Budgets Section 1
Managingthe accountability of management involves the efficient handling oftheir control aspect. It is a very pervasive problem in business. Theshareholders should ensure that the management well understands theirexpectations so that they can hold managers accountable. Once themanagers understand what is expected of them, they will put forwardprojections that aim at meeting the expectations, and they will worktowards the achievement of the projections. The expectations shouldbe consistent with the organizational goals (Cleverley et al., 2011).
Second,the shareholders should ensure that their expectations aremeasurable. They should explain the reason for such expectations sothat the management can understand what the shareholders are tryingto accomplish. Through this, the management will be able to setrealistic projections that are achievable, and that are inshareholders’ best interests. Realistic projections will enable themanagement to evaluate their contribution to the achievement of goalsand hence serve as a source of motivation (Cleverley et al., 2011).
Thirdis by establishing functional compensation policies. Evaluation willenable the identification of performing managers for rewards while onthe contrary non-performing managers will be forced to firm up toproduce results. The management’s remuneration should be pegged tothe performance of the organization. Non-performing managers shouldnot be rewarded since this will demotivate hard working managers(Cleverley et al., 2011).
Theshareholders can also enhance manager’s accountability by offeringthem ownership in the company. This will make managers feel the prideof managing the business like it is theirs. It removes theirperception from that of an employee to that of an owner and increasestheir responsibility towards the success of the organization (Izhar &Hontoir, 2000).
Budgetingis an absolute necessity for organizations. It assists to increasefocus on target strategic plans and goals. They are also usefulassessment tools. The decision regarding whether to apply a fixed ora flexible budget involves an analysis of each method along with theintended goals (Izhar & Hontoir, 2000).
Theadvantage, of using a static budget, involves the ability to plan forthe budget period. Since the budget remains constant throughout theperiod despite the changes in the actual activities, it is used for amaster budget. Further, they enable the organization to estimateexpected taxes. Finally, static budgets enable the organization tomeasure the management forecasting skills by allowing them to measurethe variability between the expected and the actual results(Cleverley et al., 2011).
Amongstthe disadvantages of using fixed budgets is its lack of flexibility.Since it does not take the advantages of changes in revenues andexpenditures, it denies the management a chance to manage the changesas they occur (Cleverley et al., 2011).
Contraryto fixed, flexible budgets account for changes in an organizationrevenues with regard to expenses. It uses percentages as opposed tofixed numbers and allows the organization to track and evaluatechanges to the budget based on actual levels. Tracking of changesenables the organization to develop more accurate predictions (Izhar& Hontoir, 2000).
Themajor challenge in flexible budgets is that they are challenging toimplement. Due to their flexible nature, they require frequentchanges, and this demands the management to update the changes asthey occur (Cleverley et al., 2011). Due to these changes, themanagement might be forced to rethink the budget again. Further, dueto constant changes, analysis and drawing of conclusions becomesdifficult, and management can be subjected to errors (Izhar &Hontoir, 2000).
Cleverley,W.O., Cleverley, J.O., & Song, P.H. (2011) Essentials of HealthCare Finance. (7th Ed.). Jones & Bartlett Learning. Sudbury, MA.
Izhar,R., & Hontoir, J. (2000). Accounting,costing, and management.Oxford: Oxford University Press.