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ACCOUNTING FOR DECISION MAKING.
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Focuses on budgeting as a key element of a company's strategic management process.... More...
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Paper Abstract:
Focuses on budgeting as a key element of a company's strategic management process. Discusses historical relationships of budgets & corporate growth, and its current status as a tool for fiscal predictions. Mergers imapact. Spreadsheets & development of electronic spreadsheets Concept of Economic Value Added (EVA). Gives example of a hypothetical software company takeover & the role budget projections play.
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ACCOUNTING FOR DECISION-MAKING
Executive Summary
Every company, whether large or small, faces several dilemmas when confronted with the budgeting process. This essay traces the budgeting process from its beginning concepts to the budgeting of today by addressing the concept that budgets are sometimes referred to as “tools of repression and barriers to change.”
It is shown that there was some truth to that statement historically but that today budgeting is an essential part of a company’s strategic management process. The essay traces budgeting from its original concept of analyzing the past to its current status as a tool for predicting the future.
Along with a
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The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper.
In thegrid (identified by rows and columns), mathematical functions had to beperformed. Also,[EVA holds] management...to world-class manufacturing standards. Early budget management systems (during a period roughly from 178 to195 ) were based on accounting general ledger rules, which were firstformulated in England, in which careful recording of debits and creditswere used as a basis of determining a company's success. (1998, April 1), What are budgets for?, ManagementAccounting, 3 . Historical Relationship of Budgets and Corporate Growth Hewitt (1998) points out that at one time in business history, budgetswere indeed used as instruments of repression. Goulden, C.; Rawlins, L. For instance, does it make economic sense to spend$16 million to buy a technology that would cost $8 million to do in house? The weakness of this process was that it recorded the past and paidlittle attention to the future. Introduction Proponents of the statement that budgets are "a tool of repressionand a barrier to change" are as firmly grounded in reality as the CheshireCat from Lewis Carroll's Alice in Wonderland. Along with an exploration of major theories, including the concept ofEconomic Value Added, there is a brief discussion of the role that budgetprojections played in a takeover consideration of a software company by agames manufacturer. (1998, April 1), Management redeemed: Thecase against fads that harm management, Organizational Dynamics, 24. References Chen, S.; Dodd, J.L.(1997, Sept. Under computerized spreadsheet software, this calculation wascompletely automated, and an accountant could prepare, in minutes,calculations that had previously taken days, weeks, or months to prepare.This flexibility gave non-financial managers access to crucial financialinformation that greatly enhanced their strategic options. This logging ofexpenses versus revenues gave a company an idea of where it had been. The Era of Projections In the 192 s, as businesses began expanding by merging with otherbusinesses, and as the growth in private investment (from institutions andindividual investors via the stocks and bonds markets) it became essentialfor budgeting to make a gradual shift from recording the past to predictingthe future, a concept that led to the idea of spreadsheets. To accomplishthis move, it needed to develop six new programs that would convert itscurrent rasterization from two-dimensional to three-dimensional. ..initiates programs aimed at productivity gains and continuous improvement"(Goulden & Rawlins, 1997, 2 4). The bottom line is that many organizations are changing from vertical,functionally designed hierarchies to flatter, process-based operations.These flat organizations are organized around processes, teams andopportunities, with every employee adhering to the idea of a budget as ifit were their own money they were dealing with. It. Under EVA, every strategic move that a company plansis considered for the economic value it adds to a company. Traditionally an instrument of financial discipline, the annual budget in the past allocated subordinate departments a sum of costs they could incur or profits they were to make. In fact, the scene betweenAlice and the Cheshire Cat could be used to typify the dilemma everycompany, whether large or small, faces when confronted with the budgetingprocess. If an accountant changed one figure, say a rent increase, thenthat change impacted every other cell in the sheet, which would requiremultiple manual changes. Theanalysis will begin with a historical overview of the relationship ofbudgeting to traditional company management, and then move into adiscussion of the pros and cons of the initial quote. Strategy, Blind men, and the elephant, 1999, Sept. In this respect, budgets could alsobe said to be "barriers to change." The Era of Electronic Spread Sheets The idea of cost projections and profit projections as a validbusiness accounting tool was entrenched by the 198 s when the developmentof spreadsheet software for computers greatly simplified the task. After careful consideration of all the factors, the CFO gavethe green light to the acquisition, a move that enabled StaTron to quicklygain market share. Indeed, in today's complex organizations, thefuture budgeting of risks is an essential factor in corporate growth.Where once the financial departments might have been considered tools ofrepression, with the growing complexity of the business world, thebudgeting process is becoming a key element of management strategy(Donaldson & Hilmer, 1998). Thus we have seen in this paper that budgeting, which once could becalled "tools of repression" have grown and changed with the complexity oftoday's business world to become valuable and viable strategic tools. In 1998,StaTron, which developed, manufactured and sold platform computer games wasin the process of switching to real time strategy games. This essay traces the budgetingprocess from its beginning concepts to the budgeting of today by addressingthe concept that budgets are sometimes referred to as "tools of repressionand barriers to change." It is shown that there was some truth to that statement historicallybut that today budgeting is an essential part of a company's strategicmanagement process. Such a situation was done when StaTron Gaming in Las Vegas wasconsidering purchasing ElectroROM, a digital processing company. The essay traces budgeting from its original conceptof analyzing the past to its current status as a tool for predicting thefuture. 27), FinancialTimes of London, 6. The Era of EVA As accountants and comptrollers gradually moved onto companies'strategic management teams, a new concept was added to the idea ofaccounting for decision-making, the idea of Economic Value Added, or EVA(Chen & Dodd, 1997). (1997, Feb.), Quality costing: theapplication of the process model within a manufacturing environmentInternational Journal of Operations & Production Management; 17:2 199-21 . Andby applying projected growth formulas to the figures could make educated"guesses" about the future. ACCOUNTING FOR DECISION-MAKING Executive Summary Every company, whether large or small, faces several dilemmas whenconfronted with the budgeting process. On theother hand, purchasing ElectroROM for $16 million would give StaTroninstant access to the existing technology which would enable StaTron toreduce its time to market (TTM) from two years to six months. 22), Economic value added (EVA superTM): an empirical examination of a new corporate performance measure,Journal of Managerial Issues, 9: 318-334. "With EVA at the root of all key decisions, the companyconcentrates on returns and profitability, not just market share. Hewitt, W. The management studies of Fayol in thelate 19th century began breaking down a company's structure to a series ofcomponents, each one contributing or detracting from the company's overallproductivity (Chen & Dodd, 1997). To seewhy this is so, consider the basic cell concept of a spreadsheet. If, forinstance, the management team was trying to ascertain a growth strategy,then all of the elements of the strategy could be analyzed in terms of thepotential EVA. It will be recalled that Alice, while lost, asked the Cheshire Cat"which way I ought to walk from here?" to which the cat answered "Thatdepends a good deal on where you want to get to." Alice, in response said"I don't much care where so long as I get somewhere" to which the catanswered "Then it doesn't matter which way you walk, "if you only walk longenough" (Carroll, The cat's statement "That depends a good deal on where you want toget to" could be used as a defining statement for any course of academicstudy on budget planning and analysis. However, when it is considered that the $16million is a firm cost while the $8 million for internal development is anestimated cost, then the CFO had to take the beta (risk) considerationsinto account. Conclusions In today's business climate, budgets are essential tools forcontrolled growth and with the technology available today, every activityof a company can be analyzed financially, as to the extent of itscontributions to the overall profitability of the company ("Strategy"2 ). In this situation, a projected budget was neither a tool of repressionnor a barrier to change. This analysis will use both secondary sources from experts on budgettheory and implementation and will and a primary hypothetical example ofStaTron Gaming, a computer games company located in Las Vegas, Nevada. Originally done by hand, the spreadsheets would log all the costelements of a company (overhead, sales, debt, and so on) and all of theprofit elements (sales, net sales and other income). In this paper, the initialquotation calling budgets a tool of repression and a barrier to change willbe examined to determine what validity, if any, there is to the statement. During the post Fayol period, and its characteristic of rapidlyincreasing manufacturing growth, company budgeting began expanding todetermining the following operational concepts: 1) Develop sensiblyfinanced growth(with prudent mix of equity and debt); 2) Maintain a strongcash position (with access to follow-on or contingency funds); 3) Manageand control above-average profitability (in terms of return on capitalinvested); 4) Aim for consistent growth in revenues (with profits laggingbut in prospect); 5) Finance expanding, or otherwise attractive, marketsegments; 6) Devote substantial resources to innovation (R&D, offerings ormarket). On the surface, no. The implication for management strategy was that managers had torely on documents that took a great deal of time to prepare to makestrategy decisions about the future. It was up to the CFO to weigh all of the options to determine the EVAof this strategic move. The spreadsheet concept had the benefit ofshowing the interrelationship of all aspects of a company's organization. A secondarybenefit was that financial managers, because of the enhanced fiscalprojections there were able to do, gradually become key players on themanagement strategy team. To transgress those limits in the wrong direction at the end of the following 12 months was to invite criticism or punishment from the finance department (Hewitt, 1998, 3 ). A StaTron strategy team, consisting of the President, the ProgramDirector and the CFO concluded that the internal development of thisrequirement would cost $8.94 million and require 14 to 18 months. However, since it was done by hand and since it was a numericallycomplex document, budget planning was, of necessity, done on an annualbasis. Donaldson, L.; Hilmer, F.G. The company name as used in the essay is hypotheticalalthough the example is based in fact.
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