BUDG has implemented a budgetary control process in January 20n. In October 20n, senior managers review the
Question:
BUDG has implemented a budgetary control process in January 20n. In October 20n, senior managers review the results of the first 9 months before starting work on the 201n+1 budget. Part of the meeting is recounted here.
The accountant: We have very poor results. We’ve not been able to meet our budget forecasts once in the last 9 months. Revenues are lower than expected, costs higher, so our profit is well below budget.
The sales manager: On the contrary! The sales force performance is outstanding. Our best representative reached his target, the worst one reached 90% of his target. It's very seldom that it happens, even in good times. In such a difficult environment, we could not hope for such an achievement in sales growth.
The accountant: Maybe, but none of you have met the budgeted targets. That’s a major problem as I use the budget to plan our financing. In March, I’ve negotiated a loan with our bank to finance the increase in the working capital needs for the summer months, based on the sales growth you had anticipated. In the end, we did not need the money because sales have not as strong as expected. The result is that we’ve paid interest on money we haven’t used.
The Production Manager: That’s right, but our results are not as bad as what you’re saying. We have improved our yields, even done better than our objectives. However, we had organized our resources to face the growth in production volumes and in the end, not everything was necessary as sales have been below budget. It’s even more striking since for the new product, volume growth has not been as good as expected. So we’ve had underutilized equipment there while we’ve had to work overtime at other workshops.
The sales manager: But I’m very happy with the efforts our sales force has put in. Indeed, they’ve managed to compensate the difficulties on the new product by pushing for traditional products. There we’re well above the budget. In the end, our objective is to maximize the turnover.
The Managing Director: This is one of our objectives, but our strategy and long-term objectives make it necessary to develop quickly on the new product. That’s why we’ve set ambitious targets for it.
The Purchasing Manager: I’d like to say that we’d negotiated very good prices with our suppliers based on the forecasted growth in volumes. For the new product, by far we’re not there. That’s why in the end, the prices we’ve got have increased, in comparison to last year.
Sales manager: But you can't expect sales representatives to reach their targets every month. We give high targets to them, that’s how we motivate them. If the targets were easier to achieve, sales representatives would not work as hard!
The accountant: It may be good for your people, but I can't work that way. What would our bankers say if I have promised to repay a loan in June, and I only do it in August? You can't manage a company on hopes or wishes. The budget must be an accurate estimate of what is expected and not a sweet dream of what could happen if everything went well.
Questions
1) What is each stakeholder’s views on the function(s) of the budget?
2) What are the difficulties that arise if we consider the different functions altogether?
3) How can stakeholders’ views be reconciled?
Expert Answer:
1 A Stakeholder is an individual or element who has an interest in an organization and can impact or ... View the full answer
