The Article “Best practices: Developing Budgets” authored by Arthur Andersen is a synopsis of research findings on the budgetary processes of high performing and was published on Inc. Website in January 2000. The article gives recommendations on the best practices organizations should adopt in developing their budgets. The key recommendations on the best practices in developing budgets are as follows:
Link the budget process to corporate strategy – a budget is a detailed plan on how the organization will allocate its financial, human and physical resources to achieve its goals (Andersen, 2000). Communication between top managers and employees plays a vital role in establishing the link. Top managers will require information about customers, competition, and changes in technology that is only available to those who are in contact with the customers in order to develop strategic goals, while employees will need to understand the corporate goals of the organization in order to achieve the set targets (Andersen, 2000).
Design procedures that allocate resources strategically – divisions in a company will need funding to cater for both operating expenses and capital expenditure (Andersen, 2000). Inevitably there will be competition among various departments hence the need for organizations to develop procedures that allocate resources to critical strategic activities.
Use a balanced score card to measure performance – organizations should use budgetary targets as the key performance indicators instead of using it as a secondary performance measure. For instance, organizations can use product defect rate (non financial measure) as the primary performance measurement for the production department while budgetary targets are used as a secondary performance measurement (Andersen, 2000).
Link cost management to budgeting – organizations need to adopt better costing techniques such as Activity-Based Costing (ABC) in order to ascertain the real costs of their products or activities. In addition, organizations should carry out a variance analysis between budgeted and actual costs and establish the reasons for the variances (Andersen, 2000).
Reduce budget complexities – organizations should seek to streamline the budgetary process by keeping to a minimum the information required to develop a budget. Streamlining the budgetary process will call for thorough training of the budget developers an investment in the latest technology (Andersen, 2000).
Develop budgets that are able to accommodate change – budgets should provide room for revision as conditions change. Having a flexible budget will eliminate the need for managers to introduce slack in their budgets to cover for contingencies (Andersen, 2000). One way organizations can establish flexibility in their budgets is by using rolling budgets that require projected budgets to be revised in the light of actual information. Rolling budgets provide managers with important alerts that a change in strategy may be necessary (Andersen, 2000).
The recommendations seem reasonable and I agree with them. However, the recommendations are generic in nature since they are meant to improve the budgetary process across organizations without regard to any particular organization uniqueness. While managers will find the information useful in guiding them in preparing their budgets, there is need for the managers to consult and ensure that they tailor the recommendations to fit the needs of their organizations. For instance, a small organization that is owner managed and has a few employees may find it easier to communicate to the employees about its corporate objectives. On the other hand, big multinationals with operations in different countries across the world will experience considerable difficulties in communicating their corporate strategies to all employees.
Reference list
Andersen A. (2000). Best Practices: Developing Budgets. Retrieved February
15, 2016, from http://www.inc.com/articles/2000/01/16379.htmls
