poor human relations and staff de-motivation. Therefore when a budget is implemented correctly within an organisation it is very beneficial.
In order for this to occur, the involvement of senior managers as well budget holders is needed. As well as this, the companies aims and objectives need to be clearly defined and so do the responsibilities of the employees. The budget also needs to be flexible and the performance of the company must be easily compared in relation of responsibilities. Overall a budget is needed if the control of expenditure is to be delegated as it controls expenditure as well as offering many other purposes that can all help to increase the performance of the company and reduce risk.