Introduction
The preparation process for the annual budget involves a great deal of energy, time, and expense. Hence, it is important that a company must be able to follow accurately all the methods of preparing an annual budget. Budgeting is defined as a form of financial planning and such budget is utilised to impose the strategy of a company. Consequently, a budget is composed of different functional budgets such as production, personnel, sales, and investment and material budgets. The combination of each functional budget made up the capital budget, master budget and even the cash flow budget which consists of income and balance sheets. The capital budget is used to show the future capital expenditures of an organisation while the cash flow budget is a plan of how much finances will be needed and used. On the other hand an income budget is a plan to show the income and costs while the balance sheet budget illustrates the forecasted liabilities, assets and equity of the firm.
Aside from determining the financial needs, other purpose of budgeting is to motivate employees and to establish figures and rations for the purpose of comparison. Other essential reasons for having a budget plan is to effectively allocate resources, coordination, rendering tasks, dimensioning of the activities of the company, efficient communication and a foundation for incentive systems.
In budgeting, the focus is not only to prepare the budget, but more importantly to have a follow-up operation for budgeting and to act according to known data. In addition, budgets are also known as a financial expression of a company’s plan for a period of time. It tells where and how the organization will spend money and where the money will come from to pay these expenses. Budgets also set limits. Imagine how chaotic an industry would be if everyone was allowed to spend as much as they wished on whatever they wanted. Besides setting limits, budgets also enables the assurance that the most important needs of a company are met first and less important needs are deferred until there are sufficient funds in which to pay for them.
There are many approaches of budget preparation that a certain organisation can use. One of these methods is the activity-based costing (ABC). Activity-based costing approach represents one capital budgeting technique for analysing an investment opportunities. The purpose of activity-based costing (ABC) systems is to focus on the causes behind indirect costs. It is primarily a system of allocation. Activities rather than traditional departments are emphasized in order to isolate the cost drivers, which are the factors most likely to cause or contribute to the incurrence of costs. ABC systems are designed to be complementary with the technological changes in the business world due to enhanced global competition (Lewis, 1993).
This method allows the management to vary the underlying activity drivers in business operations and processes so as to identify the impact of different levels in the process itself. It is noted that managers have the potential to learn much more about the risks of investment when they are able to determine the uncertainties in the business processes, rather than the traditional overview approach. The traditional approach has typically focused upon highly aggregated revenue and cost items that are merely the result of business processes.
Hence, this paper describes and discusses the budgetary process employed in a Bahrain Telecommunications Company (BATELCO). The organisation had recently established a new division to investigate and develop new business opportunities on food industries. Moreover, the paper discusses the organisation’s development of budgetary system in addressing the limitations posed by traditional budgeting. The last part of the paper provides suggestions to future budget planners on how to come up with an effective budget plan.
Budgeting Process in Hong Kong Banks
It is important to know that budgets in Hong Kong banks do not function well when treated as an isolated business procedure. In order to be successful in this approach, it is essential that the Hong Kong bank associates the budgetary process to the other key business processes such as sales and marketing, public relations and advertising, and accounting.
The budget process in Hong Kong banks is made up of activities that include the development, implementation, and evaluation of a plan for the provision of services and capital assets. The effective budget process in Hong Kong banks includes several essential features, which includes, but are not limited to the following:
· The budget process incorporates a long-term perspective;
· The budget process establishes links to broad organizational goals;
· The budget process focuses the budget decisions on results and outcomes;
· The budget process involves and promotes effective communication with stakeholders;
· The budget process is based on a "team approach" for program managers and administrative management; and
· The budget process provides incentives to management and employees.
Since the Hong Kong banking industry is a large industry, the management of Hong Kong banks is aware that it is a good idea to spreadsheet all known revenue producing areas as well as to understand all of the expense categories. In this way, the management is able to start getting a grasp of its peak business periods as well as it’s off business periods. As a result, the company begins to get an understanding on which this work will be rendered.
In previous years, some Hong Kong banks took budgeting so lightly that, until the year was nearly over, they suddenly realised that they had to put on a “hiring freeze”, until the financial people could figure out if they could pay the incoming bills. The financial situation got too bad that some Hong Kong banks started to make painful, but very predictable, across-the-board cost cutting measures.
Budgeting as Performance Measure in Hong Kong Banks
Hong Kong banks develop activity-based costing (ABC) systems to provide more accuracy in assigning indirect and support costs to activities, business processes, services, and customers. ABC systems have recognized that organizational resources are needed both for direct production of goods and services and for indirect or support activities (Krumwiede 1998). The goal of Hong Kong banks is for the ABC to measure and then price out all the resources used for activities that generate the production off and services for customers.
The ABC system in Hong Kong banks first traces costs to support activities and then to banking services. Traditional banking service costing has also involved two stages; however, in the first stage, costs are traced to departments, not activities. In both traditional and ABC cost systems, the second and last stage consists of tracing costs to the services.
The principal difference between the two methods is the number and type of cost drivers used. The traditional banking service costing systems used allocation bases that may or may not have been cost drivers. Most Hong Kong banks find that direct labour is not a cost driver and may never be a cost driver, especially in highly automated environments. Therefore, most Hong Kong banks utilise the ABC system because it uses a much larger number and variety of cost drivers than the one or two volume-based cost drivers typical for a traditional cost system. As a result the ABC method has increased accuracy.
Most Hong Kong banks do not use the traditional cost system because it uses only volume-based cost drivers, ignoring the key role of support activities in producing many modern banking services. These volume-based cost drivers often lead to one group of service subsidizing another group of service. These subsidies often create the appearance that one group of banking service is highly profitable, adversely impacting the pricing and competitiveness of another group of banking services. In a highly competitive banking environment with complex services, accurate cost information can be critical to sound planning and decision making.
Activity-based costing system is effective and appropriate for most Hong Kong banks because, as Hammer and Champy (1993) state, it facilitates the use of process-based management that represents an evolving management strategy for highly competitive environments, as opposed to the traditional, departmental management focus. Moreover, process-based management focuses upon the broader control span of cross-functional processes of how work really gets done in organizations, as opposed to the narrow control span of individual departments of organizations. Business processes have been discussed as a series of activities that are cross-functionally linked to achieve specific organisational objectives. According to Ramanathan and Schaffer (1995), almost every business has at least two core processes: the new product/service development process and the customer order fulfilment process.
An integrated process-based management approach has been advocated for success, and even survival, in today's increasingly competitive and rapidly changing Hong Kong banking environment (Daly and Freeman, 1997). It requires an integrated performance planning, analysis, and reward system and enhances the effective management of the interrelationships among both processes and functions. It also helps increase the focus on both the internal and external value chains and makes it easier to eliminate non-value added work which enables Hong Kong banks to use capacity more efficiently. It also facilitates the creation of intellectual capital through teaming and warehousing information on skills and provides a consistent framework for managing potentially diverse initiatives.
A process-based management approach has also been advocated by most Hong Kong banks to replace traditional functional budgeting with an activity-based or process budget (Sharman, 1996). Consequently, Hong Kong banks apply a process-based management approach to capital budgeting and develops this approach with actual bank applications. Hong Kong banks need such an innovative approach to capital budgeting due to the limitations of traditional capital budgeting. In the typical approach to simulation analysis of capital budgeting projects, it is assumed that variables such as market size, market share, and fixed and variable operating costs are uncertain. Another major limitation of traditional capital budgeting is the inappropriate adjustment for risk by using excessively high discount rates, especially for new technology projects, and requiring payback over arbitrarily short time periods (Kaplan and Atkinson, 1998).
Hong Kong banks address these capital budgeting limitations by using the process-based management approach with staged risk analysis for a potential capital investment in future industries. Hong Kong banks’ approach provides a structured analysis of the risks and returns associated with a potential investment so that they may be considered in reaching an investment decision. It provides insight into the relative importance of various risks in the business processes related to the potential investment and thus provides priorities for risk management. By addressing these capital budgeting limitations, the approach has the potential to be generalized for analyzing risky capital investment opportunities.
Conclusion
The budget serves as a financial plan that operates as a statement of revenue and expenses of an organization. Budgets may then be used to look forward as a plan and/or look backward as a monitor. This is due to the limiting feature of the budget to the activities, which the organization may involve in. With budget goals, an organization can also check and verify expenditures that are appropriate. Furthermore, budgets give indications of the revenue flows.
Budgeting process in Hong Kong banks is ongoing. Therefore, it is expected for them to redesign its planning and budgeting process from time to time. The future redesign team should conduct a survey to assess what to include in a planning and budgeting process redesign. First, the team should begin by clearly defining what it wants to measure. Since that determines where the business will put its efforts, choose carefully. They should make a list of attributes and ask respondents to assess the level of importance and the current performance level of each attribute; those with a high value of importance and a low level of performance are the ones that should get priority.
Use outside benchmarks wherever possible, because the one thing the team can count on is debate about the meaning of the survey results. Select the distribution list for respondents- survey a cross-section of the bank. Finally, in analyzing the results focus on the most important attributes that also got high performance-level ratings.
Budgeting does not have to be a financial form of fortune-telling. The organisation must use a conservative approach when coming up with its sales and expenses. It is also important that the budget tells what the organisation intend to do with the business. Constantly evaluate actual numbers versus budgeted numbers to see how the organisation is actually doing. Lastly, consider the budgeting process as a management tool to help keep the company profitable and keep it running as smoothly as possible.
References:
Daly, D. and Freeman, T. (1997). The Road to Excellence: Becoming a Process-Based Company. Bedford, TX: Consortium for Advanced Manufacturing-International.
Hammer, M. and Champy, J. (1993). Reengineering the Corporation. New York, NY: Harper Business.
Kaplan, A. and Atkinson, A. (1998). Advanced Management Accounting. Upper Saddle River, NJ: Prentice Hall.
Krumwiede, K. (1998). ABC: Why It's Tried and How It Succeeds. Management Accounting, April: 32-38.
Lewis, R.J. (1993). Activity-Based Costing for Marketing and Manufacturing. Westport, CT: Quorum Books.
Ramanathan, K. and Schaffer, D. (1995). How Am I Doing? Journal of Accountancy, May: 79-82.
Sharman, P. (1996). Activity/Process Budgets: A Tool for Change Management. CMA Magazine, March: 21-24.
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