Strategic Budgeting and Performance Measurement for Businesses
What is Strategy?
Strategy is how an organization develops its critical capacities to meet demands in the market – in other words, how a company creates value for customers and wider society. Organizations add value to products and services by coordinating their activities and encouraging the motivation of their members. Successful strategy involves designing, implementing, and evaluating a plan of action to achieve specific goals. The key cost accounting tool is the budget.
What are the Potential Advantages of Budgets?
It provides a framework for judging their performance. When managers and accountants prepare a budget, they take into account the past performance of the company as well as the standards set by competitors and customers. A budget can motivate managers and other employees. This effect is more likely when a budget is prepared and implemented in a decentralized manner, involving lower-level employees in the activity.
When Should a Company Implement a Budget?
Generally, when the potential benefits of doing so outweigh the potential costs. The time of a budget depends on the specific purpose, but the general budget period is for a year.
What are the Main Challenges of Implementing a Budget?
A budget can often highlight or even exacerbate existing problems. Effective use of a budget depends on communication of information and coordination of activities. Budgets can be time-consuming. This situation can lead to a rigidly implemented budget.
Goal Alignment
Goal alignment refers to a company situation in which employees identify their needs with the objectives of the company’s overall strategy and objectives. A common cause of poor goal alignment in a company is when administrative members dominate the budget activity.
How Can Companies Overcome Budgeting Challenges?
Companies attempt to promote goal alignment by restructuring their organization structure. Implementing responsibility centers, ABC systems, or balanced scorecards are increasingly common ways in which companies attempt to ensure the success of their strategy.
What is Variance Analysis and Why is it Useful?
Budgets provide feedback to organizations by highlighting if there is a difference between budgeted and actual data. Analyzing this variance (variance analysis) is valuable for understanding why actual results differ from budgeted amounts and then to use that knowledge to promote learning and continuous improvement. A static budget, based on the output planned at the start of the budget period, provides information about how much a company was off target by. However, to answer the more complex questions of ‘where’ and ‘why’, companies generally build a flexible budget. This expresses costs and revenues using actual output instead of the budgeted level.
What is a Balanced Scorecard (BSC)?
Increasingly companies use a balanced scorecard to translate their mission and strategy into a set of performance measures. This provides the framework for implementing its strategy. The aim is to balance the use of financial and nonfinancial performance measures to evaluate performance. This means that a BSC can be an effective practice for organizations that strive to attain sustainability.
Balanced Scorecard Perspectives:
- Financial
- Customer
- Internal Business Perspective
- Learning and Growth
Implementing a balanced scorecard relies on some level of decentralization. Lower-level managers often take responsibility for involving other employees in setting and implementing strategy targets, measures, and evaluating performance. A good BSC should communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets. To evaluate how successful a strategy has been, organizations compare the target and actual performance columns on the balanced scorecard.