One major setback manager or budget developer encounter is trying to design a future, a recess that cannot be created with the precision just right. This article highlights some financial management practices considered most effective in creating and monitoring an operating budget. It also highlights the most common least effective financial management practices in creating and monitoring an operation budget. Most Effective Financial Management Practices in an Operating Budget Creating and monitoring an operating budget needs a careful consideration of so many factors; one of such factors is managing the finances.
To do this, here are some of the most effective raciest many organizations adopt in creating and monitoring budgets; having a corporate strategy, creating allocation procedures, good incentives, streamlining budget, excellent cost management practices, and flexibility of budget. Having a corporate strategy Evaluating the progress of a budget is dependent on expenses and how resources are allocated. Because of this singular fact, linking a budget creation to a corporate strategy makes the budget more effective.
When a budget is linked to corporate strategy, it gives all parties involved in creating ND monitoring the budget a clearer understanding of the strategic goals. To ensure the success of this practice management must adopt a good communication channel as this will create the ease of setting a challenging but achievable goals. Creating allocation procedures Every department or unit in an organization requires proper funding to work efficiently. Sometimes these requirements are in excess of available resources; creating an inevitable competition for these resources.
This may be in the form of capital or operating expenses. Entities embarking on a recess Of creating a budget should map out procedures for allocation of resources to support key strategies. One way this can be done is reviewing the operating and capital budget. Giving the managers an idea of how a small change in one aspect of a budget can affect a different unit. Good incentives Adopting the practice of tying incentives to performance measures in a process of creating and monitoring a budget is very effective.
As logical as it may seem, that managers and employees in most entities are evaluated on how well the reach a budget target, it is a misguided opinion for an operating edged hoping to succeed. According to Andersen (2000), this is a one- directional evaluation. Balancing performance measures in a budget and linking these measures in incentive programs not only channels a process towards strategic goals but also reinforces the necessity of key strategies. It informs employees which results deserve rewards.
Streamlining Budget The drive to reduce budget complexity by streamlining budget procedures help managers and top management staff acquire the necessary budget detail, make informed decisions on allocation and communicate proposed argent in less time. When a budget is streamlined, time and cost are just right. Accurate information is made available, and unnecessary details in a budget report are eliminated. Excellent cost management practice Organization has over time improved information quality for managers and other employees by linking cost management to budget creation and monitoring processes.
An accurate cost management procedure creates that needed information on cost and ascertains the time frame for a budget process. Some organization employs the activity-based costing (BBC) process o find the actual cost of producing, selling and delivering products and services. Some employ the variance analysis in monitoring an operating budget, this studies the variance between actual and budgeted cost; comparing one cost at one organization to another. Variance analysis points out areas that require performance improvement.
Flexibility of budget No project is done perfect the first time; there is always a chance an error that needs correction or new ideas to make it perfect. So it is with creating and monitoring a budget. Having an accommodation for changes in a budget s a very good practice. It helps managers and budget developers respond to competitive setbacks or breakthrough more precisely and quick; by using available resources for good opportunities or correction of errors. Least Effective Measures in Creating an Operating Budget Budget formulation and use are tools that guide many decision making strategies in business.
The measures that are least effective could create an avalanche of catastrophic events that can negatively impact the decision making strategies. It is in the best interest of the pertinent parties to draft an operating budget based on a collective set of information relating to organizational vision and mission. Ineffective measures can be catastrophic based on the foundation for measures used in creating the budget. Among the many issues organizations face that relates to creating an effective operating budget results from poor planning, alignment failure, autocratic decision making, and performance and monitoring and reviews.
Poor planning The vision and mission of the company has to be clearly defined before planning starts. The planning phase requires gathering of information or search ensuring the best path for the organization regarding financing and future productivity. Participants at this phase need to understand and pay attention to the priorities which include; timing and impact of unrealistic expectation resulting from the behaviors of the financial markets. Planning without background or supporting evidence is unrealistic and contributes to business failure and loss of revenue.
Alignment failure A key component for an operating budget is aligning of goals because without collaboration and insight as tools for decision making the business has no destination. Alignment is basically having a blue print of where the organization wants to go and the steps to get there. An effective operating budget is a continuous series of evaluation and adjustment. Autocratic decision making To maintain effectiveness the autocratic form of management is usually not the best especially in the present financial markets.
Participation should be the inclusive of each employee. One finds that most often employees become disgruntled because his or her input was not valued or respected; therefore effectiveness needs a balance to promote accountability. Effective operating edged requires a working knowledge of the dynamics of the operations of the business; it is difficult to maintain a working knowledge of current operational status. The amount or frequency of contact with operating departments is usually directly related to the stability of processes (Brags & Burton, 2006).
Performance monitoring and reviews The effectiveness of an operating budget is usually maintained through frequent monitoring and largely dependent on feedback from all parties. According to Brags and Burton, for feedback to work properly, it should be regular, expected, and consistently reported. Comparisons are most effective when they are done regularly, consistently, and timely (2006). Conclusion Organization create budgets as a guide for controlling its spending, prediction of profit, and it expenditure as they progress toward a set goal.
Budget involves pulling resources together to achieve a specific goal. According to Expenses (2006), budgeting is an offshoot in a planning process. A basic managerial accounting tool use in holding planning and control functions together is referred to as set of budgets (p. 255). The measures for the operating budget that are least effective could create an avalanche of dictatorship events that can negatively impact the decision making strategies.