Budget Process (finance) Essay Example | Topics and Well Written Essays - 1000 words

Budget Process (finance) - Essay Example It is important to understand the term 'environment' under which the budgetary system has to operate in the modern business set up. 'The term environment is much used. Some people associate it with value system or value code. However in strategic terms, it is used to indicate the context within which the manager and the organization operates.'(Murdock and Scutt, page 280)2. With regard to budgetary operations in this competitive environment, the proponents of budgets argue that 'budgets are established to provide a benchmark for evaluating performance. For cost centers these budgets typically seek to achieve efficiency and control by specifying the expected cost levels. Moreover, those who support budgetary system also argue that budgets are very effective even in modern competitive business environments and help the business to grow discounting the adversities the business face from competitions. Those who favor budgetary controls also stress that since a budget shows expected perfo rmance of the organization, the management is pre informed about coming financial and production difficulties. Based on such anticipation management can always take corrective actions to overcome the difficult situation. They also point out that once a budget is presented it provides a yardstick to measure the actual performance. In this way there is certain strength in budgetary control system that budgets emphasize while clarifying the responsibilities of managers; and such an attribute of budgets is always beneficial to the organization. There is other side of the picture as well. Budgets are supposed to be means of internal control. 'But the leadership dictates top down the amount of sales and therefore allowed costs for the different cost centers, based on past experiences. The responsibility centers try to negotiate about their targets in a bottom up process. Usually there is a compromise between parties in the hierarchical ladder. As a consequence, this procedure fails to focus on shareholders value , because compromises tend to be comfortable from all sides , but not challenging or at least not completely focused on profit maximizing.'(Sven Rohm, page 15)4 Accordingly instead of servicing the organization as internal control instruments, budgets actually provide boost to disarray the control system; and it is not possible to keep check on the checking systems. Competitive business environment is place for perfections and such parameters change frequently with new style and inventions in this competitive fields. 'Budget is always based on estimates. The estimates cannot be accurately made in this dynamic world, although many statistical techniques are available' (National Association of Accountants, page 377)5. Further, 'budgetary control system is lopsided managerial device; in as much as in qualitative aspects of managing cannot be fully and precisely made a part of it.'(Principles of Management, page 253)6. The most important weakness of budgeting is that 'budgets are usually based on historical trends which may not continue.'(Kumar & Mittal, page 538)7. That gives an impression that budgeting is a control tool of