Introduction
The management of a company should not leave the work of budget preparation to the accounting department. Planning is an activity that is everyone one’s. Therefore, since budget-making amounts to planning, the management should be at the forefront in its making. Management can determine the number of things. These include the number of staff that it will hire or plans to hire in a certain period and the number of sales that it expects. The management can also set out the manner of conduct of employees towards customers and outstanding customer preferences. All this is subject to the approval of the budget committees. Simply put, for an organization to find success every party must involve him/herself in budget preparation.
Clarity of Assumptions
It is one thing to make assumptions concerning the expectations of the coming year or period, and it is another to make realistic assumptions. Prudence in an organization is particularly crucial. The management and the budget committees should make any assumptions based on factors on the ground. This includes the risk that the company faces on various fronts and competition. When making projections it is paramount to put into consideration factors that cannot be changed such as inflation. The nature of projections is a picture that portrays itself for the company. The company cannot, for example, say that it is going to topple the market leader of a competing company in one year. It is impossible if it has a market portion of less than 20%. This comes out as unrealistic and highly unlikely (Haddock, 2002).
Clarity is also important in trying to align the company’s objectives and goals to the projections. The management should be at the forefront to have the company’s projections reflect its mission and vision statements. It should also reflect the nature of goals and objectives it sets out to achieve in the following year/period. This is a show of focus and financial prudence. If the company, for example, faces issues of untrustworthy customers who may default loans and debts, the company should account for that. This means it should deduct that amount from its current debts and when preparing financial provisions in terms of doubtful debts (Sheffrin, 2003).
Monitoring Performance
The company should measure its performance from previous periods with the projections that had been set out. Lack of monitoring is equal to a lack of vision and focus. The company should engage all the parties involved to calculate on a timely basis, the performances of the company on various fronts. This is useful financial management practice as it makes sure the company allocates resources to projects that are working. During this review, the company may find that there has been a loophole where the money is been lost. The company should disband all projects that are not working. If, for example, the company is not doing well in corporate social responsibility, it should weigh its options and maybe start a foundation instead of helping through Nongovernmental organizations (Tapiero, 2004).
Least Effective Financial Management Practices
Poor Remuneration
Companies may go to the extreme when managing finances. This may include cutting down on the payment of workers. In most cases, this is an exercise in futility and may easily backfire. The company may find itself in a situation where employees are no longer motivated and do not drive growth anymore. That is the best-case scenario: where profits and company growth are driven by satisfied customers. When that aspect of the company is not met, there is a disaster and emanates from poor financial management practice (Haddock, 2002).
Excessive Budgetary Cuts
It is also possible for a company to engage in financial measures which fall in the unfavorable category of employees. This makes the company have very minimal traveling and their work is limited. This is not advisable, especially when preparing an operating budget that directly falls into contact with the employees. However, it does not mean that the company becomes extravagant in its spending to appease its workers. It means that they understand but it is not a case where their rights as employees are tampered with to meet other goals of the company (Tapiero, 2004).
Selective Application
A company can have the selective application of funds. This may not go down well with some people who may be affected productively. An example is where a particular company has a particular brand of office coffee specifically for some people while the rest take a lesser brand. Also, a company can offer travel fees to a particular department and leave out another who had wished for the same. Although it may sound normal it may have far-reaching implications in the long run (Tapiero, 2004).
Laws and Regulations
Any budget that a company prepares should adhere to the laws and regulations of that particular country. This means that shareholders should not be cheated and the company should not inflate figures to gain market advantage. This unorthodox means can easily make the company lose crucial publicity. Therefore, this financial management mishap should be avoided at all costs.
Conclusion
When preparing an operating budget, the company should consider all the parties involved in it. This is a show of effectiveness in budget preparation. This includes all departments and individuals who will have direct involvement with budget projections. It is ineffective to cut down operating budgets. It is prudent to cut down other budgets but operating budgets are quite sensitive. They may render the company operations unworkable especially if they are hard on employees. It is also crucial to align the company’s goals and objectives with the projections. This is a show of integration and prudence: very crucial accounting principles (Sheffrin, 2003).
References
Haddock, C. (2002). Careers in Healthcare Management: How to Find your Path and Follow It. Chicago: Health Administration Press.
Sheffrin, S. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall.
Tapiero, C. (2004). Risk and Financial Management: Mathematical and Computational Methods. London: John Wiley & Son.