In his study, Jensen (2003) states that many firms rely on the budgeting process to manage their performance. However, in most cases, managers do not consider budgeting as an important process (Jensen, 2003). A useful role of budgets considered by Jensen (2003) is coordination of organizational financial activities such as payments. This argument is true because, without a budget, organizations fail to realize their expenses, profits, and losses. Besides, the author emphasizes on effects that are counterproductive during the budgeting process. The effects are used to measure the performance of most organizations. The budget also assists in coordinating organizational activities such as payments and other processes. Budgeting process usually consumes a lot of time ranging up to six months considering the planning process, stakeholder discussions and even setting targets. These systems assist in the coordination of all activities within complex and even vast enterprises. Jensen (2003) provides the concept of gaming, which is used widely in budgeting and there is a reward for people who lie about info ration that could be valuable to an organization. In my opinion, the author made correct argument that a good budgetary process should involve other departments for sound decision making, initiating important activities and for equitable allocation of resources to various departments and projects.
According to Jensen (2003), poor decisions can be made, gaming tactics can be used and a lot of time can be wasted in the budgeting process. The process should ensure the chief financial officer work together with the strategist and other stakeholders on estimates but should not disclose issues that might impact activities of another financial year (Jensen, 2003). An important fact noted by Jensen (2003) is that forecasting on the future is crucial in the process because one has to consider inputs and outputs and chances of attaining a particular target. Later the process involves the CEO in negotiations on gaps of what is targeted and what is forecasted. The reason for involving other departments is because about 60% of expenditures are accrued from them. It is true as the author alleges that negotiations are repeatedly done and presentations are done to defend the budget. A business plan is also provided to the top management team who evaluate what might challenge the target and also risks involved such as legal risks.
From my perspectives, the author correctly argued that to solve the problem of budget gaming, managers should not be awarded for performance for achieving targets. The elimination of bonuses and incentives will improve the process of budget setting (Jensen, 2003). This will enhance the budget process because managers will not have to lie about what they can achieve and what they cannot as well. The author’s solution focuses on rewarding performance and motivating by goals through a standard form of enlisted goals and levels of rewarding. This measure will ensure the process is not rigorously manipulated thus making the budget process unbiased and the planning process will be of quality and coordination of activities will improve. Moreover, a linear pay does not bar good control of budgetary systems but improves on one’s actual performance. Good control systems for budgets require serious penalties and right measures of operation in the budgetary process. Nevertheless, Jensen’s study has a shortcoming. For example, he does not use adequate evidence to support his claims that budgeting helps in management and coordination of all activities in an organization.
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Hope and Fraser (2013) argue that rewards such as incentives are the best strategies for motivating employees to improve their performance, unlike the budgeting process. The authors observe that many people believe that incentives commonly manipulate people’s performance. The other perception of incentives is that it is considered a ‘bribe’. Bribes force an individual to do what they are supposed to do even without incentives. While these perceptions could be true Hope and Fraser (2013) indicate that some managers feel that when targets are matched with incentives great performance can be achieved. The culture of incentives in organizations also brings about dysfunctional traits. According to the renowned professor of Stanford Jeffrey, he disagrees that one would not need an organization if it was easy to measure individuals contributions and reward them because everyone will try to operate alone as individuals. He then compares the behaviour to a theory that mostly applies to rats and dogs such that you can train them to carry out tasks.
Hope and Fraser (2013) also argue that many individuals do not like work and responsibilities and cannot perform to their best unless given incentives. It discovered that incentives only succeed in attaining an impermanent compliance. Change of behaviour and attitude cannot be significantly changed when it comes to administering punishments. The practice of giving incentives does not continuously create a permanent endurance because once incentives run out some individuals go back to their usual way of behaving. Moreover, the practice does not instil values and action commitment instead it temporarily forces one to do what they are instructed to do and not because they are willing. This implies that they might even end up doing it poorly. Other disadvantages include a culture of managerial fear of being obligated to a task that has offers of big incentives.
The information provided in this article can be related to social scientists’ perceptions that it is not however big or small the incentive is what matters is how appealing it could be and they termed it as intrinsic motivation, unlike the extrinsic motivation that can be compared to a means to a finish off. Rewards have therefore been attributed to a behavioural pattern that can also manipulate one's interest in a specific task. According to the social psychology point of view, it is the most finding that is replicated. Many people develop the basic need that makes them feel they belong or have a happy relationship towards things. In this case, the only challenge left is to come up with a collaborative environment at workplaces to enhance performance unlike through incentives especially monetary. Even though critiques emphasized that incentives are not applicable they forgot that the right way to reward is through teams. Alternatively, rewards on teams can be viewed as a share of success and not simply directive handle a task and get rewarded. Teams are motivated wholly because they feel everyone contributed to the success.
Next, Merchant (2013) claims that companies make great errors during the budgeting process. According to Merchant (2013), managers get distracted from their basic jobs typically by the budget process. The distraction then further undermines their integrity as well as the integrity of the organization, information can also be distorted hence leading to poor decision making. The endless meetings are a waste of time according to some companies because they feel the numbers become out-dated the longer the process takes. Some organizations also feel that targets set in budgets are universal and that they do not clearly show the financial failures or achievements that the company accrues (Brigham & Ehrhardt, 2008). The article is unique since it discusses several strategies organizations can adopt to improve the budgeting process. First, Merchant (2013) indicates that organizations can agree to the fact that the process of budgeting is very infrequent and not flexible thus all expected functions which range from strategic planning, allocation of resources, determining compensation and performance evaluation cannot be met. Second, companies should embrace a more dynamic budget process and do away with the old budgeting process. Companies can begin by doing away with annual budgets in planning strategically and allocate money when it is required and specifically where it is needed. Thirdly, Merchant (2013) proposes that the firms should not use budgets to reward or evaluate one's performance. The only shortcoming of the article is its failure to link the discussed strategies to real-life examples.
Finally, Sivabalan et al. (2009) provide accurate reasons for making a budget. Sivabalan et al. (2009) argue that despite the criticism budgets face they are still used widely for evaluation and performance purposes. Sivabalan et al. (2009) then note that forecasting is also done with the help of annual budgets including control and planning reasons. Rolling forecasting generates very accurate predictions financially which outnumber the many listed problems. The key strength of this article is a description of how evaluation performance is used in research budgeting include budget participation, budget emphasis, and budget use. Budgeting through participation focuses on inputs from staff members. According to the article, the reasons of operational budgeting range from evaluation reasons and how budgets can be used to evaluate a business unit or staff members. With adequate and relevant examples provided, Sivabalan et al. (2009) manage to show how a budget is a useful tool for any organization that has to improve its financial performance.
Budgeting Practices in Australia
Australia uses a sample survey that analyses practices of budgeting. The most popular techniques of evaluation are NPV, Payback, and IRR. The budgeting practice in Australia is corporate and generally consistent by considering the price regulators in the country. The regulators also factor out the imputation tax value, especially when computing capital cost. CAPM is the commonly used model especially when asset models of pricing are not. The model is very popular for the cost of equity estimations. The use of real options tactics in the budget process in Australia has improved the performance of many companies in Australia (Kalyebara & Islam 2012). The projected cash flow is estimated by the operational number of years which is ten years. The approaches to budgeting in Australia have developed especially on capital and asset pricing. Newer theoretical developments have affected the budget process in Australia. Quite a number of issues have affected the country’s budgeting process including the use of CAPM and other models like French three-factor model and Fama that have been considered alternative models for asset pricing. Through an investigation, the models were assumed not to include tax credits into their budgeting processes. This has led to another popular technique abbreviated as DCF.
References
Hope, J., & Fraser, R. (2003). New ways of setting rewards: The beyond budgeting model. California Management Review, 45(4), 104-119.
Jensen, M. C. (2003). Paying people to lie: The truth about the budgeting process. European Financial Management, 9(3), 379-406.
Kalyebara, B., & Islam, S. M. N. (2012). Corporate governance, capital markets, and capital budgeting [recurso electrónico]: An integrated approach.
Merchant, K. A. (2013). Companies get budgets all wrong. Wall Street Journal, 21.
Sivabalan, P., Booth, P., Malmi, T., & Brown, D. A. (2009). An exploratory study of operational reasons to budget. Accounting & Finance, 49(4), 849-871.
