Table of Contents
- Price for an Essay
- Theoretical Framework
- Meaning of Budgeting and Budgetary Control
- Nature of the Budget
- Principles of Budgeting
- Significance of the Budget
- Classification of the Budgeting
- Budgetary Control
- Summary of the Literature Review
- Conditions Necessary for the Success of a Budgetary System
- Related Free Management Essays
Abu Dhabi Health Services Company (SEHA) is an independent public joint stock company managing government hospitals and treatment administration in clinics of the Emirate of Abu Dhabi. Presence of the new advanced technology used in treatment and diagnoses together with technical teams, medical specialists that have the expertise in the treatment fields, have enhanced medical care provision. The company provides comprehensive healthcare services that attain the required international standards (Abu Dhabi, 2013).
The company works in a network consisting of companies that assist in the provision of consultancy and other technical help. An example of the companies in this network is Price Waterhouse Coopers (PwC). This is a consulting firm that is considered to be the largest in the consultancy industry in the world. PwC has supported SEHA Corporate Office in developing effective governance structure, procedures for actions and policies, through its services. Employees, who are interested in SEHA, also affect the company’s management decision making; mainly they influence the decisions about how and when they should be appropriately paid in order for them to earn a living. The employees are affected by the decisions that management makes on their job tenure and security. When management makes decisions that are risky, the employees are in a position to lose their jobs (Abu Dhabi, 2013).
This research, as mention before, will provide the chance to apply the knowledge and skills learned in the course in the class setting. For this reason, theories related to accounting will be discussed. Furthermore, theories of budget, management and other related topics, such as communication, will also be considered the most important areas to be discussed. Applying these theories to the identified issues in budgetary control will help in coming up with the most effective approaches to solve problems associated with this topic. According to Finkler & McHugh (2008), these effective solutions will eventually result in a smooth flow in the budgetary control system, good relationship among stakeholders and growth of the organization.
Meaning of Budgeting and Budgetary Control
Badu (2011) defined a budget as a functional document prepared before a predetermined duration of time of the policy to be used during that actual time for the purpose of achieving certain objectives. He further explained that budgeting and budgetary control system play the most important role in every company as they help in identifying the efficient control in management system for the realization of competitive advantage. Amalokwu & Lawrence (2008) defined the budget as a quantitative statement for a specific period of time including expenses, assets, revenue and cash flows providing focus to the organization, aiding in coordination of activities, direction of activities, control of facilities and resource allocation.
Nature of the Budget
According to Badu (2011), a budget is a plan expressed in terms of money, which is prepared and has its approval before the actual budget period, that shows income, expenditure and capital to be used. Budgets are different from forecasting since forecasting is not a scientific process, which involves merely guesswork. Budgets differ from forecasting since they are scientific documents that pass through a systematic process and approved principles when developed.
Principles of Budgeting
There is a number of principles that are used in the budgeting process. These principles are widely used since budgeting plays a crucial role in the overall economic development of a nation. The principles aim at bringing out transparency and participatory practice in the process. According to Samuel & Wilfred (2009), budgets should be comprehensive enough, containing all the elements of finance that need to be disclosed. Moreover, budgets should be clear and easy to understand in order for different users to make decisions out of the budget. Budgets should also be prepared on a regular basis, at the beginning of a fiscal year and at the end of that year. Finally, the budget should be accurate meaning that all the revenues and expenditures in a budget should be estimated correctly. Budgets should be not only accurate, but real.
Significance of the Budget
According to Samuel & Wilfred (2009), budgets are widely used by all organizations and countries as guidance in the economic decisions making. Budget facilitates economic advancement of a country. Moreover, it is a vital concept used by governments of different nations to administer their operations and formulate appropriate economic policies for national development.
Classification of the Budgeting
The classification of budgeting is provided below. Surplus budget is defined as the revenue expected exceeding the expenditure. It is the most admired budget class by any nation. Balanced budget is defined as the expected revenue being equal to the total expenditure. Deficit budget is defined as the opposite of surplus budget, in this case the expenditure exceeds the expected revenue. Supplementary budget is defined as the budget developed to supplement the already developed budget in cases, where the existing ones are insufficient in one way or another. Development budget refers to budget prepared for a long period and incorporated in the development plan of a country.
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A good and effective budgetary control system is required so that the assets included in the budgets are controlled and safeguarded. However, there are several problems that are experienced when carrying out the activity in this control process. Different literature that discusses the problems associated with this issue has been identified.
The application of interview questionnaire with the purpose of data collection from the Ernest Chemist Company’s employees was used by Badu (2011) to find out the challenges faced in the organization. He found out that Ernest Chemist Company has an appropriate system of budgeting and budgetary control and that there only a few problems pertaining to the ethical issues. The system provided guidelines for the managers and supervisors to help them forecast ahead and enhance efficient and effective utilization of the scarce resources in the organization. According to Badu (2011), low level of integrity in the company was one of the ethical issues found out. The employees gave unreliable and wrong reports to the mangers. Unsteady water and electricity bills and taxes on property were also identified as environmental issues impacting the budgetary control. In addition, Badu (2011) stated that there was a wide variation in the measurements of the objectives achieved. The research methodology used was appropriate, as it led to the attainment of first hand data from the company.
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According to the study done by Kenneth & Ambrose (2013), a number of problems are involved in the budgetary control systems of organizations. The challenges listed involve undermining value proposition process in the budget while majoring on reducing the costs, focusing on the short term plans of the middle level management (hence the strategic plans are not linked) and also the subordinate employees are not given any control of their actions concerning the activities done on the budget. Other problems discussed in the study include difficulty in predicting the occurrences in the business environment, improper training of the managers and pressurizing the employees using the targets to be achieved in the budget. The funds that are disbursed are inadequate to achieve the set objectives of the budget. The limitation of this study was the fact that it did not discuss the medical industry. However, it doesn't represent a problem for this study, since there are several common problems that companies face in their budgetary control systems regardless of their areas of operations.
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According to Veronique & Winston (1991) and Michael & Arie (1970), a participative budgetary system experiences the problem of diversified employees’ culture and different managerial opinions. The various groups within a culture will react different to budgeting system used. Challenges between the controller and the controlled can emerge in the budgetary process; that is, the relationship between the people involved in the budgetary control also imposes problems in the process. If the decisions on budgeting control are centralized, the other employees will be discouraged and hence may not accept the budget. This leads to the failure of the system.
John (1998) stated that budgets have both financial and operational benefits. Budgets and the process of budgeting have become the most important concern in today’s management accounting. As a result, budgeting goals should be understood in order to avoid any obstacle or challenges of budgeting and budgetary control that can prevent the organizations from normal operation. The study revealed that there is a number of challenges that are encountered in the process of budgetary control. Consequently, John (1998) found that the process experiences resistance from the employees. The employees should take part in the budgetary control for the system to achieve success. In situations where the employees are resistant to the budgeting system, the goals are likely to be out of achievement by the organization. In addition, setting financial goals for the budgetary system is a difficult process. This process usually involves different opinions from the managers. Some of the mangers set goals that require employees to stretch and work harder, while others set goals that are achievable and consider complex goals as discouraging.
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Responsibility accounting is another challenge faced in the process. Budgets always provide quantitative goals used to enhance performance. The presence of quantitative goals helps to hold employees responsible and accountable for achieving the goals through responsible accounting. According to John (1998), responsibility accounting is the application of numbers used to hold specific employees responsible and accountable for the performance. This process, however, does not identify individuals, who are accountable for problems that might arise. The study is important for this research paper since it brings out the relevant accounting theories used in budgeting process.
Studies done by Dwight (2013) on the common challenges that are faced in budgeting identify several challenges that organizations face in their budgetary control. Firstly, visibility is an issue in the budgeting forecasting. Budgets for a year ahead, for example, can be characterized by inaccurate and unreliable forecasts that can lead to losses. Outdated information used in budgeting can make the budget unrealistic and invalid. If the organization cannot provide insights to the mangers on the time frame, they cannot make good decisions regarding financial plans.
Second challenge is control; lack of control on the spreadsheets from different regions of business operations, can make the managers work excessively and extensively in order to consolidate all the different versions of the spreadsheets. These versions can be difficult or impossible to control, hence such a situation can lead to a failure in the budgetary control. This study is relevant since it reveals the problems in the budgetary control that are most likely to be faced by SEHA company as it also deals with budgets for different regions, hence the issue of lack of control may pose a challenge to the company.
Summary of the Literature Review
From the results of findings obtained from the various authors, it is possible to identify the following challenges that SEHA company faces in its budgetary control: difficulty of visibility in forecasting and budgeting that leads to unreliable and inaccurate information, difficulty in the control of the wide range of spreadsheet versions, and lack of guidelines in the responsibility accounting, where employees are not held accountable in cases of problems. Other budgetary control problems at SEHA involve cases when the budgets are not strategically focused and may contradict with other management roles, the budgets focus more on cost reduction than value addition and, finally, lack of integrity also poses a challenge since the subordinates may not give true reports to the managers.
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Conditions Necessary for the Success of a Budgetary System
Proper budgetary control system requires accurate forecasting, calls for decentralization of the process by involving all the employees and managers in decision-making. The proper budgetary control should also ensure that the goals of the budget and allocations of funds are linked to the general goals of the organization. The organization should also have a sufficient number of spreadsheet versions of budgets for easier consolidation. Such a measure will eliminate the pressure that the managers have in terms of time constraints.