Managing Finance and Budgets

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Managing Finance and Budgets

• Lecture 11
• Budgetary Control

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Session 11 Budgetary Control

• Objectives
• By the end of this week, you will
• Be able to discuss how a budget is constructed.
• Be able to state different budgeting principles,
  and how these might be used in different
  situations.
• Know how budgetary targets might be used as
  controls.
• Be able to discuss some of the ways in which
  managers react to budgetary targets
• Know some of the non-financial measures used in
  budgeting.

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Menu

• A The Budget-Setting Process
• B Approaches to Budgeting
• C Monitoring Controlling Performance
• D Behavioural Issues
• E Using Non-Financial Measures
• F Follow-up work

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Section A

• The Budget-Setting process

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The Budgetary Context

• Last week, we saw that the creation of a budget
  is simply one element in the Planning Control
  Process.
• This process sees a budget as both a planning
  tool and a means of control.
• We looked at planning in the last presentation
  in this presentation we will concentrate mainly
  on the control element.
• Before we do this, this section will look in a
  bit more detail as to how precisely budgets are
  created.

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The Planning Control Process a summary
Mission, Aims, Objectives Market, Products,
Services Sales, Costs, Profits, Returns
1. Identify key objectives
Limiting factors External internal
Environment - market size, production capability,
competition
2. Identify available options
3. Evaluate and select options
Markets, products, financing, physical
resources, human resources
4. Prepare detailed plans or budgets
Short-term plans Sales, Cash, Stock, Labour,
Production à Master budget
5.Collect information and control
Identify variances and respond as appropriate
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Steps in the budget setting and control process
Click on each box for an explanation
2. Communicate budget guidelines to relevant
managers
1. Establish responsibility for the
budget-setting process
4. Prepare the budget for the area of the
limiting factor
3. Identify the key or limiting factor
6. Review and co-ordinate budgets
5. Prepare draft budgets for all other areas
8. Communicate the budgets to all interested
parties
7. Prepare the master budgets
9. Monitor actual performance relative to the
budget
10. Act to ensure performance conforms to the
budget
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Step 1 Establish Responsibility

• Normally, this is the work of a Budget Committee,
  consisting of a senior representative of each of
  the important areas (Sales, Production etc.)
• Often a Budget Officer is appointed to carry out
  tasks required by the committee.
• This person is often an accountant.

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Step 2 Communicate Guidelines

• At this stage, all previous work (e.g. strategic
  planning, overall business objectives for the
  year) are communicated to the heads of the
  various departments.
• This will normally be an interactive process, and
  heads of departments will often have played an
  important part in drawing up the planning
  documents.
• At this stage, it may be the case that each
  departmental or section head will be asked to
  prepare a draft budget for the following year for
  their area, as a bid for funding, within the
  guidelines set. (This may also occur later at
  step 5)

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Step 3 Identify the Limiting Factor

• The Key or Limiting Factor is the aspect of
  business that is crucial to it achieving the
  objectives set.
• For many businesses this is sales however in
  some circumstances it may be labour, or even the
  ability to maintain supplies of raw materials.
  It may even be, a cash flow issue, where an
  overdraft needs to be carefully managed.
• Clearly this will need to be as a result of
  detailed analysis of the current position.
• It should also be noted that the Limiting Factor
  may change from year to year.

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Step 4 Prepare the Budget for the Limiting
Factor

• Often, this is simply preparing the Sales budget.
  If so, it would be based on market research and
  on evidence from sales in past years.
• If the Limiting Factor is another area, clearly,
  the capacity of the business to operate in that
  area would need very careful analysis of the
  available evidence to ensure that the information
  is as accurate as possible.
• This factor will now define the overall activity
  level of the business for the next 12 months.
• N.B. In research by Dury et. al, 1993, 85 of
  all businesses based such targets on opinions of
  sales staff. (see M A. p 368)

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Step 5 Prepare draft budgets for all areas

• Once the details of the Limiting Factor Budget
  are known, other budgets can then be prepared.
• Two methodologies can be employed
• 1. A Top-Down approach Senior management of
  each area originates the targets, then filters
  then down, requiring managers lower down to
  prepare budgets which conform to these targets.
• 2. A Bottom-Up approach Targets are fed upwards
  from the lowest levels, then negotiate with the
  manager higher up in order to achieve a budget
  which conforms to the constraints set by the
  limiting factor.
• The Bottom-Up approach clearly involves more
  effort, and may result in several rounds of
  negotiation at different levels before agreement
  is reached. It does however hold the promise of
  achieving greater consensus.

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Step 6 Review Co-ordinate

• All budgets are submitted to the Budget Committee
  for scrutiny, to ensure that they are
  complementary, and dovetail together well.
• Where discrepancies occur, the budget committee
  will exert its authority and budgets will be
  returned for amendment.

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Step 7 Prepare Master Budgets

• The Master Budgets are normally
• The budgeted Profit Loss account
• The budgeted Balance Sheet
• Possibly a Budgeted Cash Flow
• This work is undertaken by the budget committee.

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Step 8 Communicate Budgets

• The budgets agreed by the committee are now
  passed to individual managers.
• Normally this is filtered down through senior,
  middle and junior management layers, to the
  budget holder.

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Step 9 Monitor Performance

• Monitoring of performance may be carried out
  weekly, monthly or quarterly.
• Examination of actual performance against targets
  will be done by the budget holder the person
  responsible for the budget, and the target.
• Where there is significant variation from the
  budgeted value, managers would be expected to act.

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Step 10 Ensure Performance matches the Target

• This is the process of control.
• There are two ways in which we may match
  performance with target
• Modifying behaviour it may be clear that an
  overspend is occurring, or that predicted sales
  are not being achieved. If so, curbs to spending
  must be put in place, and sales campaigns
  re-energised.
• Modifying the target it may become clear that
  targets were unrealistic. If so, new targets must
  be negotiated, and a new budget issues with
  amended targets. This would undoubtedly have
  repercussions elsewhere in the business.
• The latter part of this presentation concerns
  itself with the details of this process.

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SAQ 10.1

• Why do you think the process for budget setting
  so complex? Why, for example could not one
  person (for example, the finance director)
  decide on the budget then just tell everyone?

Solution
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SAQ 10.1

• There are two main reasons
• Firstly, whoever is in charge of the budget needs
  to have as full a picture as possible before
  setting it. That requires consultation and lots
  of discussion.
• Secondly, individual budget holders have to
  believe in the budget, and understand their
  relationship with the whole. This can only be
  done through a process of discussion
  negotiation.
• NB In fact, in many SMEs, one person deciding
  on the budget and then telling everyone else is
  good description of what happens. This may not be
  the best way, however!

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Section B

• Methods of Budget-Setting

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Methods of budget-setting

• In the previous section, we looked at the process
  by which a budget comes into being.
• Here we look at the different budgeting methods
  and principles.
• These methods may be used across the whole of a
  company, or particular parts of it, and the
  methods used may vary from year to year,
  depending upon the circumstances.

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Budgets Time horizons

• Periodic budget
• This is a one-off budget set for a year (e.g.)
• It is normally broken down into monthly or weekly
  amounts
• Continual Budget
• This will be updated continually (still for one
  year, but a new month will be added to replace
  the one which has passed.)

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Methods used in budget-setting

• Incremental Budgeting
• - same as last year with a bit added
• Zero Base Budgeting
• - budget holders required to justify why any
  money is needed
• Activity Based Budgeting
• - those responsible for activities which incur
  costs hold the budgets
• Standard costing
• - standard quantities costs used to generate
  targets.
• Sensitivity Analysis
• - computer software used to answer what-if
  questions.

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Different Forms of Budgeting
Click on each box for a fuller explanation
Incremental Budgets
Zero-Base Budgets
Activity-Based Budgets
Standard Costs
SAQ 10.2
Sensitivity Analysis
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Incremental Budgeting

• Traditional form of budgeting, common in local
  central government
• Costs and allocations of monies tend to be on a
  historical basis, i.e. what happened in
  previous years
• Adjustment (increments) are made on the basis of
  changes (e.g. inflation, increases in
  productivity, workforce etc.) that happen from
  year to year.
• Often used for discretionary budgets (i.e.
  where budget holder is responsible for allocating
  a sum of money within a department)
• No clear relationship between the input or output
  (e.g the raw materials required or the level of
  sales produced)

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Zero-Base Budgeting (ZBB)

• Draws on the philosophy that ALL spending needs
  to be justified.
• All budgets are allocated a zero base, and will
  be increased from this only if a good case can be
  made out for the money
• Senior management will be using the criterion of
  value for money to allocate scarce resources.
• ZBB encourages managers to adopt a questioning
  approach this leads to more strategic thinking
  and allocation of resources to enable this
  strategy to happen
• Clear links required between input/output and the
  resourcing

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Activity-Based Budgeting (ABB)

• Derives from the philosophy of Activity-Based
  Costing, that it is activities which drive costs.
  This is applied to the the Budget process.
• If cost-driving activities can be identified,
  then the cost of the output can be achieved more
  accurately)
• Central feature budget holders (those who are
  responsible for meeting a particular budget) have
  control over the events that affect performance
  in their area.
• ABB tries to generate budgets in such a way that
  the manager who has control over these cost
  drivers is accountable for the costs.
• Typical problems increased levels of activity
  generated from outside the managers control,
  e.g. Manufacturing Budget thrown into disarray by
  a new sales contract

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Standard Costing

• Embodies the idea that standard quantities and
  costs can be planned for individual units such as
  sales items, labour rates, raw materials etc.
• The standards are targets, and become benchmarks
  by which actual performance s measured.
• The targets may be derived from experience,
  market assessments, current rates (e.g. labour,
  fees etc.), but should be realistic.
• Variances (differences between the budgeted
  amounts and the actual amounts) are always based
  on standards.

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Sensitivity Analysis

• This is a tool used in setting technically
  complex budgets
• It investigates changes to profit due to
  adjustments in key variables
• It identifies key areas for managers to focus on
  for maximum effect
• In order to use it, managers need to
• Identify key questions to be answered e.g. what
  is the effect on profits of 10 decrease in
  sales? Or a 10 increase in cost of sales?
• Use of spreadsheets or other types of computer
  software in order to create what-if analyses,
  perform goal-seeking or other complex tasks.

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SAQ 10.2

• 1. What do you think might be the advantages and
  disadvantages of zero-based budgeting?
• 2. How might any disadvantages be overcome?

Solution
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SAQ 10.2 Solution

• Advantages
• Little Wastage of Resources
• Strategic use of resources, enable plans to be
  fulfilled more easily

• Disadvantages
• Time Consuming
• Managers can often feel threatened by ZBB

The disadvantages might be countered by using
the approach selectively, for example only every
third year, or on particular budgets which tend
to require strategic input, e.g. training,
advertising, research development.
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Section C

• Monitoring Controlling Performance

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Budgetary Control Structures

• Budgets provide a useful mechanism for control.
• This starts with the detailed planning within the
  budget, which forms the basis for exercising
  control
• In addition we need a basis for measuring actual
  performance against planned performance
• Finally in exercising control, we need a means of
  finding out where and why events deviated from
  the plan, and ways of rectifying these.

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The budgetary control process
Click on each box for a fuller explanation
Prepare budgets
Perform and collect information on actual
performance
Respond to variances between planned and actual
performance and exercise control
SAQ 10.3
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Steps in the budget setting and control process
Click on each box for an explanation
2. Communicate budget guidelines to relevant
managers
1. Establish responsibility for the
budget-setting process
4. Prepare the budget for the area of the
limiting factor
3. Identify the key or limiting factor
6. Review and co-ordinate budgets
5. Prepare draft budgets for all other areas
8. Communicate the budgets to all interested
parties
7. Prepare the master budgets
9. Monitor actual performance relative to the
budget
10. Act to ensure performance conforms to the
budget
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Performance Monitoring Techniques

• The figures within a budget serve as a basis for
  measuring the performance of a team or
  department. The following interrelated techniques
  can be used
• Simple Performance Comparison
• Flexible Budgeting
• Variance Analysis

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Simple Performance Comparison

• This Budget is part of the Profit and Loss budget
  for a manufacturing company
• The amounts shown represent targets to be
  achieved for a particular product line during the
  next 12 months.
• This allows us to compare our prediction with
  what actually happens.

• Budget Sales (Units) 1000
• 000 Budget
• Value of Sales 100
• Direct Costs
• Materials 40
• Labour 20
• Total Direct Costs 60
• Gross Profit 40
• Overheads
• Admin Salaries 20
• Travel 5
• Other costs 20
• Total Overheads 45
• Net Profit (5)

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Comparison of Actual Performance (1)

• Original Budget Actual Figures
• Sales 1000 Units Sales 1040 Units
• Original Actual
• 000 Budget Figures
• Value of Sales 100 104
• Direct Costs
• Materials 30 37
• Labour 25 24
• Total Direct Costs 55 61
  
• Gross Profit 45 43
• Overheads
• Admin Salaries 20 19
• Travel 5 8
• Other costs 17 17
• Total Overheads 42 44
• Net Profit 3 (1)

Here we can see what has happened at the end of
the period Although we have produced and sold
slightly over target, the sharp rise in the cost
of materials means that we have made an overall
loss.
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Comparison of Actual Performance (2)

• Original Budget Sales (Units) 1000 Actual
  Sales (Units) 1500
• Original Actual
• 000 Budget Figures
• Value of Sales 100 150
• Direct Costs
• Materials 30 47
• Labour 25 25
• Total Direct Costs 55
  72
• Gross Profit 45 78
• Overheads
• Admin Salaries 20 27
• Travel 5 10
• Other costs 17 23
• Total Overheads 42 60
• Net Profit 3 18

Here the original sales targets have been well
exceeded, and we have increased our profits
considerably However all is not as well as it
seems!
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Flexible Budgeting

• If it becomes apparent before the end of the year
  that there is a huge discrepancy between the
  actual performance and the budget, it may be
  necessary to revise targets.
• This might happen if there are unexpected surges
  or slumps in demand, or the economic situation
  changes.
• This does not mean that we dispense with the
  budget altogether, and write a new one.
• Flexible budgeting allows selected targets to be
  revised.
• The revised budget is said to be flexed.

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Comparison with Flexed Budget

• Original Budget Sales (Units) 1000 Actual
  Sales (Units) 1500
• Original Flexed Actual
• 000 Budget Budget Figures
• Value of Sales 100 150
  150
• Direct Costs
• Materials 30 45
  47
• Labour 25 30 25
• Total Direct Costs 55
  75 72
• Gross Profit 45 75
  78
• Overheads
• Admin Salaries 20 20 27
• Travel 5 8 10
• Other costs 17 17 23
• Total Overheads 42 45 60
• Net Profit 3 30 18

Here we have written in new targets on the basis
of the new sales figures. We can now see that
despite the fact that we have increased our
profits, this is well below what we should have
achieved.
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Variance Analysis

• Used to analyse performance and promote
  management action
• Variance - the difference between the budgeted
  amount and the actual amount this can be
• adverse the difference will ultimately lead to
  a reduction in the budgeted profit
• favourable the difference will ultimately lead
  to an increase in the budgeted profit.
• Variances might cover Sales Volume, Pricing,
  Direct Materials Usage, Direct Materials Price,
  Direct Labour Efficiency, Direct Labour rate,
  Fixed Overheads

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Relationship between the budgeted and actual
profit
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Sample Variance Analyses

• Sales Volume Variance
• The difference between the profit as shown in
  the flexed budget and the actual profit
• Flexed Budget Profit 30,000
• Actual Figures Profit 12,000
• Sales Volume Variance 18,000 Adverse

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Typical Variance Analyses carried out

• Direct Material PRICE variance
• (Actual material purchased x standard price)
  less Actual cost of material purchased
• Direct Material USAGE variance
• (Standard quantity of material required for
  actual production x standard price) less (Actual
  material x standard price
• Total Direct Material variance
• Standard direct material cost less Actual
  direct material cost

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Relationship between the total, usage and price
variances of direct materials
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Types of Control

• There are essentially two types of control used
  in budget management
• Feedback Control where the information from
  actual performance is used to cause actions to be
  taken to rectify an unfavourable situation.
• Feedforward control where action is taken in
  advance to anticipate what might occur, and
  therefore avoid an unfavourable outcome.

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Key elements for budgetary control

• Achievable yet rigorous targets
• Accurate, relevant, customised and timely
  reporting
• Short reporting periods (e.g. one month)
• Clear lines of responsibility
• Accountability of the budget holder
• Records of action taken to control operations
• Flexibility provided where appropriate
• Serious attitude from higher management towards
  importance, relevance and accuracy of budgets

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The use of Targets for Control

• Targets in themselves are a useful means of
  control. These are devolved down to junior
  managers who are able to monitor self-correct.
• Regular upwards reporting of performance to
  targets means that problems which occur will be
  relatively minor and easier to deal with.
• It is only when large variances occur between
  targets and actual performance that further
  investigation intervention is required.

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Investigating Variances

• This can be expensive in terms of time and money.
• Knowing the reason for a variance is only useful
  if an investigation into its cause can yield a
  method for rectifying it.
• To decide whether this should be done, we can use
  the statistical notion of significance. In this
  case, we would regard variance to be significant
  if it was greater than 5. In this
  case
• Significant adverse variances will need to be
  acted upon.
• Significant favourable variances should be
  investigated.
• Insignificant variances should simply be kept
  under review.
• We can only act on variances if the cause of them
  is known, and there are clear courses of action
  to be taken

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Acting on Variances 1
This is an example of a feedback control, as the
unfavourable situation has already occurred.

• Example 1
• In a large retailing company, variance in
  budgeted Profit Loss half way through the year
  shows a projected shortfall in budgeted profit of
  15 at year end. This is traced back to a
  reduction in turnover sales targets are not
  being met in the being met in stores in the South
  West of England.
• Action Taken
• Area Sales Manager to meet with Marketing Team
  members of the team to focus on particular
  stores, examining sales records team to visit
  advise, and devise a strategy unique to that
  store. Targets to be kept under weekly review,
  Area Sales Manager reporting directly to
  Financial Director.

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Acting on Variances 2
This is an example of a feedforward control, as
the unfavourable situation has not yet occurred.

• Example 2
• In a small engineering company, variance in
  budgeted Cash Flow predicts a potential cash-flow
  crisis in two weeks time, on further
  investigation this appears to be due to late
  payment by a valued customer.
• Action Taken
• Credit control to contact customer and negotiate
  payment however, the payment will arrive too
  late to avert the cash flow crisis. Bank
  contacted and alerted to potential problem,.
  Temporary overdraft facility negotiated.

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Management by Exception

• The use of budgetary targets is an important way
  in which decision-making and responsibility can
  be delegated to junior management.
• Control is retained by senior management, since
  they can use the variances to determine which
  junior managers are meeting or exceeding their
  targets.
• This means that energy can be concentrated on
  those areas which are under-performing the
  exceptions.
• This process is called Management by Exception.

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SAQ 10.3

• Comment on the following
• (a) The main function of calculating variances is
  to provide feedback to managers on performance.
• (b) All variances should be investigated to find
  their cause.
• (c) It is highly valuable to calculate variances
  because they will tell you what has gone wrong.

Solution (a)
Solution (b)
Solution (c)
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SAQ 10.3a Solution

• The main function of calculating variances is to
  provide feedback to managers on performance.
• Solution
• This misunderstands the term feedback, viewing
  it simply as information. Variances are used
  dynamically as either feedback or feedforward
  control mechanisms, so that managers can act
  either compensate for an already-existing
  unfavourable situation (feedback), or to prevent
  one occurring (feedforward). The variances
  identify what needs to be modified, and can help
  to suggest courses of action.

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SAQ 10.3b Solution

• All variances should be investigated to find
  their cause.
• Solution
• It is extremely unlikely that any budget target
  will be hit exactly that is simply a fact of
  life. To that extent, variances will occur on all
  targets, even if this is only by a few pounds or
  pence. If we were to investigate all variances,
  we would waste a lot of effort and a lot of time.
  
• Investigating variances can be expensive.
  Significant variances only (greater than 5),
  should be investigated, and only then if this
  appears to promise a course of action.

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SAQ 10.3c Solution

• (c) It is highly valuable to calculate variances
  because they will tell you what has gone wrong.
• Solution
• Calculating variances identifies a discrepancy
  between a predicted amount and an actual amount.
• If that difference is significant, then it might
  tell you that something has gone wrong, but the
  cause might be somewhere else.
• Investigating variances might (or might not)
  identify the root cause of the problem, but it
  might not tell you how to rectify it for
  example, the discrepancy could be caused by an
  over-ambitious budget target.

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Section D

• Behavioural Issues

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Budgets Behavioural issues

• This section looks briefly at how managers react
  when confronted by budgets.
• We examine
• Reaction - Positives and the Negatives
• How Managers react to Targets
• Keys to Successful Budgeting

SAQ 10.4
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Positive Reactions to Budgets

• Budgets can be
• Motivating - Targets become clear, and if the
  goals are attainable, this provides a sense of
  fulfilment in achieving them.
• Empowering - budgets set boundaries within which
  to work each manager knows their resources, and
  is able to work autonomously within the limits
  set to achieve their targets.
• Inclusive - where the budget-setting process is
  dynamic, iterative and based on true negotiation,
  this can help form a sense of community in which
  all managers feel that they have a contribution
  to make, and understand their role within the
  organisation more fully.

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Negative Reactions to Budgets

• Budgets are often seen as
• Restrictive - it becomes more difficult to take
  advantage of opportunities since the expenditure
  has already been allocated.
• Inflexible - money often needs to be spent
  within a particular time-frame. It discourages
  managers from thinking strategically.
• Limiting targets are seen as a maximum instead
  of a threshold.
• Self-defeating prone to end-of-year expenditure
  binges
• Confrontational - they become catalysts for
  organisational conflict

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Budgets as performance evaluation

• Where evaluation of performance is based on
  the ability of the manager to meet the budget a
  range of factors occurs
• Rigidity the manager feels straitjacketed by
  the budget, and restrained from taking risks, as
  this might create adverse variances.
• Fixation- There is a focus on budget at expense
  of other criteria
• Manipulation Figures are often massaged or
  distorted in order to present the department in
  the best light.
• Exaggeration Introduction of slack during
  budget-setting processes

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Management Styles

• When confronted by budgets, managers appear
  to adopt one of three styles
• Budget-constrained style
• Managers focus only on the targets, and on
  performance of subordinates in that context all
  other issues are deemed irrelevant.
• Profit-conscious style
• Managers use budget information in a flexible
  way, and in conjunction with other data. Emphasis
  is on overall improvement budget data is just
  one piece in the jigsaw.
• Non-accounting style
• Managers ignore the budget targets are not
  seen as relevant.

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Keys to Successful Budgeting (1)

• Information is the key
• Aims of budgets must be understood. This means
  communicating as much of the background (
  corporate strategy, short-term objectives,
  limiting factors) as possible.
• Budgets must be seen as attainable. Highest
  performance is achieved by setting the most
  difficult specific goals which are acceptable to
  manager
• Control information must be understood, as well
  as the consequences of targets not being met.

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Keys to Successful Budgeting (2)

• Participation is the key
• It is crucial in the budget-setting process to
  acceptance, job satisfaction and motivation
• It is also likely to increase accuracy
• It should decrease distortion and manipulation...
  
• However
• Managers may deliberately introduce slack (I.e.
  deliberately over-or under estimate items during
  the budget-setting negotiations)

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SAQ 10.4

• A Sales Manager believes that she could reach
  her overall sales budget target by reducing
  prices and selling a higher volume of units.
• Why might it not be sensible for her to do so?
• What overall issues does this raise about budget
  monitoring and control?

Solution
Solution
67
SAQ 10. 4 Solution (1)

• A Sales Manager reaches her overall sales budget
  target by reducing prices and selling a higher
  volume.
• This is not sensible because
• Production targets will have been set in the
  production budget this will involve budgeting
  for raw materials and labour etc. Suddenly
  selling more will cause problems elsewhere this
  will mean that higher stock levels will be
  required, and may cause problems with debtors.
• Similarly, reducing prices will reduce
  profitability. This will have an effect on the
  companys balance sheet, and may ultimately
  reduce dividends to shareholders.

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SAQ 10. 4 Solution (2)

• What overall issues does this raise about budget
  monitoring and control?
• Budgets are interrelated, and targets are set to
  dovetail individual managers need to know how
  their targets match with those of others. One way
  to do this is through a budgetary committee, and
  participation in the budgetary process.
• Managers not only need targets, they need to know
  to what extent under normal conditions those
  targets can be flexed, that is, by how much can
  we exceed or fall short without a new budget
  needing to be set?

69
Section E

• Non-Financial Measures in Budgets

70
Non financial measures in budgeting

• The budget itself tends to be a document which
  apportions money according to a strategic plan
• In manufacturing, the money sets numerical
  targets for input, throughput and output.
• However, in service industries and in other areas
  such as Education and the National Health Service
  it is difficult to measure output using
  conventional financial means.
• It is increasingly the case that other,
  non-financial measures are used as a basis for
  reporting.
• Where these relate to hard data, based on
  measurable objectives, targets can be
  incorporated into the budgeting process

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Examples of Non Financial measures

• General examples of these include
• Product quality
• Delivery efficiency
• Supplier quality
• Supplier delivery
• Set-up times
• Throughput times
• Wastage
• Customer satisfaction
• Employee satisfaction

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Specific Non financial measures

• There are two specific examples
• Patient Waiting Times in the NHS
• Pupil Performance Indicators for Schools
• In both cases
• These are non-financial Measures which appear as
  targets for specific institutions.
• These are treated in the same way as other
  budgetary measures, i.e. institutions are
  compared with one another (league tables) and
  their past performance (looking for year-on-year
  improvement)
• These are elements of control resources follow
  the successful achievement of targets.

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SAQ 10.5

• What particular problems might be caused in a
  hospital by the incorporation of non-financial
  targets such as Average patient waiting time in
  an A E Department as part of their budgetary
  considerations?

Solution
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SAQ 10.5 Solution (1)

• The problems are exactly the same as those
  outlined for financial targets
• Rigidity managers may feel straitjacketed by
  the targets and manage purely to meet rather than
  exceed them this means that natural grass-roots
  development tends to be stifled. (e.g. new
  types of procedure which might ultimately lead
  (in the long run) to improved patient care will
  not be implemented, as in the short run this
  might result in failure to meet targets.)
• Fixation- There is a focus on the target at
  expense of other criteria.In the example given,
  it could lead to undifferentiated patient care
  (e.g. a patient with a cut finger becomes as
  important as road traffic accident victim)

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SAQ 10.5 Solution (2)

• Manipulation The department is reorganised in
  such a way as to present figures which meet the
  target, but do not necessarily result in
  improvements. (e.g. All patients are met at the
  door by a doctor, and then asked to wait this
  technically reduces the waiting time to zero, but
  does not improve the service)
• Exaggeration Accounting procedures are put in
  place which locally redefine what the target
  means. (e.g. Average patient waiting time
  redefined as the time before first treatment
  divided by the total number of separate visits by
  a doctor or nurse subsequently.)

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Follow-up to Lecture 10 - Activities

• Reading
• All of chapters 12 and 13 of M A, except the
  details of material on variances pp pp 395-404.
• Activity.
• Attempted the test material on budgets on the M
  A website, sections 12 13. There will be no
  questions in the examination which ask you to
  calculate budgets, so any of these questions
  which require calculation (e.g. calculation of
  specific variances) can be omitted.
• The seminar this week will focus purely on the
  examination.