setting budget, performance measures, management reporting

Introduction to the top-down setting of budget

This approach requires top management to prepare setting budget, performance measures, management reporting with input from down the line operating personnel. These figures are prepared for the entire organization based on activities carried out by the organization to run the day-to-day affairs of the business.  The departmental budgeted figures from management are passed on to the respective department managers to prepare their respective departments’ targets. Later on, these targets further allocated to sales and operations staff to abide by it (Kim and Park. 2006).

2-    Application of top-down budget

The organization uses this approach when

• The organization has recently come into existence.
• The size of the business is minimal, i.e., sole proprietor.
• When economic recession or business hardship.
• When the operation team of an organization lacks the budgeting skills
• When coordination among different departments is cumbersome to bring them up to a single pitch.

3-    Advantages of top-down budgeting

There are different advantages of the top-down budgeting approach (Wehner, J., 2010).

a)      Incorporation of the strategic plan

As the top-down budget is prepared by senior management of the organization, they better understand the organizational mission, vision, and strategic plan. Therefore the essence of mission, vision, and strategic plans are included in the top-down budgeting by using the organization’s business target, the primary purpose of organization existence, and strategic techniques. This budget approach allows the allocation of resources to departments as per the growth target and critical importance of the respective unit.

b)     Enhancement between goals and objective of departments

Due to corporate functional budgeting techniques, budgetary figures are prepared by departmental heads and requirements in the organization’s day-to-day affairs. A department that generates revenue is provided with a more significant part of the total budget than the operations department, which is less critical than sales or revenue generation units. However, there is a thought process behind such discrimination to meet the firm’s corporate goal against a balanced approach.

c)      Utilization of resources.

Senior management has a bird’s eye view over the organization’s resources, capabilities, and competencies. They are in a better position to utilize the resources required to meet the strategic targets. Excess workforce or budgetary amount available in one department can be reallocated to other units to efficiently and effectively utilize the resources and budgetary amount via top-down budgeting.

d)     Time-saving exercise.

The top-down approach is widely used by senior management to avoid input from inexperienced staff, which saves the time of lower grade staff and focuses on their core responsibility.  Lower staff will utilize their skills and resources to prepare the budget, keeping in mind their horizon, whereas senior management can save time and resources by preparing the budget, keeping in mind the organization’s broad vision.

e)      Single Benchmark

The top-down approach prepares a single budget at one time as compared to multiple budgets of each department. Due to the preparation of this single budget, the organization avoids duplicate efforts for budget preparation. The budget preparation becomes quick when senior management focuses on a single set instead of combining multiple budgets and consolidating to reach a combined budget compared to the bottom-up approach.

4-    Disadvantages of top-down budgeting

There are disadvantages to the top-down budgeting approach (Sześciło and Wilk., 2018).

a)      Low moral develop among team members.

As this budget required no lower management staff contribution, their concerns and requirements may not be addressed in the budgeting preparation exercise. Thus the level of confidence and motivation fells as dissatisfaction will rise among the managers. Other defensive measures which managers usually incorporate when they prepared departmental budget has been eliminated, which give rise to a sense of insecurity among managers to perform.

b)     Loss of team spirit among the staff

The top-down approach invites no feedback from lower staff for budgetary figures, and their concerns remain unattended. Such a scenario eliminates the time spent and teamwork emotion from the organization compared to down up approach. Employee participation in budget creates a sense of ownership among staff members, and they address any budgetary issue on their own. Such feeling is team spirit, which will remain absent in the top-down approach.

c)      Acceptance of strategic goals.

In the top-down budget, senior management incorporates strategic goals during budgetary exercise. These goals and targets are included without concern to the people who are supposed to carry out those tasks. In such cases, employees have no option other than to accept the same and ensure its compliance even such targets are unrealistic and impossible to achieve.

d)     Realistic approach missing

As the senior management does not participate in the organization’s day-to-day affairs, they are not aware of the real problem faced and dealt with by the lower staff. Therefore it is difficult to lower staff to implement a budget that does not address the problems. Senior management sometimes surprises junior management’s decision to implement such a budget, which is unrealistic and unachievable.

e)      Imitative by lower staff stifled

When lower staff members take the organization’s betterment initiatives, that effort must be appreciated by the senior management.  Any recommendation related to the budget must include in the budgeting exercise. Any avoidance of such an approach leads to demotivation to individuals and another workforce who planned to take more initiative.

Part B-       Reporting to Financial controller related to problems of current systen of performance measures, management reporting , budget setting  and recommendations under current financial position.

To,

The Financial Controller,

Telescope Ltd

United Kingdom.

Refer to scenario of Telescope Ltd, we will be considering the problems related to performance measurement mechanism at organization along with hurdles which are faced in reporting of performance figures to board members of Telescope Ltd. Lastly we will discuss regarding limitation of budget setting in current scenario along with recommendation to overcome these problems.

1-      Problems of current system of performance measurement.

1. The area office at telescope has been treated as profit center along with management of working and small asset acquisition. However strategic decision making has been rest with managerial board at head office rather preparation of strategy by taking feedback from the area offices (Black et al., 2001.).
2. There should be equal participation of area office at managerial board meeting to view the performance of branch office.
3. The management of Telescope Ltd is focus on fees earning rather that looking at the issues of administrative affairs.
4. Manager performance is measured on performance related pay only. Same shall also include impact of reduction of expenditure which can leads to cost savings.

2-      Hurdle of current system of performance reporting.

• Central administrative expenses are based on number of people rather that actual expense which has been incurred at branch office. The actual expense shall include in order to exhibit true and real picture of expenditure incurred by respective offices
• The variance of actual profit and budgeted net profit were reviewed based on the budget prepared keeping in line with previous economical and organizational conditions violates the matching principles (Cunningham and Harris., 2005).
• Following the variance figures based on order received, fee income, net expenses and net profits. All the mentioned variances are calculating negative variance as these current figures are compared with budget figure based on previous years conditions.

3-      Problems of Current system of setting budgets.

• The budget figures of previous year prepared keeping in view the economic conditions of respective year. These figures were used for previous year but cannot be applied for current year.
• Due to current economic downturn of business, the budgetary figures were not aligned and same has been used which has misappropriate the comparing figures.
• Cumulative budget has been prepared on lump sum basis. These figures shall be calculated by Monthly budget Multiplied by 6 months.
• The budget prepared by organization was very old and was based on structure of 02 offices only rather than current structure .
• There shall be caution in budget to revise during the year based on certain conditions duly approved by senior management.

4-      Recommendation in light of financial difficulties.

Following recommendations shall be consider after the discussion of current systems performance measurement, reporting and budgeting issues.

• Order received and time invoice shall be reduced to 20 % due to economic decline due to corona virus.
• Professional and administrative salaries, reprographic , office a expense shall not be declined as the expenditure were remain intact despite of economic downturn
• Printing stationary, traveling expense, central administrative expenses shall be reduced to 20% due to reduced business activities in revised figures
• No changes in depreciation shall be incorporate as will remain unaffected by business economic conditions.
• Over draft facilities shall be converted to own equity by injection of funds and symaltenously setting the overdraft limits.
• Management shall also focus on administration of expenditure rather than keeping entire attention over generation of fee income only
• The board meetings shall focus on actual and profit keeping in mind current economic scenario and industry view performance of offices and organization as whole.

After these incorporation following report data will be prepared and reported

After the inclusion of above mentioned recommendation, total of operational and planning variance of order received, net income and net expenditure has been arrived as positive.

5-    References

• Kim, J.M., and Park, C.K., 2006. Top-down budgeting as a tool for central resource management. OECD Journal on Budgeting, 6(1), pp.87-125.
• Wehner, J., 2010. The Promise of Top-Down Budgeting. In Legislatures and the Budget Process (pp. 103-128). Palgrave Macmillan, London.
• Sześciło, D., and Wilk, B., 2018. Can Top-Down Participatory Budgeting Work? The Case of Polish Community Fund. The Case of Polish Community Fund (November 1, 2018). Central European Public Administration Review, 16(2), pp.179-192.
• Black, S., Briggs, S. and Keogh, W., 2001. Service quality performance measurement in public/private sectors. Managerial Auditing Journal.
• Cunningham, G.M. and Harris, J.E., 2005. Toward a theory of performance reporting to achieve public sector accountability: A field study. Public Budgeting & Finance, 25(2), pp.15-42.