Topic: The CEO’s Memo to Budget Managers; Type: Memo; Subject: Accounting and Finance; Academic Level: Masters; Style: APA; Language: English (U.S); Number of pages: 3 (double-spaced, Times New Roman, Font 12); Number of sources: 1
Running head: memo
Topic: The CEO’s Memo to Budget Managers Type: Memo Subject: Accounting and
Finance Academic Level: Masters Style: APA Language: English (U.S)
Number of pages: 3 (double-spaced, Times New Roman, Font 12)
Created by: https://writersperhour.com
Number of sources: 1
Budgets positively and negatively affect how the management act and perform. Managers
commonly increase spending, especially at the end of the budget period, a process called "use it
or lose it." However, this process can negatively affect an entity's goal. Managers spent this
amount with fear of the amount being reduced by supervisors in the following financial budget.
As such, managers tend to overspend at the end of the year, even it if it means spending
Requirement: As the CEO, write a memo to the budget managers directing them not to employ
this method. You should offer a logical rationale and if possible, an alternative to this approach.
TO: Budget Managers
22nd October, 2014
RE: CHANGE OF BUDGETING PRACTICES
“Use it or lose it" Approach
This memo serves to advise you on the need to refrain from the “use it or lose it” practice
of time-limited budget. This approach leads to unnecessary and wasteful spending of the
available resources meant to gear our organization ahead if effectively utilized. In addition, this
spending potentially results in lower value spending as the opportunity cost to our entity by using
about-to-expire finances is effectively zero. The low-quality spending at the end of the budget
period is driven by the fact that various departments in our organization tend to spend funds on
low-value undertakings. In addition, they are likely to engage in so many transactions, thereby
compromising effective management of these transactions.
Available Options to Address "Use it or lose it."
Use of rollover budgets
As the budget managers, this memo advises you to adopt the practice of rolling over the
budget as this would potentially increase efficiency in resource utilization and avoid the
inefficiency from the wasteful budget-end spending. Under this system, you would carry out the
budgeting on an annual basis as is the norm, but instead of expiring at the end of the fiscal year,
unused finances are added to the newly formulated budget in the forthcoming period. You are
solely required to break the annual budget into months or quarters and then add each in the future
after the just ended one is dropped. Intuitively, our various departments will not engage
themselves in a wasteful fiscal year-end spending as these funds would be used for higher value
undertakings in the next budget period. This rolling budget will always make you remain focused
on the future as it makes you think about the next full term and not just the remaining part of the
current fiscal year. In the same context, the continuous budget makes the budgeting process an
ongoing process and not a once-a-year exercise.
This memo also views it prudent to advising you on the need to adopt and embrace a
bottom-up approach to the budgeting process. This is where, as the top managers, we need to
greatly get the input of lower level employees in our budgeting process. As the top management,
our core role is just offering general budget guidelines and leaving the lower level to drive the
development of their units’ budgets. The various budgets will then be grouped into the middle
level to form a divisional budget that is eventually submitted to you as the budget managers or
committee and later to the top management for review for consistency and coordination.
The purpose of engaging all people in our entity is from the understanding that there are
behavioral implications in budgeting other than the technical aspects. Whereas the technical
aspects of budgeting concentrates on mathematical computations of projected revenues and
costs, their implementation and achievements rely on the behavioral aspects, use of people. This
implies that the behavioral aspects and technical aspects of the whole budgeting process should
not be separated.
You are therefore advised that, the efficient use, as well as the application of the budget,
is profoundly influenced by employees' commitments and attitudes to the ideals of the budgetary
process. The budget so developed should be the one that encourages all levels of employees to
exhibit behavior that is in line with the objectives of the organization. This will prevent them
from engaging in unnecessary and wasteful spending of funds and other resources. Employees
also see participative budgeting as self-imposed and thus improve their morale, performance, job
satisfaction and commitment to our organization’s goals and targets. Therefore, a meaningful
participation of the lower level managers and subordinates in the budgeting process offers them a
chance to participate in the decision-making process on goals that suit them and the firm.
The participative budgeting also fosters a great sense of care and responsibility making
employees carry their duties with the required due care and diligence as they would like to
identify with the achievement of budgets. If conducted in a sensitive and positive manner, the
budgeting process leads to increased motivation as well as improved goal congruence between
the entire organization and an individual.
The advantages we stand to Enjoy through Proper Budget Process Formulation
Our organization will have a well-orchestrated roadmap to guide its employees in
achieving its objectives. This will make it easy for results interpretation and the ability to foresee
potential problems. It will also enable us to evaluate activities to assess whether they will help
our organization achieve its goals. We will easily be able to establish whether a given plan
optimally allocates resources among the entity’s various activities. Another advantage is that a
proper communication of strategic goals from the top management and feedback from employees
and lower-level managers on the goals is supported. Performance evaluation will also be
enhanced by comparing the budgeted performance goals against the actual results.
Horngren, C. T., Sundem, G. L., Burgstahler, D., & Schatzberg, J. (2013). Introduction to
Management Accounting. New Jersey: Pearson Education, Limited.
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