If you have any questions about the content of this guidance contact the Finance Manager for your Academic Department or Professional Services Department for advice. Good financial management systems and processes for tracking resource utilisation are essential for a department to make effective use of its resources.
Effective planning and financial control will help departments to:. For the allocation of expenditure budgets, the appropriate levels may be informed by historic expenditure patterns and any appropriate benchmarks that have been identified or adopted. Consideration of budgeting materiality levels will of course vary from department to department depending on the size of the overall budget and the number of people actively engaged in the process of managing expenditure against budget.
Find out more about management responsibilities for budgeting Faculties and Academic Departments. When budgets are allocated to individual 'cost centres' an account for collecting costs funded from core budget allocations or teams, the following steps should be taken:. It is not possible to take budget into reserves during the financial year as this would prevent the correct assessment of the PYA for that year.
The recommended best practice when recording the unallocated or unreleased element of reserves is to hold them in a single 'cost centre' and view the release of reserves as part of the budget allocation process to individual 'cost centres'. Find out more about the use of reserves for academic departments and faculties by reading the Financial Advice Notes on the Reserve Accounts Policy which is available from here.
Guidance on the principles for agreed carry forward balances on non-staff expenditure and non-earmarked projects for Professional Services departments is explained in detail here.
Regular monitoring of expenditure is essential; not just to verify expenditure against target but also to identify changing patterns or circumstances that need corrective action.
You should have procedures in place within your department to monitor progress against budget and objectives at regular intervals generally monthly. In addition, appropriate reporting and authorisation mechanisms should be in place.
Thus revision is possible during the operating period and the performance standard can be changed. In one company that uses such a budgeting system, managers commit themselves to a budget with the understanding that, if there are substantial changes in any of five key economic or environmental variables, top management will revise the budget and new performance criteria will be set.
This company automatically makes budget revisions whenever there are significant changes in any of these five variables.
Naturally, the threshold that triggers a new budget will depend on the relative importance of each variable.
With this system, managers know they are expected to meet their budgets. The budget retains its motivating characteristic because it represents objectives that are possible to achieve.
Uncontrollable events are not allowed to affect budgeted objectives in such a way that they stand little chance of being met. Yet revisions that are made do not have to adversely affect commitment, since revisions are agreed to in advance and procedures for making them are structured into the overall budgeting system. Some companies use rolling budgets to reduce multiple role conflicts.
With a rolling budget, each budget period is likely to be much shorter than the traditional month period: a quarter or, perhaps, four months. Budgeting becomes more or less a continuous process. As each budget period ends, budgets for the periods in the future are prepared or revised. For example, a rolling budget might work in the following manner. At the end of Period 3 an arbitrary starting point for this example , top management compares actual results for the period with the budgeted objectives, and performance evaluations are made.
At the same time, it revises the budget for Period 5 for the last time. In addition, it revises the budget for Period 6 for the first time and formulates the initial budget for Period 7. The budget for the next period, Period 4, has been completed at the end of the last period. Commitment is maintained with a rolling budget because a manager knows that, once final, the budget will not be modified for purposes of evaluation.
Failure to achieve budgeted objectives results in loss of incentive compensation. Yet, because the budgeting period has been significantly shortened, the individual manager finds the financial impact of such a failure easier to tolerate. The budget undergoes two revisions before it is final. Thus it can be adjusted for what might be termed unforeseeable events under a more conventional budgeting system.
The adverse effects of not revising budgets are thereby somewhat reduced. Some companies use a second technique to reduce multiple role conflicts: they require the regular submission of revised forecasts during the year. Such companies as well as most others , divide the period covered by the budget into months or quarters for reporting purposes. At the end of each reporting period, managers are not only responsible for seeing that the actual results of operations are reported; they also must provide a forecast of the operating results for the portion of the overall budget period that still remains.
These revised forecasts become inputs to the planning process and serve to update those plans that were based on either the original budget or the most recent forecast. These continually updated forecasts restore some of the realism needed for intelligent planning.
In one company that uses a technique similar to the one just described, evaluation of performance is based on comparisons both of original budget with actual results and of actual results with latest forecast. Thus for this company, the role conflict between motivation and evaluation is reduced in that performance evaluation is based partially on a comparison between actual results and latest forecast.
Resolving the conflicts between the various roles of the budgeting system can be a complicated task. In part, this is due to the fact that, while planning is basically a straightforward business activity, the concepts of motivation and evaluation are part of a complex area of the behavioral sciences. One should, therefore, be wary of generalizations about how management can best proceed to reduce such conflicts.
Nonetheless, the following points might help senior managers when they are considering how to resolve or alleviate such problems:. Recognize that role conflicts exist. Although the adverse effects of the conflicts can often be reduced, they cannot be totally eliminated. The mere recognition that role conflicts exist is a giant step toward coming to grips with the problem.
Much of the unhappiness with contemporary budgeting systems stems from attempts to make one budget serve multiple roles. The GMJ technique discussed earlier operates on the principle that the relative importance of the several roles served by a budget is a function of the level of the organization involved.
The importance of planning and motivation varies with the level in the organization at which the budget is being used. At lower levels, the budget is used for motivation.
At higher levels, its relevance to financial planning and intraorganizational coordination becomes more important. While GMJ does not eliminate role conflicts, setting priorities for each role at the various levels in the organization does reduce the effects of the role conflicts. Similarly, the technique of differentiating among the levels of the organization as to where the performance of managers will be evaluated on the basis of revised or ex post facto budgets is based on the principle that particular roles of the budget do not have the same importance at all levels of the organization.
Remember that reliance on other elements of the management control system can be helpful in reducing role conflicts. Companies using the tight ship policy might be said to view motivation as being of paramount importance.
Budget objectives are set at difficult but attainable levels for purposes of motivation. Any adverse effects that this may have on financial planning are dealt with by instituting timely and it is hoped effective systems of reporting, contingency planning, and other management coordinating devices. Recognize that role conflicts may be reduced by restructuring the budgeting system itself. In the case of rolling budgets and adjustable budgets, role conflict is reduced by recycling the budgeting process several times during the year.
This recycling allows for the input of continually updated information to the planning process. It also allows for the explicit consideration of unforeseen or uncontrollable factors that would not be part of the process of setting the budgeted objectives in a more conventional budgeting system. Motivation is maintained through the use of fixed or, in the case of adjustable budgets, variable according to known criteria standards.
Where regular revised forecasts are submitted, role conflicts can be reduced both by providing continually updated information for the planning process and by partially basing the evaluation of performance on a comparison of actual results with latest forecast.
Robert N. Anthony, John Dearden, and Richard F. Homewood, Ill. Irwin, , p. Charles T. You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Budgets and budgeting. Conflicting Roles in Budgeting for Operations. Edgar Barrett and LeRoy B. Fraser, III. Cheikh's Story I became involved with budgets and advocacy… because there was very little participation by women who dared to speak up with their opinions.
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