Monitoring performance

One of the purposes of budgets is to monitor performance of an organisation and managers. After the budget is approved the last element of budget control kicks in which is to monitor performance. The budget will be used to evaluate and control day-to-day operations in accordance with the goals specified in the budget.
For the budget to be useful in monitoring performance it’s important that it is accurate, reliable and up to date. It should have been prepared with the participation of the staff that will be assessed using that budget.

It is vital that participation up to the lowest level in the enterprise be ensured to make the staff committed to the budget implementation. Everybody in the organisation should understand his role in achieving the budgeted targets. The budget should also be linked to the corporate objectives so that it is to track the achievement of the strategic goals.

A budget should be able to motivate staff to work hard to improve performance. To achieve this, the budget should be set at an achievable level so that staff will be motivated to work harder to achieve the set targets. If targets are seen to be unattainable it will discourage staff from working harder.

Companies should ensure that their budgetary control systems are effective by meeting the following factors:
Top leadership should be in support of the system. Top management in the organisation should take the preparation of budgets and their implementation seriously in order to achieve the objectives of the enterprise. Lack of support from top management will render the whole budgetary control process ineffective.

The budget targets should be challenging yet achievable. The budget is intended to stretch all staff to perform better. This can be achieved by setting a budget that stretches everyone to achieve targets.
The company should have systems to collect data, analyse and report on time. Systems set up to collect data to measure performance should be reliable and data should be collected on time.

The reports should be sent to managers responsible for specific areas. The staff that is responsible for the performance that is being reported on should receive the reports so that they can act on the reports on time.
The reporting periods should be short preferably every month. Time is of the essence in monitoring performance so that under-performance can be rectified in time. Failure to report on time will render the reports meaningless because the intention of these reports is to enable performance to be improved so as to meet budget targets.

If the reporting periods are on a monthly basis then the variance reports showing the comparison between actual and budget should also be monthly.
Management should ensure that appropriate action is taken to get operations back under control if they are shown to be below budget. Failure to act on adverse variances will render the budgetary control system ineffective and not serve its proper purpose.

Any major variances that have been identified should be investigated to establish the cause. Once management has established why a particular variance has occurred, a decision can then be taken to put in place appropriate control measures to prevent any adverse variances continuing in the future. Early detection of adverse variance is important to enable early correction. If the results are not meeting the targets the areas not performing well should be brought back on course so as to meet budget targets at the end of the budget period.

If there are favourable variances, it’s also important to investigate the cause of a favourable variance so that it can be reinforced and be repeated in the future. Investigation of variances should be by exception so that focus should be on major variances which are most important for the survival of the organisation.

When assessing the performance of a manager, it’s important that the manager is only assessed on revenues or costs that the manager can control. The principle of controllability is one of the hallmarks of budgetary control. A manager should therefore be made accountable and responsible for revenues and costs that he or she can control directly. Any revenues or costs the manager cannot control should not be part of the report. Variances should be reported to the managers who are in a position to control the revenues and costs to which the variances relate, otherwise they should not be held accountable for what they can’t control.

Budgets and variance analysis are key control mechanisms in a company to monitor performance and track achievement of corporate objectives.
Budgets as control mechanism are used to set targets, measure performance, highlight errors, determine responsibility, and take corrective action to return the performance to budgeted targets.
Other than using budgets for controlling current period performance, they also perform a strategic role in which strategic decisions might have to be made on allocation of resources, decide on which products to remove and which products need a new competitive advantage so that performance is improved.

Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship.  For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062. Website: www.shekinaconsult.com.