The Importance in Performance Measurement & Management
In finance organization planning and budgeting play a vital role in the specialized organization. Analysis of business cases and acquisition is combined here. They are also described as financial planning and analysis departments. They work as operational functions which function non-financial goal such as sales, transactions, targets of customer satisfaction, and implementing the budget. They also provide random functions in the finance department such as reviewing and checking details of the department. The data is also validated and important agendas are explained and discussed (Operating budget, 2009).
This type of budgeting leaves an actual interpretation on the goals and the operational functions. The force which is applies on the finance is used for accountability of the performance of the report and is planed on the base assumptions of the reports. These measures are perceived through budgeting and reporting. The function of the budget report is based upon the results and this helps the person to get innovate to work better before it becomes too late. It is better to get the remedy before the cause erupts. Tough integration is required for budget preparation. This involves non-financial measures and also enables the operational measures to provide indicators in the long run consequences.
It is now well accepted that activity/process-based performance measurement systems exist to provide the desired level of integration. More advanced users of activity-based costing have turned a historical, or a trailing, perspective into broader activity-based management application. This has been accomplished by understanding the links between activities and cross-functional processes (Zillgit, 2004).
Logic related from a depth is required for an activity based approach to plan a budget. A person who is assessed in the management orientated business should be able to prove for managing the business. They are called process owners. They perform cost-functional services to customers and stakeholders.
They must have as great an influence on managing the operations of the organization as functional managers. Therefore, management and employees have a different attitude to setting budgets. It involves a combination of top-down goal setting with bottom-up activity analysis by function. Negotiations between functional managers and process owners, over activity assignment to processes, create the reconciliation between the organization’s strategy and the work of its employees.
In order to prepare an activity/process-based budget, the organization must have already completed activity-based costing and process analysis of all major processes. Information from these analyses will greatly influence the goals set by management. Combined, the two provide the raw material for budgets based on prior-period performance which management will modify accordingly to meet new goals (Mazur, 2005).
Activity costing is divided into two major divisions. The first is activity analysis, resource assignment, and activity costing. The second is activity-driver analysis and cost-object costing. The first facilitates the costing, budgeting and managing processes.
The second focuses on the economic performance of outputs of the organization, which provides strategic and goal-orienting input to the planning process. Process analysis is also divided into two major divisions. The first is a high-level identification of definitions of the processes themselves. It includes determination of process measures and goals. The second involves the assignment of activities to processes, process costing, and the creation of current state process maps.
Steps in activity/process-based budgeting
The steps described are applicable to any organization, whether manufacturing or service, revenue-generating or public service. Fundamentally, the mechanisms are the same. However, goals will vary according to the operational objectives. For instance, a government organization that is program-funded will not have a sales forecast. Instead, there will be a series of program objectives and policies to be addressed (Anthony & Breitner, 2009).
Organization goal setting
Goal setting is often based on strategic or operating plan assumptions. The assumptions which they include carry size, competition, environment, and technology and quality experience. To compete effectively, management has decided it needs to increase market share by 10 per cent. This creates a goal for sales to increase in excess of 30 per cent from the current period. Moreover, owners or influential shareholders may have established a return on investment goal for management.
In government, targets for service improvement and cost reduction may have been set, while productivity improvement is expected to be sufficient to maintain the current volume of work (Marley & Pedersen, 2009). Existing ABC information is critical to organization goal setting. It is used strategically to identify which product/service, and customer/market segments, make or lose money. Management uses this information to focus marketing and organizational energy into the most profitable channels, or to create strategies to turn around strategic but inefficient uses of resources.
Process goal setting
This information provides management with a set of criteria to establish high-level organization goals. These, in turn, are decomposed to establish the implications for each of the major processes. For example, banks have a process to sign up new customers. It involves application processing, credit checking, and risk assessment, opening accounts, obtaining signature specimens, and printing check book. Overall organization goals for banks will have a substantial impact on process goals, because growth plans will define how many new accounts will have to be set up and how many check will be cleared. In addition, there will be goals set for level of accuracy and the amount of time it takes to open an account or process a check (Taylor, 2003).
One aspect of process management is identifying critical business issues. These include issues such as the need to introduce new products more rapidly to secure future revenues, or to process orders more quickly to increase customer satisfaction and retention. Strategic ABC information influences which processes to prioritize for re-engineering, or potential elimination. Finally, management will establish financial/cost goals for the process, based on its perception of the degree to which the process is strategically important to the future performance of the organization (Borsodi, 2007).
Activity analysis is a comprehensive evaluation of all significant activities performed by people in the organization. It is prepared for each function or budget cost centre to reflect changes to the organization structure or work performed by the people. This will include changes which have either already occurred, or are planned to occur, during the budget period (Drury, 2007).
Additional effort is required to analyze other operating expenses by function to assign them, where appropriate, to activities. This will evaluate depreciation and operating costs of running, setting up, and idle or downtime for equipment, as well as other functional expenses, such as building, travel, consultant’s fees and other anticipated items. The function activity budgets are prepared to facilitate the managers, as it is necessary for them to keep in view what is important for them to be processed and this helps because it includes all the functions and the information required by these managers. In forecasting total process throughput, process owners also derive activity-driver quantity information.
Each process consists of a number of activities that have a common purpose, even though they are performed in a variety of functions. Process definitions are established during the initial process analysis project. In their role as agent for customers and other stakeholders, process owners buy only what is needed from function owners to ensure that their needs are met for the right quantity of quality products and services (Meyers, 1996).
Budget negotiations begin in earnest as process owners debate with function managers to agree on what activities the process owner wishes to acquire from the function. Agreement is reached on what driver quantities and resources that the function will supply, and that process owners are prepared to fund. These negotiations establish the budget foundation for both the function and the process. Each function owner meets with the owners of all processes that their function supplies and creates a series of service agreements. It is these service agreements that form the basis of both the function and process budgets (Kemp & Dunbar, 2003).
Function budgets are determined by adding up the value of all of the contracts they have negotiated. It specifies with the resources for the managers to match the budgeted funds and determine an action on whether increasing it or decreasing it. in this event there is a shortfall of funds, management, organization, and the managers must be responsible to intimate appropriate plans to overcome any kind of funding which is delayed to be paid. If senior management permits the function to utilize resources that are not funded by processes, the cost should not be allocated to funded processes, but rather, treated as an allowed budget overrun, classified as business sustaining expense, funded by executive management (Mazur, 2003).
Integration with non-financial measures
Non-financial measures of performance within an organization are effectively measured by examining process characteristics. By understanding which activities are used by each process, and assigning resources consumed to the activities, management accountants are able to calculate its cost. Process costs are calculated in total and by individual activity. In addition, the activity driver quantities are used to determine the cost of each transaction, as well as the cost of things such as idle capacity.
Both financial and non-financial measures can be calculated in aggregate for the process, or decomposed to sub-processes and even to individual activities. The individual activity is the lowest building block within an organization that can be managed. It can be measured in terms of all attributes — resources consumed (cost), timeliness and cycle time, quality and quantity of throughput (Marley & Pederson, 2009).
With clear information on activities and process relationships, both function and process owners are able to compare and evaluate how effective the performance is in the area of responsibility. This is often accomplished through benchmarking, or comparing their performance against that of organizations which perform similar activities. It is used to determine what innovations exist in order to process similar throughput more efficiently.
Productivity improvement is a clear objective for both function managers and process owners. Both are required to improve the productivity of activities that fall within their joint realm of interest. Simple activity and process-value analysis and benchmarking may identify opportunities. Function managers are able to prioritize spending decisions between activities that are critical to the effective operation of the business, and those that are only nice to have.
As the new budget year starts progressing, operational data is tracked by function managers and process owners who monitor actual results in comparison to budget. Resource utilization is monitored and management accountants are involved in updating activity based costing results with sufficient frequency to provide insight to process owners on their performance (Drury, 2007). Management accountants produce reports wherein the overwhelming requirement is to clearly and understandably depict what the organization is spending money on, and where it makes or loses money in comparison to plan. This is necessary so that managers can make decisions on how to react. Operations managers and process owners may also receive new versions of profit and loss statements.
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In conclusion it can be stated that the only reason to measure performance is to influence behavior. The financial requirements have been discussed over a long period of time and the requirements have been disconnected from its path and the important role of the organization is to pursuit of the strategy. And so, the information provided by accountants appears to have been out of synch with the needs of our organizations. Yet, the biggest impediment to doing so is our willingness to change the mechanisms accountants employ.
Activity or process-based budgeting offers a most powerful device to our organizations in driving change and human behavior (Meyers, 1996). Strategy implementation is one which directly aligns to the daily schedule and this device is used for controlling the management accounts accurately and correctly in keeping the view of the role of organization performance knowledge indicator.
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Kemp, S. & Dunbar, E. (2003). Budgeting for managers. Mc-Graw Hill Professional , New York.
Marley, S. & Pedersen, J. (2009) Accounting for business. Pearson Education , New York
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Taylor, P. (2003). Book-keeping & accounting for the small business: how to keep the books and maintain financial control over your business. How To Books Ltd, Kensington.
Zillgit, J. (2004). College athletics needs budget cap, thinking cap. Retrieved November 3, 2008, from USA TODAY: http://www.usatoday.com/sports/columnist/zillgitt/2004-02-18-zillgitt_x.htm