The use of budgetary control in performance management has of late taken on greater importance, especially as a more integrative control mechanism for the organization . Critically evaluate this claim, supporting your discussion with both theoretical arguments and practical examples Introduction According to Yucel and Gunluk (2007), budgeting is important in the management profession. Although various management accounting tools are considered to be irrelevant, budgeting is still valued and used in controlling the management team in organizations. Budgeting is useful in achieving the targeted performance in an organization. Private sectors use budgeting to plan and control, to measure performance and to communicate as well as coordinating (Yucel, R. & Gunluk, 2007). The use of budgets in an organization has attracted several criticisms, for example, the use of budgetary planning as a measure of performance is said to have negative impacts on the employees. Employees in an organization where budgetary planning is used to measure performance are associated with having tension, fear and resentment among other issues. These factors are likely to affect the achievement of the long run performance goals. However, in the case where workers experience budget pressure, they look for ways in which they can meet the budget and end up forming teams. Teams are important in an organization because they help the organization to achieve goals, as well as change the perception of employees towards the management. On the other hand, the budget pressure can have negative impacts of line managers. The line managers in most cases do not join groups to handle budget pressure, but instead, they blame others. As a result, they interfere with good relationship within the organization. Bad relationship within an organization can affect the overall organization performance (Briers & Hirst, 1992). Budgetary control influences the managerial behavior that is later reflected in their performance (Otley & Pollanen, 2000). In the past, accounting management had been ignored and considered to be of no use in organizations. Moreover, many people believed that management accounting had a negative impact on the decision-making process. However, the main problem was the use of poor data in making decisions. Additionally, managers could pretend to work, but in reality no work was being done because appropriate tools of measuring performance had not been established. However, recently, the view of accounting management has changed completely. Accounting management, especially in the area of budgetary control has a great impact on influencing performance (Otley & Pollanen, 2000). Therefore, the use of budgetary control in performance management is an integral control mechanism, and it has gained importance in the contemporary business environment. The use of budgetary control in performance management as integrative control mechanism and its importance in organizations today Criticism about the use of budgetary control system Otley (2001) opines that many organizations have changed the way they operate, thus, using budgetary systems in controlling and measuring performance. Today, organizations seek other techniques that are applicable in their present situations in measuring performance. However, financial and nonfinancial motivations have a great impact on performance and the employee behavior. Budgetary control styles have a great impact on dysfunctional behavior. For example, a rigid budgetary style focuses on whether the employees at management level have achieved their budget or not. Such a process interferes with the overall performance of an organization. Evaluating the performance of managers using such tools encourages them to be cautious when implementing the goals of an organization. The managers become cautious because failure to meet the set goals, they face severe consequences that may include losing their job (Van der Stede, 2000). However, according to Otley (1978) as cited in Stede (2000, p. 610), rigid budget control does not have any positive tension on managers. However, it makes them negotiate for budgets that are easy to obtain and focuses on short-term goals rather than long-term goals. Budgetary control styles applied by different organizations encourage different behavior on managers depending on the contextual variables. For example, organizations that have experienced positive performance in the past encourage flexibility of the budget thus creation of slack that reduces the pressure for achieving short-term goals (Stede, 2000). Budgetary control system uses and importance The budgetary process acts as an agent for allocating responsibilities in an organization. Budgetary process accountability is assigned to different people within an organization. Therefore, employees can meet the business requirements (Ryan, 2007). The use of budgets to control performance is common in organizations today. Different organizations use different budgeting techniques for various reasons. The study by Jones (1998) about how the UK hotels use budgets shows that the hospitality industry in the UK uses budgetary planning in evaluating the overall origination performance and in enhancing control in an organization. When used properly, budgetary control, as well as planning can be useful to managers in achieving not only the short-term goals but also the long-term goals. Budgeting helps the management to set performance standards and in achieving the standards. The behavior of the management is influenced and controlled by budgets. However, a stable environment is required for budget to work effectively. The budget is crucial in attaining the target performance of an organization. However, the drastic social and the economic changes in the business environment strain the implementation of budgets in measuring performance and controlling (Ryan, 2007). A study conducted by Frucot and White (2006) about the impact of budgetary participation of managers shows that, involvement of managers in the budgetary process influences their performance positively. However, their impact on managers differs from one organization level to another. Budgets are important in information and control system. Although managers involved in the budgetary process show positive performance, the performance depends on the level of participation that the managers are involved in the budgetary process. Yuen (2007) asserts that use of budgets as a control mechanism has been adopted by companies to facilitate performance. When budgets are set, employees work hard to achieve the budget targets, the budgets in this case act as a motivator. When budgetary information is well communicated to the employees, it increases their job performance. Moreover, in public sectors it is easy to increase employees performance by involving them in budgetary activities. Budgetary control system is also used to influence the behavior of the employees in the organization. For example, employees who are charged with decision-making responsibility in the budgetary process, develop a positive attitude towards the job thus influencing their behavior in the workplace. Budgetary control has gained importance in managing performance in recent years. Budgetary control has the capability of enhancing interaction between the stakeholders of the organization. Through budgetary control, the management can measure the gap between what has been achieved by comparing the intended results and the actual results. Budget is useful in quantifying various strategies of an organization. Budgets provide a basis on which various control measures can be exercised within the set boundaries Okpala, 2013). Okpala (2013) provides evidence that budgetary control helps in enhancing employee motivation thus, boosting performance. However, for the motivation that is based on budgetary control to be successful, it is important to involve the employees in setting the budgets. Organizations such as the Nigerians Property Management Company (PMC) have experienced mismanagement for not exercising the effective budgetary control. In the contemporary world, organizations emphasize on budgetary control in all activities including product innovation. The driving force to emphasize on budgetary oversight is to take control of the costs associated with innovation and to enhance financial performance. There are arguments that budget oversight in innovation is likely to affect innovation negatively. Nonetheless, it can be noted that, when budgets are used as a planning mechanism, they help in enhancing financial performance and assist in product innovation. The implementation of the budgetary system in product innovation and marketing determines the product s impact on the organizational performance (Dunk, 2011). Budgets are used by the management to enhance the commitment of the level managers. When used together with the reward systems, budgets facilitate performance of the workers. Budgets are useful when planning about product innovation and it helps in achieving desired financial performance of the product. However, when the budgets are used as a control mechanism, they may be disappointing because a person may not attain the expected financial performance of the product (Dunk, 2011). Budgetary control system in an organization has the capability of saving the organizational resources, as well as increasing the overall performance. Through budget control, an organization is can balance the revenue and the expenditure, thus enhancing the financial performance. The management can make decisions about the steps to take by comparing the budgetary information and the actual results of an organization. For instance, if the gap is huge, the management may look for a way of doing things so as to enhance performance (Carmen-Veronica, 2014). In the UK hotel industry, budgetary control is used in planning, controlling and to evaluate the performance. In addition, budgetary control in the hotel industry in the UK is an important tool for motivating managers. Budgeting is an important tool in the hospitality industry, and different companies use different methods of budgetary control. However, it is important to train and educate managers within different departments in the hospitality industry about the required skills for budgeting. This way the hospitality industries can benefit from budgeting (Jones, 2008). According to Yucel and Gunluk (2007), budgets are used as a control mechanism to regulate behavior in an organization. Despite many criticisms about budgeting, such as taking too much time, budgeting is still relevant in contemporary business environment and is used by many organizations. Research conducted in undeveloped and developing countries shows that budgeting is still relevant for businesses operating in these countries (Yucel & Gunluk 2007). The involvement of subordinates in the budgetary process is critical as they are engaged and motivated. Thus, they concentrate on achieving the budget targets. Therefore, the subordinate performance is influenced positively by the budgetary control process. On the other hand, through involvement of subordinates in the budgetary process, the management can control and communicate to the subordinates. Additionally, relevant motivational strategies can be established to improve the overall organization performance. The levels of seriousness that the management applies in the budgeting process, and the features of the budgeting systems affect its effectiveness to a great extent. If the management is serious about budgeting, they make realistic and achievable budget objectives through proper communication of the budgetary objectives to the employees. They can also allow them to take part in the whole process to provide emotional incentives to the employees. In the long run, the management can encourage the employees to achieve the budgetary objectives, thus enhancing the overall management performance (Kung, Huang & Cheng, 2013). According to Kung, Huang and Cheng (2013), flexible budgetary models are associated with the emotional and the informational incentives, which are useful in enhancing employees performance. When the employees are involved in the budgetary process, they are part of the decisions made in the organization. In this case, it increases their job satisfaction. When employees are satisfied, they are likely to improve performance. Additionally, with flexible budgetary models employees are encouraged to share information with the management. The management team is required to emphasize on the budgets so as to realize the benefits of budgetary in the organization. Budgets are useful in the contemporary business because they are used in planning and controlling. Through the use of budgets, management can allocate resources in the organization and communicate their expectations to the subordinates. Budgets can also be useful in the composition of the financial balanced scorecard of an organization. Budgets are widely used and viewed to be an important tool in planning and controlling in today s complex business environment (Nazli Nik Ahmad, Sulaiman, & Alwi, 2003). Many Malaysian companies use budgets as a control and planning mechanism. In Malaysia, budgets are considered as an important tool for monitoring businesses. Nazli Nik Ahmad, Sulaiman and Alwi (2003) compared the use of budgets in three different countries, the Malaysian, the UK and the New Zealand. From the comparison of the uses of budgets in the three countries, it is evident that budgets are useful in contemporary business. However, the way different companies apply budgets in the challenging business environment determines the performance of an organization. For example, budgeting has been criticized for being time and money consuming, however, in the technology era, the KMPG has made the process to be fast and accurate. Companies are required to go beyond the budgeting process to keep up with the current business environment. Many companies have opted to stop using budgets in their organizations. For example, Svenska Handelsbanken in Sweden abandoned the use of budgets back in 1970s, and it has been successful (Neely, Bourne & Adams, 2003). However, many companies, especially in North America still value budgeting as a tool for their control system. Other notable companies in the US have been successful in implementing budgets in their control system. A good example of a company that has been successful in implementing budgeting is the Jonson & Jonson in the US. A research conducted by Libby and Murray (2007) about the US IMA members regarding budgets showed that, managers value budgets, and they are not willing to do away with them despite the widespread criticisms against them. The managers who were involved in the survey said that they could not do without budgeting systems. Different companies that have been successful and relied on budgets argued that budget adds value to their organization and that these companies have designed ways to improve their budgeting systems rather than doing away with them. Another study by Libby and Lindsay (2010) about North American firm also indicated that, despite the existence of the criticism of budgeting systems, many firms are not willing to abandon budgeting as a tool for their control system. The majority of firms in the survey showed various ways of improving their systems, thus making it easy for them to derive value from the budgetary control system. According to Libby and Murray (2007), budgets are not used as rigidly as it is outlined by many critics; however, they are used subjectively in the overall evaluation of the managers performance. Additionally, in their research, Libby and Murray (2007) identified that, although budgetary systems are viewed to be problematic, the problem associated with the budgeting system is overstated by those who are against the use of budgets as a tool for the control system. Thus, many companies still use them and are not willing to abandon them. Conclusion It is evident that the use of budgetary control in performance management is an integral control mechanism, and it has gained importance in the contemporary business environment. The use of budgets in the organization has experienced lots of criticism in recent years. Nonetheless, it is still considered to be an important tool in the organization control system. Many companies such as Jonson and Jonson have been using budgets, and they are successful. Other companies have used budgets in various ways, and they add value to their businesses. The majority of firms are not willing to leave budgets; instead, they are looking for various ways to improve the budgeting process to achieve good results. Therefore, despite the criticisms, budgetary controls are widely used by organizations across the globe and are considered to be an important tool in organization control system.
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