All large companies use a hierarchical structure framework in order for the organisation to fully function and therefore enable it to run as smoothly as possible and increase efficiency to the maximum. This enforces the need for senior managers, middle managers or line managers and employees. In order for tasks to be carried out in this kind of organisation, orders and responsibility need to be passed down the organisation from the senior managers to the employees. For this to occur middle managers are often used to communicate between the two.
This however does not mean orders are just passed down, but also ideas, targets and goals. This therefore requires responsibility to be passed through the organisation in order to achieve the companies targets and goals, as senior managers are unable to manage the organisation entirely by themselves. Good management is required to pass down orders and instructions and obviously responsibility for the companies best interests.
This means that responsibility needs to be delegated, therefore the responsibility of expenditure will be required and delegated down the organisation by management so that parts of the organisation, e.g. different sections within the organisation like the production section and the sales department, will need to function independently in order to meet the targets set by the company. To control these sections or departments, a budget tends to be used to restrict expenditure and increase efficiency in order to reach the targets set. It is therefore important to examine if budgets are needed within companies by studying the advantages and disadvantages of them and whether companies can function without a budget, meaning the control of expenditure can be delegated without enforcing any means of control.
Within companies, budgets are commonly used and are seen to be required to set financial targets within different sections of the organisation. This is to guide the company through a certain period of time and restrict the amount of expenditure the company can spend. Other than restricting the amount of expenditure, “A budget is a useful exercise in itself because it forces managers to look ahead, but it is even more useful if it is also used for control purposes. ” (J. R. Dyson, 2001). Some of these different purposes include the planning of the companies future activities, these are related to the objectives of the organisation.
For instance a certain amount of money can be made available for the budget, depending on the amount of money available and the size of the company. Realistic and detailed future activities can then be set for the forthcoming period, usually a year so that the company have a target to which they can work towards. This occurs because actual performance can be compared to the planned performance. If there is a great difference between the actual and planned performance then it is possible to correct the problem when variations between the two occur.
Co-ordination within the company can be assured through the use of budgets. Different sections of the organisation can be given different budgets, however if the budgets are co-ordinated the whole company can become more co-ordinated. The sales section’s budget should be in co-ordination with the production sections budget. If the production section has a lower budget in comparison to the sales section, then the production section will be unable to afford to meet the number of sales gained by the sales section, meaning the company would be dysfunctional.
This suggests that “Effective budgetary control requires the co-ordination of departmental objectives and their subordination to the corporate objectives. In order for this to be totally effective it is necessary that the budget represents a goal that is achievable. ” ( P. Sneyd, 1994). The use of a budget can increase communication within an organisation, as a budget can set the company a set of common goals and targets.
If all the sections within the company are working towards these common goals and targets there will be increased co-operation levels within the organisation. A budget obviously allows budget holders, a person “to whom a budget has been allocated and who is responsible for ensuring that expenditure conforms to that budget,” (R Brockington, 1993) to carry out the necessary actions in order for the company to meet it’s targets, this, as mentioned before restricts the budget holder to the amount of money that can be spent and the purpose of the expenditure.
Unlimited amounts of money will not be at the budget holders discard and the budget holder will need to prioritise the purpose of the expenditure. This ensures that the most important needs of the company will be guaranteed, however less important needs may not be achievable. This means that authorisation is given to the budget holder to spend money when required on the needed purposes.
Authorisation responsibility is then passed to the budget holder as they will be held responsible for the results that are achieved, consequently showing that responsibility is needed to be delegated into each section of the company. A well designed budget can also motivate the budget holder, who tends to be the middle manager of a section of the company. A challenging but realistic target will increase motivation as long as the budget holder and employees realise that the target is attainable.
This suggests that the budget holder should be included in the amount of money set for the sections budget. The budgets set can also be used by senior management as a means of evaluating the performance of the budget holders within the company, as some budget holders will achieve their set targets within their budget and others will fail. However, the budget set must be realistic. A budget holders performance cannot solely be judged using the budget as a number of other factors could influence performance.
The budget does however give senior managers another means of control over the middle managers. However, “Managers should not be disciplined for any variances (especially if a budget has been imposed on them) unless they are obviously guilty of gross mismanagement. Budgetary control is a means of finding out why a variance has occurred. ” (J. R. Dyson, 2001). After looking at budgets and some of the purposes that can be gained by implementing a budget control system within an organisation, It is important to identify the disadvantages of using a budget.