Book Report: Corporate Budgeting Identifying a Research Problem

Pages: 13 (3872 words)  ·  Bibliography Sources: 16  ·  Level: Doctorate  ·  Topic: Business  ·  Buy This Paper

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[. . .] Notably, one of the negative aspects of corporate budgeting is that the issue does not lie with the process of budgeting, but rather due to the use of budget targets to ascertain compensation. In particular, when managers are assured bonuses for a certain financial period, if they accomplish particular performance goals and objectives, two things without doubt take place. To begin with, they endeavor to place low targets that can be accomplished easily. Secondly, subsequent to this, they undertake all that it takes to ensure that they realize them, regardless of whether the corporation suffers in the end. Jensen (2011) gives the recommendation that solely by breaking the connection between budgets and bonuses or gratuities, will it be possible to remove the incentive to falsify and cheat. It is through this that it will be conceivable to eradicate the budgeting incentives that propel people to act in manners that put an end to corporate value.

Campbell et al. (2002) further delineate the drawbacks and problems encompassing corporate budgeting. According to the authors, corporate budgeting is bad not just for the reason that it causes top management to play the system and conceal information but also for the reason that it generates inflexibility. The measurement of performance against the corporate budget impacts considerably more than the bonus of a manager. It influences promotion opportunities, opinions and views of their peers, and self-assurance. For instance, if a manager misses the budget, then he or she ought to have the feeling of failing the company, and failing himself or herself, and that is dreadful. However, if the manager succeeds, then he or she is lounging and is rewarded despite the fact that the reward is largely in the mind. Another aspect is that managers are every so often enthusiastic when propositioning budgets. Every now and then, this emanates from the overall accepted but improper understanding that stretch budgets correctly stimulate managers and personnel. Every now and then, it takes place for the reason that there are no expenditures to over forecasting. And from time to time, it takes place for the reason that, it is stress-free for the manager to proclaim that they are sorry well along for not meeting targets than saying no in the course of the budgeting process. In addition, motives barely matter. Regardless of whether managers put forward optimistic budgets by way of self-centeredness or simply by way of hopefulness or hubris, they are still gaming the system. Dwelling on what a manager, a division, or a corporation can do is not useful. Numerous managers have attempted to strut their workforce by setting irrationally high prospects for themselves and their corporations, with undesirable outcomes.

The article by Barksy and Morris (2016) also delineates the negative aspects of corporate budgeting. To begin with, the key objective of budgeting is to generate a comprehensive financial plan that offers guiding principles to managers with respect to procurement and use of an organization’s resources in quest of business strategy. However, numerous individuals within the organizations have the sentiment their details, to some extent, are worthless, if not in actual fact detrimental, to the accomplishment of the proposed business strategy. In addition, numerous person feel the sense of betrayal by the managers when their proposed recommendations are overlooked or undervalued. Without doubt, budgeting is vital for efficacious decision making within a business framework. Regardless of this, several persons within the organizations perceive corporate budgeting in a negative manner, with respect to both the process of budgeting as well as the end product. In accordance to several personnel, budgets signify irrational objectives and limitations in conjunction with controlling development or execution. In addition, Barksy and Morris (2016) show that budgets can generate lack of forethought and lack of preparation in the sense that personnel lay emphasis on budgeted amounts of money instead of enhancing business processes, which can generate a limiting environment for several personnel. This is for the reason that invention and initiative are not operationalized through budget distributions.

The budget is the nuisance of corporate America. Numerous CEOs of different companies such as Jack Welch at GE, Bob Lutz at Chrysler together with other corporations in European nations including Volvo, Diageo and Ericson have proclaimed that corporate budgeting ought to have never existed or taken place. As a result, these companies have abandoned and cease to employ the traditional budget or have opted to alter the budgeting process significantly. The underlying reasons for these sentiments and actions is that corporate budgets are more often than not too late, are significantly politicized with respect to the trade-offs made, take a very long period to develop, require loads of organizational resources, and fail to measure to the vital things that make corporations effective and successful in the present day fast moving global economy. Traditional budgeting is not successful or efficacious in numerous organizations for the reason that the process is employed as an agent of the most restraining kind of control. This does not imply that the component is no good only that it is not being used as it should be and in the proper manner (Babbini, 1999).

In the present day, budgeting is for all intents and purposes a top down process. The budget packages flow out from the corporate office to a number of departments and at that juncture operating units with forms to be filled in and transactions and operative predictions. Numerous organizations are at this day and age labelling this practice as "bottom up", for the reason that the subsequent phase is to turn up the finished business unit forms to compute total corporate budgets. In particular, the bottom-up expression could be suitable if that was in fact the culmination of the process. A limited number of organizations discontinue at this juncture. The more probable actuality is that the procedure is iterative, with budgets being "attuned" by corporate, and thereafter returned to the operating units. The resultant budget, every so often more than a few months subsequent to the preliminary dissemination of the budget forms, then comes to be regulation despite the fact several of the conventions on which the budget is centered on do not apply anymore. Budgets fashioned in this manner fail to quantify and address those things that generate shareholder value and which are important to the success of contemporary organizations, which comprise of consumer loyalty, expansion of intellectual properties, rapidity to satisfy consumer expectations, member of staff development and product or service quality (Babbini, 1999).

Part II

The research problem encompasses the present day issues that are perceived in corporate budgeting. Traditionally, corporate budgeting was deemed to be a fundamental aspect within the organization, which facilitated its success in succeeding financial years. In the contemporary setting, more and more claims have arisen portending to the adverse impacts of corporate budget to the organization in general. This research problem is of great significance due to the reason that a budgeting system is an amalgamation of information flows together with administrative practices and procedures that is more often than not a vital part of short-term planning and control system of an entity. As is outlined by Hornstein (2013), corporate budgeting is the practice where a corporation guesstimates its capitals, planning operations properly. For any business looking to define a budget in preparation for a major goal, it is significant for a firm to comprehend its confines as regards employees, resources, and consequences for any major or minor changes.

Key conclusions from the literature is that corporate budget has an adverse impact on an organization at large. In fact, a common ground that is notable is that numerous Chief Executive Officers (CEOs) and organizations in general have the perception that corporate budgeting is adverse to the success of organization and ought not to have taken place in the first place. It can be concluded that corporate budgeting impels and enables managers to lie, inflate outcomes, and give low bids to different parties. It can also be perceived that it sets personnel against each other, which gives rise to a sense of suspicion amongst each other within the organization. Another key conclusion is that corporate budgeting misleads incentives, motivating individuals to behave in manners that are in contradiction to the best interests of their corporations. Moreover, corporate budgeting is unscrupulous not only for the reason that it impels top management to play the system and hide information but also for the reason that it produces rigidity and inflexibility. The measurement of performance against the corporate budget influences significantly more than just the gratuity of a manager. It impacts promotion prospects, feelings and opinions of their peers, and self-confidence. Therefore, what can be noted from the literature is the negative impact of corporate budgeting and the issues that lie therein.

Some of the gaps in the literature encompasses the rectification… [END OF PREVIEW]

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