Performance Measurement Strategy

A performance measurement system is an activity developed to implement an organizations strategy effectively. This involves recognition of the critical factors that impact overall success. When the tactical factors are effectively identified, measured, and rewarded regularly, employees are created aware of them and are thus motivated to achieve those goals that eventually result in the entire success of the business. While profitability can be an obvious component, there are a great many other factors that determine both short and long-term goals essential for company expansion and efficiency. The Balanced Scorecard ( BSC ) is one example of a performance measurement system made to evaluate goals from multiple perspectives. The causing balance that the system fosters culminates in goal congruence and encourages employees to constantly work in the best interest of the company (Anthony & Govindarajan, ch. 11, pg. 496). This newspaper will review the fundamentals of BSC, its historical evolution, and the results achieved from its application in several company case studies.

What is the Balanced Scorecard?

The seminal article, 'The Balanced Scorecard - Procedures that Drive Performance' by R. Kaplan & D. Norton, 1992, evidently demonstrates the theory and implementation of BSC. The machine is comprised of both financial and functional measures that derive from a company's tactical aims. Effective measurement is thus the key component for motivating breakthrough advancements in critical areas (Kaplan, Norton 1993). The "Scorecard" in BSC refers to a way of saving and communicating performance and results. "Balanced" refers to balance among options, performance indicators, results and output measures, horizontal actions and vertical accountability. The platform was created to improve results via development of high priority activities and resources that go with the overall company strategy. Hence, it is a mechanism to drive change by measurement of future orientated strategies with intense goals for improvement. Performance options are used to monitor organizational performance on a daily bases. This design in so doing bridges the distance between leadership strategy and employee procedures ( Hall, 2000). Employees are evidently aware of their goals and professionals have the ability to view company performance in several areas simultaneously (Kaplan, Norton, 1992). The four perspectives resolved in this measurement system are

1)Financial (e. g. , profit margins, return on possessions, cash flow).

2)Customer (e. g. , market talk about, client satisfaction index).

3)Internal Business (e. g. , employee retention, routine time reduction).

4)Innovation and Learning (e. g. , percentage of sales from services).

Figure 1, source: Kaplan & Norton, HBR, 1992

The above diagram, Number1, illustrates the principal the different parts of the BSC system that donate to its success. By defining the four perspectives and requiring professionals to select a restricted volume of critical indicators, the BSC clarifies the company's strategy and fosters continuous measures for achievements of the founded goals (Kaplan, Norton, 1993).

Financial Perspective

The financial performance options indicate the company's profitability and progress. Historically this measure has been of great importance in determining an organization's price. While it is an essential aspect of a company's success, relying on financial control systems only can be harmful to the company's long term success. If the only goal of the business is measured by cash flow, quarterly sales expansion, and increased market share, the business may holiday resort to the sacrifice of quality and service in an attempt to cut costs and increase immediate sales. While this plan may succeed short-term, the long-term implications are irrevocably damaging as client satisfaction and future sales plummet (Anthony, Govindarajan, ch. 11, p 494).

Some critics feel firmly that financial performance should not be considered a performance solution at all. Rather, concentration of effort in areas of client satisfaction, quality, routine time lowering, and employee drive will in the end culminate in long-term financial success (Kaplan & Norton, 1992). Matching to Kaplan and Norton, financial measures are in fact beneficial and, when designed effectively, can actually increase the company's total quality management program. For instance, Kaplan and Norton site a chemical substance company research study that implemented a total quality management program comprising considerable measurements of "employee contribution, statistical process control, and key quality signals" (Kaplan & Norton, 1992). This plethora of data conveyed on the professionals reviews was so overwhelming concerning be useless in conditions of assessing and improving functions. One department director, however, created a daily income affirmation with regards to key components of procedures so employees could monitor the effects of the production techniques from the prior day. In doing so, employees were empowered to make changes to constantly increase the development process and quality which, in turn, had a primary bearing on underneath line. In this instance, the daily financial article served as the principal communication between management and the development employees to favorably or negatively strengthen their businesses and decisions from the prior day. (Kaplan, case 9-190-039, Texas Eastman Company, HBR 1992). This example demonstrates an essential component of any measurement system: limitations and regular monitoring of critical operations. With this strategy in place, employees are created aware of the organization's strategy and goals and realize the impact that their activities have on those goals. Furthermore, financial performance actions complete the BSC strategy by forcing managers to explore the relationship between procedures and finance. Advancements in the areas of quality, response time, efficiency and new innovations are just beneficial if indeed they ultimately cause a rise in the bottom line.

Customer Perspective

Financial performance actions, however, aren't the only measure of importance to a company's success and, in reality, can be damaging to the organization's long-term success if overemphasized. For this reason, it is merely one of the four perspectives to be looked at in the BSC system. Another measure of the BSC system is the client Point of view. Many companies focus on "customer satisfaction" however the BSC forces professionals to identify the critical factors related to customer satisfaction and the means to measure or keep an eye on them frequently. Concerns generally fall into the four types of timeliness, quality, service and cost. The key and often overlooked key to this perspective is identifying the needs, needs, and anticipations of the client rather than setting up the goals arbitrarily. It is beneficial to use external options in order to establish company goals with respect to the customer point of view. External methods include customer surveys, report credit cards, and benchmarking current practices with leading opponents' best systems (Kaplan & Norton, 1992). This category of the BSC system is specially important to replicate business sales and long term success from customer devotion and retention. The cause and effect relation between the internal business perspective, customer perspective and the resulting financial point of view is shown in the school text web page 499.

Internal Business Perspective

The inside business perspective is the mechanism that delivers data linking interior business results to financial success and satisfied customers. Organizational targets and customer objectives are achieved through the id of critical business processes. These processes are then supervised or measured frequently to ensure reasonable effects (Balance Scorecard home page). The info extracted from customer methods and financial performance is then utilized to refine internal operations to achieve goals relating to processes including cycle time, quality, worker skills and efficiency. Measures must mirror localized department and workstation levels that are influenced directly by worker actions. In doing so, the employee can take direct ownership with their actions which is fully integrated into the measurement of goals thus increasing motivation. For instance, a responsive information system would allow for the tracking of any late delivery to its source. However, terribly designed actions and the resulting lack of feedback would lead to an inability to trail problem sources with a concomitant insufficient individual responsibility for employees at lower levels. Without properly discovered critical goals and options and an obvious understanding and way of measuring of these goals, employees are unable to contribute and optimise activities that promote the companies overall objective and donate to financial success. (Kaplan & Norton, 1992)

Innovation and Learning Perspective

The final link that completes the BSC string involves the business's potential to evolve to support changes in demand, technological advancements, and continue to be competitive available on the market. As company goals evolve and change in response to internal and external options, the importance of this final section is recognized. Inability to evaluate and react with innovative improvements in businesses and services would quickly result in a company to lose its competitive advantage. While this section might consume a share of the bottom series, the long-term benefits are understood in continual progress and development of the internal processes and customer satisfaction and thus leads to increased overall company value. (Kaplan & Norton, 1992).

The primary benefit for this technique is its ability to bridge the distance between top management strategy and its own application to lessen level operations. When properly investigated and applied the system allows for simple communication between top management and everything departmental levels. Key objectives are discovered and their interrelationship is illuminated. Lower level staff are empowered to make decisions to improve functions. New and better operations are continually found out, implemented, and assessed and invention and action are rewarded at all levels. (Hall, 2000)

Putting the Balanced Scorecard to Work ( Implementing BSC )

Theoretical implementation of the well balanced scorecard involves four basic steps

1)Define strategy

2)Define actions of strategy

3)Integrate measures in to the management system

4)Review procedures and results frequently

(Anthony & Govindarajan, ch 11, p 500)

While all aspects are important to the success of the machine, the fundamental part is the execution of measures. Managers must present new methods to monitor new goals and techniques and constantly reevaluate old options to ascertain their relevance as the system evolves. (Kaplan & Norton, 1993)

The first step involves defining one's strategy. The BSC is not really a one size suits all template, but rather varies widely from one company to another. It is made to fit each company's mission, strategy, technology, and culture. (Kaplan & Norton, 1993). The scorecard is identified by its potential to link various perspectives of an company. This interrelationship is the direct consequence of formulating a concrete company strategy with explicit goals. By determining overall strategy at the corporate level, the scorecard is then put on the lower levels. (Anthony & Govindarajan, p. 501) In this way, all goals and way of measuring systems stay interrelated and aimed toward the ultimate strategy and well identified goals initially proven at the corporate level.

With a well defined strategy and group of critical goals, the system must continue in applying steps to not just to operations and financial functions, but also to the management system itself. For instance, compensation and rewards must be based on measurement system successes rather then entirely on financial performance. (Anthony & Govindarajan, p. 500)

Unlike a great many other systems, BSC amounts critical factors in both financial and operational actions allowing companies to share the results of activities already used while simultaneously measuring current routines in customer satisfaction, internal procedures, and the organization's advancement and improvement activities which are the indications for future financial performance. (Kaplan & Norton, 1992) Therefore the review of these steps and results on a normal and frequent basis is the ultimate step in implementation of BSC. It's the responsibility of senior management to constantly evaluate the actions and use changes in the strategy and adjust measures consequently to be congruent with revised strategies and goals. In doing this, management is constantly aware of whether the strategy has been implemented correctly and its own overall success; the value of these actions is conveyed to all levels of the business; and strategy are constantly growing and measurements are increasing to better indicate those final results. (Anthony & Govindarajan, p. 501)

Practical implementation of BSC requires a company to build a unique scorecard. These steps are specified in this article "Bridging the length" by Mary Jo Hall. The look will very depending on where the organization is at terms of tactical planning and execution, but the process of developing a BSC can be split into a series of stages that apply to all. When completed, the BSC serves as a mechanism that pushes cause and effect analysis and integrates strategy with daily work. The group of six phases include: (Hall, 2000)

1)Mobilizing the leadership

2)Developing the architecture

3)Linking and aligning the parts

4)Mapping the initiatives

5)Rolling out and cascading throughout the organization

6)Continuing to target and enhance the strategy

( source, Hall, 2000, p. 26)

In the first level older leadership must be experienced and committed to the BSC structure. A thorough knowledge of the BSC system is needed to put into action the cascading chain of order that it requires. This is followed by the strategic structures (level 2) or expanding the perspectives that are appropriate for the organization. Traditionally, the four perspectives include financial, customers, inside business, and learning and growth, but these may be improved to fit the company focus. The value of this structures is the fact that it forces the business to see its processes and service through the sight of its customers. Leadership must determine a "Value Proposition" described by the equation

Value = Product and Service Attributes + Image + Relationships

Customer satisfaction procedures include time (rapid response), quality (defect free products and services), and price (not only at purchase but within the life-time). (Kaplan & Norton, 1996). Leadership must therefore build a "value chain" that links internal procedures with customer recognized value including the development of new work, development, and delivery. Targets may then be determined for every single BSC perspective. This is completed via brainstorming for each and every point of view and then discovering the most significant objectives.

In stage 3 the perspectives are prearranged horizontally with financial on top, accompanied by customer, internal processes, and learning and growth on underneath. (see Figure 2, Strategic


Figure 2, Strategic Map, source: Hall, 2000, p 26

An interrelationship digraph is designed for each objective. This often times reveals a critical path that highlights the " high impact targets" (those steps that produce the greatest come back in the shortest timeframe). Measures are then assigned for each and every objective including defining the machine of measure, and how and when it is collected.

With clear objectives and measures driven, stage 4 involves mapping initiatives. These action jobs are used to evaluate the business strategy once the initiatives are mapped the tactical map is basically complete and can be executed.

Stage 5 and 6 are the execution of the strategic plan via creating links between resources and initiatives. This calls for establishment of communication, implementation techniques, and reviews mechanisms. Followed by the continual improvement via responses loops to constantly evaluate and record the BSC process. (Hall, 2000).

Case Studies

The remainder of this newspaper will review BSC applications in several organizations to show the variants and changes of the BSC system as it pertains to different company models: traditional for income, Department of Security, government, and healthcare industry. As stated earlier, creation of the well balanced scorecard for each and every company is custom-made to reflect the company's strategy and targets. BSC is utilized by more than 50% of North American companies countrywide attesting to its level of popularity and efficiency as a management system. (Turner, 2000).

Rockwater Case

Rockwater, a wholly possessed subsidiary of Halliburton, a worldwide engineering and development company, is a worldwide leader in underwater executive and structure. Increased competition required the CEO to consider ways to help make the company more competitive. The strategy engaged developing long-term human relationships with large suppliers predicated on value and protection alternatively than low-price competition, while preserving a second-tier service for customers that chose suppliers exclusively on the basis of price. The following diagram (Figure 3) shows how Rockwater's eyesight was translated to a company strategy and then broken down in to the critical strategic objectives from the four BSC perspectives.

Figure 3, Rockwater's Strategic Aims, source: Kaplan & Norton, HBR, p. 135, 1993

The vision was determined by the older management team. Then the strategy originated to use the vision. They were, in turn progressed into strategic objectives. The next phase, of course, was translating those aims into tangible goals and actions. The Balanced Scorecard's set of four performance options was thus utilized to facilitate that website link. See Rockwater's BSC, Body 4 below.

Figure 4, Rockwater's BSC, source: Kaplan & Norton, HBR, p. 135, 1993

The financial steps encompassed both short-term goals of: Come back on Capital Employed, CASHFLOW, and Project Profitability addressed historical uncertainty caused by unforeseen variations in performance.

Customer satisfaction perspective was split into Tier I and Tier II customers. Tier I customers were asked to supply regular service and performance ratings, providing the company with competitive market responses. Market show by key accounts provided objective actions with their success in this field. (Kaplan & Norton, 1993).

Internal operations were determined for every single project life routine. Emphasis was put on the aspects that the company found most important to their eyesight including 1) time spent with clients. This emphasis communicated the company's belief in the value of building long-term relationships and gratifying customers 2) emphasis was also located on safety as inner studies exposed that indirect costs from accidents could be 5 - 50 times the immediate costs.

Innovation and Advancements came from product and service advancement and improved interior work processes. Measurement for these systems was tracked by percent income from new services and by a continuos improvement index that followed several key operational measures such as safety and rework. This perspective also included staff attitude review and employee suggestions that your company experienced empowered and encouraged their workers.

In this example, the BSC helped Rockwater in obtaining a process view of procedures, inspiration of employees, better safeness protocols and long-term value oriented partnerships with customers which culminated in their original mission statement: to be number 1 in the industry. (Kaplan & Norton, 1993)

Department of Defense Case

The Division of Security (DoD) in addition has adapted the BSC as a means to evaluate performance for electric business and electronic business (EB / EC). Number 5 shows the use of BSC that has been customized to a period continuum model.

Figure 5, Use of the EB/EC Continuum

With this adjustment, organizations with DoD can develop from Stage 1 use of EB / EC to the more complex use of electric technology in Period 3. Each phase outlines the goals and performance actions founded for the section and is designed such that the team can graduate seamlessly to another phase. (Defense Reform, Electronic Business Seminar, April, 2000)

Traditionally, federal companies focused on inner or process performance as dependant on factors including: amount of programs managed by the company, number of full time equivalents allotted, and the size of the budget. Along with the BSC system, the framework allows the way of measuring of the organization's short-term and long-term ability to meet goals through the id and assessment of performance drivers and effects. (Defense Reform, Electronic Business Conference, April, 2000).

The following diagram (Physique 6) illustrates the well-balanced scorecard perspectives used by the DoD.

Figure 6, Balance Scorecard Perspectives

Again, the BSC system has been improved from the initial four perspectives to add every one of the relevant perspectives necessary to achieve the desired goal by managing the results of interior processes with exterior stakeholder measures. (Defense Reform, Electronic Commerce Convention, April, 2000).

Due to the immense number of procedures and organizations throughout the DoD, dimension solutions using the BSC system must be applied to small segments toward individual job goals and processes. This version also veers from the initial design of BSC for the reason that top management does not dictate one singular strategy and list of goals, but rather encourages specific assignments to develop methods appropriate to each projects goals and operations prior to execution, thus using the BSC platform in manageable applications.

Government use of BSC case(s)

Government agencies have also found the BSC system useful. The city of Charlotte, N. C. altered and put in place the BSC system in an attempt to promote eye-sight and technique for the near future. City mangers have found the system useful as it provides "substantial focus, inspiration, and accountability in administration. . . " (Syfert, Elliott, 1998)

Another government variant of BSC sometimes appears in the article by Dale Quinlivan, Rescaling the Balanced Scorecard for MUNICIPALITY. This article suggest that the original construction is not satisfactory for 'not-for-profit' business and that the Australian Business Brilliance Platform categories would serve as appropriate perspective categories.

According to, The Balanced Scorecard Institute in its world wide web page, "in administration settings, outcomes derive from mission success rather than benefit", and Kaplan and Norton go further to say: "Success for federal and not-for-profit organizations should be measured by that they meet the needs of their constituencies. Tangible targets must be identified for customers and constituencies. Financial factors can play an allowing or constraining role, but will seldom be the primary target. " (Kaplan and Norton, 1996)

This was also observed in the BSC program in Charlotte, N. C. where the financial perspective was changed with the client perspective. The Kaplan model assumes a connection between customer service and financial goals, but this hyperlink does not actually exist when the assistance are provided by public money. For this reason, Quinlivan implies the perspectives be altered or custom-made to meet up with the not-for-profit criteria. Healthcare organizations for example have designed the four perspectives of

1)Patient - value added - patient perspective

2)Worker - value added - inside perspective

3)Business - value added - learning perspective

4)Business - value added - financial perspective

For each perspective, the eye-sight of that which was to be achieved was translated into changes in habit, performance and conception. This set up, the BSC for the perspective and a list of actions and steps to accomplish them could be devised. (Quinlivan, 2000)

Similarly, the Australian Business Superiority construction categories might better serve a federal model. This model shows categories that have been proven to make a difference dimensions of organizations ability to deliver effective service. ( Quinlivan, 2000, p39). The Business Results category provides the framework to link cause and result to business results. Because federal government organizations deliver an unusually large numbers of services, the perspectives chosen for the BSC must concentrate on major strategies required to maximize service success. For instance, Charlotte, N. C. discovered 5 key areas in their proper plan: community safe practices, city-within-a-city, transportation, economical development, and restructuring administration. Each area applied its BSC towards a group of 19 objectives set up by the town. With these modest changes, the BSC has shown to be an effective management system for administration applications in Charlotte, N. C. , and the health attention industry. (Quinlivan, 2000, p. 40)

Health Care and attention Industry (circumstance)

As briefly pointed out, public healthcare service industry is just one more organization that requires some modification of the BSC system.

Performance management in a multi-agency healthcare setting up would be probably good for two reasons

1)General population services would reap the benefits of improvement in areas including economy, efficiency, and service delivery.

2)To bolster accountability and account for the resources used and effects that are achieved.

(source: International Journal of Medical Marketing, p 175, 2003)

The BSC system was carried out within the Bradford Health Action Area at an initial care trust center. This organization implemented the BSC system using the four steps suggested in the next diagram (Amount 7) to accomplish its main aim and eye-sight.

Figure 7, How the BSC seeks to provide strategic benefits, source: International Journal of Medical Marketing, p 181, vol. 3, 3)

The following diagram (Shape 8) below, demonstrates the Balanced Scorecard designed for the healthcare center and how the components relate to the mission affirmation which states, " is the fact that via collaboration working, it'll provide and fee services and improvement programs that will certainly reduce health inequalities and increase benchmarks of health for its local human population. . . " (International Journal of Medical Marketing, p 184, 2003)

Figure 8, Balanced Scorecard

This system utilizes four perspectives as outlines by Kaplan and Norton, however, the financial perspective is replaced by a cost perspective which is designed to boost the allocated budget by attaining goals set forth in the rest of the three areas. Software of the BSC system proved to be attainable and promising in the evaluation of its application to the public healthcare system.


The BSC is a thorough view of an entire organizational system that allows management to check out the past, present, and future financial methods. The reason and effect of human relationships and the increased communication that are fostered creates a goal congruent atmosphere that includes contribution from lower level employees. The methods allow for continuous reevaluation and improvement by upper management with a cascading string of command word that filters back to the operations on a regular basis. These options and processes dwelling address the inadequacies of traditional financial based systems and when implemented correctly, provide and dynamic framework for long-term organizational success.

Furthermore, the BSC system is dynamic enough to be adapted to not-for-profit organizations and government systems with similar results.


Budgetary planning is the procedure of preparing complete, short-term plans for all the functions, departments and activities of the company. It is important that the short-term strategies and objectives that make up the budget are related to the long-term plan and targets of the company. The budget may be used by preparing a standard cover the organisation which is then divided into more descriptive budgets for the several parts of the organisation [the top-down way] or by devising finances for the many parts of the company and then delivering them together to build up the overall budget [the lower part up methodology].

Extrapolations, Forecasts and Plans

In speaking about budgetary planning it is important to tell apart between extrapolations, forecasts and ideas.

An extrapolation is the continuing projection of a preexisting trend.

A forecast depends by using an extrapolation, but is modified to take accounts of any known factors that will affect the pattern.

A plan includes some intervention by the organisation in order to change events so as to make it more likely that the organisation's goals will be achieved.


It is essential that the strategies of each section are related to the other person and are included together to produce a coherent complete e. g. it is not a use planning for sales of 150, 000 systems if productive capacity is fixed to 120, 000 items. Note the importance in this framework of restricting factors and the main budget factor.

The main budget factor is the factor which operates as an over-riding limitation on the activities of the organisation. It could be sales, successful capacity, financing, shortages of materials, labour or energy. The main budget factor can transform over time. Figuring out restricting factors is a key component in the co-ordination facet of budgetary control.

The Expert Budget

This is the overall plan for the business's financial activities, to which, therefore, its

sectional plans must be related. For commercial organisations it will be normally in the form of a planned Income Assertion, Balance Sheet and CASHFLOW Statement.

The grasp budget is the main element element in budget co-ordination as it summarises the rest of the plans and discloses any inconsistencies amidst them.


As far as it can be, real Activity should be in line with the original plan and steps should be taken to restore Activity to the program whenever there are deviations from it [although on occasions it'll be necessary to adjust the program to meet changing circumstances].

Control is exercised in organisations by the continual reviews of information to assist in such corrective action.

Variations from plan are exposed by measuring genuine performances and comparing it to organized performance. These variants [known as variances] are analysed in greater detail and reported to professionals for action. NB taking action on variances is the main element area of the control mechanism. It's important therefore, that information [in the proper execution of budgetary reports] is well-timed, relevant and comprehensible.

We shall discuss the control aspects of budgeting in more detail in the next session.

We can summarize the purposes of budgeting as follows

It has been stated that the operation of the budgetary control system within an company can be valuable in a number of different respects. Included in these are:-


The budget is a good way of aiming in detail the prepared activities of the company for the approaching period and relating those to the objectives of the company.

Resource Allocation

The budget is definitely an instrument by which a good and productive allocation of resources may be performed. Without a coherent budget; resources may be allocated indiscriminately with consequent detrimental effects on the organisation as a whole.


A carefully well prepared budget should help to co-ordinate the organisation's activities and resources. For instance, production must be co-ordinated with sales; buys of materials and labour with creation; and stocks of materials with production requirements, storage facilities and the cash available.


The budget is vital in comparing real performance to organized performance and allowing corrective action to be studied when deviations happen.


Budgets own an important part that can be played in the communication of aims, targets and obligations throughout the organisation. Completed properly, this may have extensive benefits in promoting co-operation by any means levels.


By establishing challenging but natural targets well designed budgets can play a substantial part in motivating professionals. The targets must be clear and possible, and the supervisor should take part in setting his or her own budget.

Performance Evaluation

The budget offers senior management a means of judging the performance of their groups. It must be kept in mind, however, that adherence to the budget together cannot measure all areas of a manager's performance.

Budget Planning

In order to handle budgetary control, it's important to formulate a fully co-ordinated specific plan in both financial and quantitative terms for a forthcoming period. The length of the time is usually one year. The plan must be in lines with the long term development strategy of the organisation, although in the shorter term of any budget calendar year, conditions may prevail that could dilute this target. For example a depressed economy could lead to a short-term departure from the long term ideas. Therefore, before formulating the budgets, the insurance policy to be pursued during the forthcoming trading period needs to be founded.

Once finances are operating throughout an company, it's important that feedback is manufactured open to the managers responsible for its operation. This is done by means of monthly budget reviews. These studies contain comparisons between the budget and the genuine position and throw up differences which can be known technically as variances.

There are two major aspects to budgetary control; planning and control. [We will give attention to Control in the next treatment].

Planning - The budget is a corporate plan that models out in detail the financial and/or quantitative goals of every section and Activity within the organisation, and reconciles them within an overall plan. The plan must be internally dependable.

In attracting up the plan one of the first activities needed is to recognize the Limiting Factor. As the name signifies this is actually the factor that may limit the size and scope of the business's operations. In order to produce an internally regular plan, the budget should be built around and reconciled to the restricting factor.

Before proceeding further in to the part of planning, a distinction needs to be attracted between a budget and a forecast. One of the prime reasons for formulating costs is to attempt to attain future aims through a co-ordinated comprehensive plan. In other words budgets are used with a view to influencing the course of future events. On the other hand, a forecast is merely a prediction of future incidents assuming that present tendencies will continue, or that they will be changed by foreseeable factors.

There are several benefits that can accrue from careful precise planning.

i. The environment in which the organisation functions is watched, and plans prepared accordingly.

ii. Permanent objectives are maintained firmly in view, and steps taken up to ensure that the present budget [as way as possible] is stored in line with them.

iii. Under the heavy pressure of daily operations, management doesn't lose vision of future requirements.

iv. Management makes a conscious effort to consider, and/or to create new opportunities, and also to exploit them.

v. An abundance of information is manufactured available to management, on which financial decisions can be made, and the effects of alternative lessons of action can be addressed

vi. A short term profit plan is well prepared in detail which is satisfactory to management.

vii. Management can ascertain that sufficient resources are available to handle the plan, and that so far as possible maximum use is made of them.

Budget Preparation

The Budget Period - This is the time period for which a Budget is employed. The time varies depending on the type of Budget.

Examples: (a) Trading Budget [say] 12 months.

a. Capital Expenditure Budget [say] 5 years.

a. Research and Development Budget [say] 5 years minimum amount.

It should be borne in mind, that when a Budget is ideal for more than one year, that the chances of it being customized are extremely high.

Although the overall Budget may be for a year or more, it will always be broken down into shorter intervals. Budget periods in excess of one year would be divided into annual sums, and the total annual quantities would be further sub-divided into regular monthly accounting periods. Costs which are compiled throughout one year, would likewise be divided into accounting durations.

Having attained the amounts for every single period, the real expenditure incurred throughout a period can be weighed against the correct Budget and Variances extracted.

Introduction of budgeting (definition, process, differing roles)

Budgeting is the main element to good management. That is true for folks, small family-owned companies, new high-technology companies, large businesses, government organizations, and nonprofit organisations. Professionals and others in positions of responsibility must plan on a daily, each week, monthly or gross annual basis if they are to operate effectively. Because of the value of money to businesses, and because of the fact that it is the common denominator in all departments, the vast majority of enterprises produce costs as an aid to planning.


Budgeting is a massive and very important managerial accounting area. It is a coordinated financial plan reflecting the agreed policy and comprehensive intentions associated with an enterprise for another period. An excellent definition of budget is distributed by CIMA (Chartered Institute of Management Accountants).

A budget is an idea indicated in money. It is prepared and approved before the budget period and may show income, costs and the administrative centre to be employed. May be used showing incremental effects on former budgeted or real results, or may be published by zero-based budgeting. (Leslie Chadwick. Management Accounting. 1998. Page 103)

A budget is a detailed plan which pieces out, in money conditions, the ideas for income and costs in respect of another period of time. It is prepared in advance of that time period and is based on the agreed goals for that time frame, alongside the strategy planned to accomplish those goals.

Budgetary Process

The budgetary process has to be given effectively in terms of first planning, final agreement and subsequent monitoring of implementation. The principal stages of budgetary process are

1. communicate the details of targets and technique to those in charge of preparation of budgets;

2. communicate the facts of budget preparation procedures to people responsible for planning of finances;

3. determine the restricting factor which restricts overall budget overall flexibility and forms the emphasis of the budget cascade;

4. prepare an initial set of budgets;

5. negotiate costs with line managers;

6. co-ordinate and review finances;

7. accept finances in last form;

8. perform ongoing overview of budgets because they are implemented.

(Pauline Weetman. Financial & Management Accounting. 1999)

The manager can proceed through these basic steps to prepare the budget. Budgeting is a continuing process, which requires adaptation of existing budgets where a need for change is mentioned, and the concern of performance against previous budgets when the next circular of budget prep begins.

Budget's variety of Roles

Budgeting can be used in organisations of all types to assist in the development and co-ordination of programs, to connect those strategies to the individuals who are responsible for taking them out, to secure co-operation of professionals at all levels as a typical against which genuine results can be likened. You will find budget's varieties of roles: (forecasting, planning, communication, co-ordination, drive, performance measurement and authorisation).


The reason for budgeting is to provide the needs of management according of the judgements and decisions. Making forecasting about future needs and innovations is very important to companies. Many future events almost defy exact prediction. An accurate forecasting can help organisations define good budget aims. Due to intentional and unintentional bias, it is sometimes difficult to anticipate.


Budgeting is arranging a future period and, as applied to the accounting areas of an organisation, requires management to systematically analyze what is expected in its financial environment. This check out the future invariably compels management to determine goals and goals for the future and, it can help management identify major problems that may develop later if corrective action is not taken.


Budgeting encompasses the complete organisation; hence, it requires the participation of all levels of management. The procedure of compiling, critiquing, and revising budget data requires professionals to talk to each other and with subordinates and superiors. It really is an important, formal avenue of communication between top and lower levels of management about the organisation's long-term targets and the practical problems of implementing those objectives.


Budgeting is the program of action for complete company and must therefore indicate the coordinated initiatives of all components of the company. Co-ordination can be seen as a balancing activity, which seeks to allocate priorities by predetermined agreement and also to unite lots of individual activities into a whole. Co-ordination is necessary to avoid sub-optimality.


Involving staff in the budget process, together with good clear marketing communications and budget education, should improve staff motivation. The environment or imposing of unrealistic goals, which results from a lack of consultation, can have dramatic demotivating effects. Targets need to be negotiated, natural and achievable. An achievable budgets lead to good performance, but it is determined by personality, responses and approval of budget.

Performance measurement

Effective control requires a basis for assessing performance. The original bases for calculating performance are historical, industry and budgeted data. Budgeted data is a more reasonable basis than the first two bases, because the benchmarks are relevant and current. Checking genuine and budgeted data produces variances that are meaningful methods of performance.


A sound budgeting system requires clear lines of authorisation. From an audit perspective, authorisation is also a very important key word. It requires to be delegated for budget preparation, cashflow management, materials management, the taking of action, e. g. to solution a detrimental situation revealed in a budget and genuine comparative statement.

Strengths and Weaknesses of budgeting in modern times

All professionals do some kind of planning or budgeting. Because planning and budgeting are especially important in uncertain conditions. The budgetary process plays a part in effective management in some areas, such as control, communication and co-ordination, and performance evaluation. In the present day times, budgeting is also good for organisations in many aspects.


There are three major benefits of budgeting

1. budgeting compels managers to think ahead by formalizing their responsibilities for planning.

2. budgeting provides certain expectations that are the best construction for judging subsequent performance.

3. budgeting products professionals in coordinating their attempts, so the targets of the company as a whole match the aims of its parts.

(Charles T. Horngren, Gary L. Sundem & William O. Stratton. Management Accounting. 1996)

Formalization of Planning

Budgeting forces managers to believe ahead-to anticipate and prepare for changing conditions. The budgeting process makes planning an explicit management responsibility. To prepare a budget, a manager should place goals and objectives, and establish guidelines to aid their achievements. The objectives are the destination details, and budgets will be the street maps guiding us to those spots. Without goals and objectives, company functions lack way; problems are not foreseen; and results are difficult to interpret afterward.

Expectations (framework for judging performance)

Budgeted goals and performance are generally an improved basis for judging genuine results than is past performance. The major drawback of using historical results for judging current performance is the fact inefficiencies may be concealed in the past performance. Intervening changes in monetary conditions, technology, maneuvers by competition, personnel, etc also limit the usefulness of comparisons with days gone by.

Communication and Coordination

Another good thing about budgeting is that personnel are informed of what's expected of these. A good budget process communicates both from the very best down and from the bottom up. Top management makes clear the goals in its budgetary to lower-level managers also to all employees. Employees and lower-level professionals inform higher-level professionals the way they achieve the goals.

Budgets also help manager coordinate objectives. For example, a budget causes purchasing staff to integrate their programs, while production professionals can anticipate and arrange for the employees and physical facilities they'll require. In the same way, financial officers purchase requirements, and predict the company's dependence on cash. Thus the budgetary process causes professionals to visualise the relationship with their department's activities to other departments also to the company as a whole.


Like many other tools open to managers, budgeting offers the potential for vast benefits but also offers potential pitfalls and problem. Now, increasingly more organisations recognise that the budgeting system could very well be the greatest barrier to change. Many companies have deserted budgeting for some reason, like Ikea, SKF, Boots, and so on.

Preparation Time

Preparing a budget for a firm can be considered a massive task, necessitating hundreds or hundreds of hours of valuable management time. Careful coordination and planning are required to keep budget planning from becoming too onerous for managers or from interfering with the other obligations. Each supervisor requires minimizing time. The budget calendar should be carefully prepared and easy-to-use forms should be provided.


In some conditions the prediction capacity of management is very weakened. The greater limited management's ability to help make the accurate forecasts and predictions that are essential for the budget, a lot more limited the effectiveness of a single budget becomes. Swiftly changing monetary conditions also make budgeting difficult. However, managers who research the budgetary impact of possible changes can learn what factors to monitor most closely and to develop contingency plans that can be carried out if needed.

Budgetary Slack

Budgetary slack occurs when professionals intentionally demand more funds in the budget for their departments than they have to support the expected level of businesses. If the department constantly produces large favourable variances, this may be a symptom of slack built into the budget. The desire by professionals to pad their finances may signify poor relationships between upper and lower management, or poor administration of the budget.

(Wayne J. Morse, James R. Davis & Al L. Hartgraves. Management Accounting. 1991)

In modern times, the thinking about budgeting is now. "Bane of Corporate America", "Tool of repression", "An needless evil", senior professionals share these descriptions on the system of budgeting in their companies. Many tools of budgeting are ever more unsuited to modern business. Finances reinforce command-and-control management and undermine tries at organisational change. The total annual cycle is unsuitable for companies facing speedily changing markets. It is a true that professionals of organisation need to develop the budgeting system and make it suited to modern business.

Explanation and Evaluation of the alternatives

Whilst there are undoubted advantages in properly organized traditional budgeting systems, all too often budgeting tends to reinforce the position quo and budgets are often only extrapolations of days gone by. Traditional budgets usually focus on last year's numbers as foundation and focus money. Alternatives of traditional finances to current ways are not considered systematically and activities have solo level. So that they can beat these real problems, alternate approaches to budgeting have been developed, two of which Zero-base Budgeting and Programme Planning and Budgeting System, are referred to below.

Zero-based Budgeting (ZBB)

ZBB is a cost-benefit approach whereby it is assumed that cost allowance for an item is zero, and can remain so until the manager accountable justifies the living of the cost item and the huge benefits the costs brings. It is formally defined by the CIMA thus

A approach to budgeting whereby all activities are re-evaluated each time a budget is set. Discrete levels of each activity are valued and a combo chosen to match the cash available. (T Lucey. Management Accounting. 1996. Site122)

Compared with traditional finances, ZBB starts with zero or minimal baseline and focuses goals and aims. It is considered as a systematic study of alternative ways to achieve goals and objectives. There are substitute levels of funding indicated. ZBB was devised as a reaction to the original incremental approach to budgeting. It really is worried about the evaluation of the expenses and great things about alternatives and, implicit in the strategy, is the concept of opportunity cost.

ZBB is a method of combating budgetary slack and can encourage managers to examine choice ways of obtaining objectives. It really is hard to fault in its explicit linking of allocations of scarce budgetary resources to achievement of targets. Furthermore, ZBB's rationale is whatever is applied to proposed costs in new areas, which should support or encourage systematic use of appraisal techniques like net present value. ZBB may therefore be valuable where organisations are confronted with particularly volatile conditions.

The basis steps in ZBB are

1. development of decision deals consisting of departmental or company activities;

2. evaluation of every decision bundle;

3. rank of decision plans;

4. compilation of appropriate decision packages in to the budget up to the limit of available resources;

5. monitoring, control, and follow-up.

(Wayne J. Morse, James R. Davis & Al L. Hartgraves. Management Accounting. 1991)

The approach is particularly useful for the output-driven method of budgeting since it pushes questions to be asked about the programs designed and the cost-benefit areas of the plans. Over the negative side, this can be a time-consuming activity and could very well be most usefully applied on a selective basis where the questioning procedure is most useful. Some activities of organisation bring an factor of discretion which is rewarding reappraising them on events. Others form an important core, so that it might be less appropriate to have a ZBB methodology.

Programme Planning and Budgeting Systems (PPBS)

PPBS can be an approach that seeks to split up the insurance plan planning aspects of budgeting from the short-term financial planning process. From the overall objectives, the organisation moves on to recognize the programmes that will achieve those goals. The expenses and advantages of each program are then identified so that the programmes may get comparative priorities. Subjective judgement must select the most suitable programmes for execution and the resources required are then allocated to those programmes.

PPBS differs from traditional budgeting. First, it projects further than just one year ahead. Second, it transcends departments. It really is about how precisely resources are going to be allocated to achieve the many objectives of the company. Once the objectives have been set up, programmes are discovered to meet those goals and the costs/benefits of choice programmes are assessed.

PPBS is dependant on three control ideas: (1) It is a formal planning system, (2) it uses a program budget, and (3) it emphasises cost-benefit research. The basic steps in PPBS are

1. a careful specs and analysis of program objectives for every single area or agency;

2. the process analysis, insofar as it can be, the output of an application in terms of its targets;

3. gauge the total costs of this program for several periods in to the future;

4. analyse alternatives and seek those that have the best benefits as related to the stated objectives.

(Wayne J. Morse, James R. Davis & Al L. Hartgraves. Management Accounting. 1991)

PPBS emphasises control through responsibility accounting. The key to successful PPBS is forcing organizations to cool off using their current operations and to evaluate their overall aims. Through such evaluations each agency mind accepts the duty of current and prepared activities and must take into account the results. Alas, PPBS is not well received lately because of implementation difficulties. All managers mixed up in process must know about it, and its own execution is very time consuming.

Beyond Budgeting

"Many companies are devising alternatives to traditional command-and-control budgeting systems, " say Jeremy Trust and Robin Fraser. In the end of the 20th century, they argued the particular one of the main barriers to businesses competing better in the information get older is the budgeting system. The various tools of budgeting are unsuited to modern business. Budgeting is also unsuitable for companies facing swiftly changing markets. Handelsbanken forgotten budgeting over twenty years before and has since maintained its position as Scandinavia's most profitable loan company. Now, increasingly more companies get away from budgeting, such as Volvo, IKEA, SKF, Borealis, KF, Schlumberger and Boots. Each one of these firms are actually managing successfully without budgets.

The pioneering companies developed system. Their experience can tell us a great deal about how to replace budgeting. ('Tool of repression and a barrier to change'. Financial Times. 18th May 1999. )

1. Set focuses on to increase long-term value and overcome the competition, not the budget;

2. Devolve strategy to the front collection and make it a continuous process, not a top-down twelve-monthly event;

3. Co-ordinate by handling cause-and-effect human relationships across sections and responsibility centres, not by using departmental finances;

4. Start using a few key leading and lagging signals to evaluate performance, not comprehensive historical reports

5. Give professionals the freedom to do something.

Early in 1998 CAM-I European countries initiated a new research project known as the Beyond Budgeting Circular Desk (BBRT). It is rolling out into an exciting and leading-edge overview of how to control large businesses in the info get older. The BBRT programme will be evaluating in much more depth the components of the steering mechanisms to be used instead of budgeting, and expanding guidelines for applying them.

The response of companies should be - in line with the CAM-I BBRT - to develop a new leadership eyesight and governance model in order to establish a fresh performance management environment. The BBRT calls this a devolutionary platform: (http://www. juergendaum. com)

1. Develop a performance climate based on competitive success;

2. Motivate people by offering them issue, responsibility, clear prices as rules and distributed rewards;

3. Devolve performance responsibility to operating professionals; give them the freedom to choose;

4. Empower operational managers giving them the ability to act;

5. Organize around customer focused groups that are accountable for profitable customer outcomes;

6. Support transparent and wide open information systems that provide "one truth" throughout the business.

While the CAM-I research programme is only doing its first phase it has already been noticeable that companies can gain large benefits from controlling without finances. But this implies not only abandoning budgets but also reinforcing these changes by adopting the most likely management structure and style and this depends upon business needs and organisational complexity.


(1) Alan Upchurch. (1998). Management Accounting. Pitman Posting.

(2) Charles T. Horngren Gary L. Sundem & William O. Stratton. (1996: 10th Ed. ). Launch to Management Accounting. Prentice-Hall.

(3) Graham Mott. (1999: 5th Ed. ). Accounting for Non-Accountants. London: Kogan Web page.

(4) Iain Fleming & Sam Mckinstry. (1998: 2nd Ed. ). Accounting for Business Management. London: International Thomson Business Press.

(5) Jeremy Trust & Robin Fraser. 'Beyond Budgeting - creating a new management model for the information time'. Management Accounting. 77(1): 16-21.

(6) John Fanning. 'Budgeting in the 21st Century'. Management Accounting. 77(10): 24-25.

(7) Larry N. Killough & Wayne E. Leininger. (1987: 2nd Ed. ). Cost Accounting. WEST.

(8) Leslie Chadwick. (1998: 2nd Ed. ). Management Accounting. London: International Thomson Business Press.

(9) Pauline Weetman. (1999: 2nd Ed. ). Financial & Management Accounting. Prentice Hall.

(10) Roger W. Mills & John Robertson. (2000: 4th Ed. ). Fundamentals of Managerial Accounting and Fund. Mars Business Affiliates Ltd.

(11) T Lucey. (1996: 4th Ed. ). Management Accounting. London: DP Publications

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(13) http://jan. ucc. nau. edu/~ha355-c/ha355/class/statement/budget/

(14) http://www. fao. org/docrep/W4343E/w4343e05. htm#TopOfPage


The main responsibility of administrator is planning for the near future by deciding what should be achieved and how it will be achieved. Budget is such a formalized system of planning, forecasting, monitoring and controlling the use of resources which help the managers to attain organization's aims both in public areas sector and private sector. Finances fulfill lots of roles in the management of organizations and various roles may cause some conflicts. Here, we will identify the principal roles of finances and have a briefly comment on the compatibility of these differing assignments.

Principal Roles

According to Emmanuel et al. (1990), there are five main roles for budgets: a system of authorization; a means of forecasting and planning; a route of communication and coordination; a motivational device; a way of performance analysis and control, as well by providing a basis for decision making.

The first main role of costs is authorization this means within the final approved budget management could use the resources on specific activities and without keep asking for permission to spend. However, the amount of authorization is a major issue to the most notable management. Inappropriate authorization may harm to the business. Overspending may cause the closure of the business enterprise unit.

The second role is forecasting and planning. Forecasting predicts the function which the corporation has little if any control on it while planning is associated with forecasting and other information of the business try to shape the near future by alerting those factors that controllable in the light of available forecast. For instance, a business will forecast sales and development, then use cost card data to estimate labor. Planning will concentrate on important sources of the organization such as money, management, manpower, materials, markets etc. Because there are too much uncertain factors of forecasting, you should aware that forecasting sometime deliberately distorted. For example, the sales division may overstate the sales volume when forecasting for the coming period. The reason they perform by doing so isn't only because this may make the section looks good but also help them to get more resources. They may say, ' we are going to sale more amounts, we need more staffs. ' Such action may really influence the precision of the planning.

The third role is a route of communication and coordination. Since finances need a lot of information from different departments, no one could make all the finances singly. From the good channel for people to communicate. Along the way of planning, the representatives from each department are comprised to get ready the budget. The info which accumulated from each department will be mentioned and clarified. Coordination within different departments can not only help the business enterprise ensure that the way to obtain each of its source is appropriated and balanced but also help to ensure that the d

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