Budgeting and Entrepreneurial Control System - Essay Example

Budgeting and Entrepreneurial Control System This paper tries to answer the question of whether ‘budgeting is a boon or a bane.’ This will be done by looking at the control system within which budgeting takes place. A control system in organizations largely influences its ability to recognize the financial, social and cultural modes of control within it so as to lay down in clear terms the role of the entrepreneur when it comes to deliberating social control over the employees concerned. This part of the paper will first of all outline the issues that have been dealt with by Paul M Collier in his Entrepreneurial Control and the Construction of a Relevant Accounting. This will be applied to the case of budgeting. For starters, Collier has identified the role of the entrepreneur as regards the social control he exercises over the employees, as a crucial factor in the control system that influences the overall operations of the budgeting system. The success and credibility of this exercise of control on the entrepreneur’s part depends largely on the recognition of the importance of a set of beliefs and boundary systems that will decide what elements the control system will consist of as a package. This in turn has its pros and cons as far as affecting the management system is concerned. A management control system essentially consists of various elements including the management accounting practices employed by a particular organization. In this regard, it is imperative to state that the control systems employed by the management are a result of evolution of various systems and beliefs over a period of many years. This is what formalizes and assists in the quantification of various information – financial and other. In doing so, the management identifies various elements of the control system that have to do with the external information relating to markets, consumers, competitors and their decision making mechanisms. This helps the management take decisions of its own. According to Collier, the organization’s control mix and the strategic choices arising out of the implementation of this mix to real time operations in the organizations are the basis of the various frameworks under which the organization’s management control system operates. While there are various frameworks for studying this management control system, this paper will describe the 10 year old longitudinal field study that can be applied to the budgeting system through the frameworks laid down by Simons (1995) and Ferreira and Otley (2005), where both deal with formal systems based approaches as opposed to the informal, social or cultural forms of control. Even though the disciplinary separation between comparative policies and social relations within the organization has been regularly challenged, in the traditional theories it continues to persist as a result of institutional inertia and hiring practices. The traditional perspective describes control as a means of regulation and a means of setting certain standards for inspection. In this regard, the traditional perspective more often than not seeks to restrain rather than enable in order to manage and exercise control. Here, the budgeting system will make use of the issue of democratization in an attempt to go beyond rhetoric and to develop a framework that integrates the role of transnational activism into the analysis of domestic regime change. This is where the systems based view of control fits in, as laid down by Otley et al and Simons. While Comparative research on democratization confirms that underlying socioeconomic conditions affect the long-term sustainability of democratic reforms. According to Collier, this systems theory leads to several gaps in the performance as regards decision making at the lowest rungs of operation. This is where the budgeting and financial part requires reforms in terms of training and motivation. The initiation of such reforms, as well as the process they take, can best be understood using an agency-based framework that links internal and external influences. Thus, with equal emphasis on external influences which constitute areas like social standing of an employee, the management exercises relevant social control through motivation of an employee to achieve the social standing he or she has in mind. While external interventions are a potent factor in the traditional perspective where challenging authoritarian practices is concerned, it is also interesting to note that they do not simply displace existing internal practices and conditions. In this regard, the management may make optimal utilization of resources by diverting the same towards effectively influencing the behaviour of the employees in certain environments when they are in search of the ways of achieving certain goals. Even though management still pays a great deal of attention to the empowering role of networking and mobilization, the long-term effects of such interventions are still poorly understood where influencing behaviour under certain circumstances and in certain environments is concerned. Therefore, as Collier tries to imply, the systems based view of control is more often than not a means of measuring process outputs through concerted efforts at influencing the internal factors at play. This systems based view is a good approach for the budgeting system in the first five years of a longitudinal plan. The next five years may resort to a use of the interactive control system. With the use of interactive control systems by the top managers of the company, there will be a trend of regular and personal involvement in the decision activities of subordinates. This will be triggered by the recognition of a need that a diagnostic control system needs to follows an interactive model through a pattern of continuous and frequent top management attention and interest. Further, this process must be influenced by strategic uncertainties. In this case, the actions taken by newly-appointed top managers attempting revolutionary and evolutionary strategic change, irrespective of the fact that they used to exercise control systems interactively to overcome inertia. Therefore, there is a greater need for communication of the substance of their agenda, structure implementation timetables; ensure continuing attention through incentives, with a shift of focus towards awareness regarding organizational and strategic uncertainties. In this way, the traditional theories have put the management control systems in the perspective of information flows and the organizational and environmental dynamics through key performance measures at group and organizational levels. (Ferreira et al, 2005) This kind of perspective supports the flow of feedback and suggestions at every level. From a systems theory perspective, the management control will comes across as an important tool in financial control where accounting has been described as a “pre-eminent technology by which to integrate diverse activities” (Collier, 2005). Owing to the existence of calls for a broader perspective of management control than accounting-based controls, the limitations of financial measures will find an outlet in the requirement for a return to the operations-based measures. This will mark the origin of management accounting systems and coupled with the requirement to devise a methodology that will rise beyond the limitations posed by financial measures, one will find the basis for the formulation of a wholesome economic perspective. This can explain the subsequent development of the Balanced Scorecard (Kaplan and Norton, 1992) and similar models. There will be a close amalgamation of the traditional perspective with that of the economic perspective in all arenas of the management system in the budgeting system. This will lead to uniformity of operations and an easy progression of the scale of activities over ten years. From the economic perspective, management control systems seems more like a process that consists of strategic plans, long-range plans, annual operating budgets, periodic statistical reports, performance appraisal, apart from policies and procedures (Daft and Macintosh, 1984). This spectrum also includes personnel controls that coordinate personal objectives with those of the organization so as to influence higher ranks in the organization as well as the action controls that influence various levels of organizational actors by prescribing actions to be taken which is true to the prescriptive nature of the economic perspective. Furthermore, these results control the influence over organizational actors so as to measure the results of their actions (Merchant, 1998); as well as objectives, strategies and plans, target-setting, incentive and reward structures, and information feedback loops. Thus it has been concluded that performance management can provide an important integrating framework for the economic perspective unlike the traditional perspective. For small scale organisations that have never had formal, systems-based controls as a significant feature as it is a goal-oriented organization, budgeting may become a necessary evil for further growth and expansion. While these goals may lean more towards short term profits than long term sales growth and market share it has been noted that the twin objectives of sales growth and continual R&D were clearly understood throughout the organization. Further, the budgeting system has demonstrated that the means of measuring achievement is via cash flow, monitoring actual sales levels apart from a concerted effort towards achieving sustained progress through R&D and patent registration in the technological department. These developments have led to the belief that management accounting and non-financial performance measurement were not valuable as a control device in the budgeting system. It has been widely accepted that other than to a limited extent in terms of expense control, this performance measurement system has little use. In annual method of accounting, the matching principle was not applicable owing to the lead time between R&D, export market development and patent litigation and subsequent income flows. In this regard, accounting reports have not provided any significance in contribution to the measurement of the budgeting system’s success. Yet, according to the performance management literature, it has been seen that non-financial performance measures are yet to take care of accounting’s limitations. With a scarcity of formal non-financial measures other than number of units sold and market share, there has been a shift of attention to qualitative aspects of performance, such as customer satisfaction, flexibility, quality and innovation, as suggested by models such as the Balanced Scorecard. However, these are not quantified. Information networked (Ansari, 1977) controls have been visible in various spreadsheet models. These controls can act as the critical control device within the Budgeting system as they demonstrate an emphasis on continual feed forward processes rather than on any post feedback. Further, in a trend that shrugs off the traditional profit and balance sheet presentation, the Budgeting system’s spreadsheet model is more of a historical record, a forecasting device and a decision-making tool. As a business model, this will has funnel profits into the product build decisions apart from providing forecasts regarding the available and required cash flow that will support exponential growth. The advent of the revised spreadsheet found various elements of industry and market share modelling. This is in keeping with the cluster theory that has been used for the company. Therefore, it can be used to capture market share by targeting the customers of weaker competitors, apart from identifying the Budgeting system’s borrowing ability by linking his cash flow to the bank’s lending policies. Therefore, the economic perspective has shown the structuring of a relevant accounting which has ensured a discourse of future-oriented market share, sales growth and cash flow. In the terms used by Miller (1998), traditional accounting had been pushed to the margins, while the spreadsheet models developed by Taylor can become central to the success of the Budgeting system. References Ansari, S.L., 1977. An integrated approach to control system design. Acc. Organizations Society 2, 101–112. Daft, R.L., Macintosh, N.B., 1984. The nature and use of formal control systems for management control and strategy implementation.J. Manage. 10, 43–66. Ditillo, A., 2004. 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Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal. Harvard Business School Press, Boston, MA. Read More