Guillermo_Budget

The master budget is often known as a outline of a company's plans that sets detailed goals for an organization regarding sales, production, distribution, and financing. The master budget is the major financial document which also provides the basic information for a customary financial control structure. Another purpose of the master budget is to provide a communication tool in which the company’s employees can observe how their hard work affects the company’s overall goals. When the budget is being met, it lends to improve the moral of the employees. When employees have access to the budget, they can see firsthand how their efforts have a direct impact on the organization. This can also provide insight to upper management as well. If in any given time period, management can see whether or not the employees are meeting their goals set forth in the budget and take corrective action before the problem escalates. Budgeting entails a great deal of forecasting which brings a fair amount of uncertainly into the equation. This is particularly true when forecasting revenue. A sales forecast is a prediction of sales based on previous sales performance to develop an analysis of market conditions. (Adler 2009) Using past data for current results may put the company at a disadvantage. Although forecasting may not always be accurate, it gives the company a sneak preview of what they can expect in the near future. Using a sales forecast for long and short term planning has its risks, and the most significant risk of sales forecasts is that of unethical decision making. For example, if budgets are used as a tool for employee performance evaluations, than the budgets may be exaggerated to show in favor of the employee. Managers who do not perform as expected or fall short of their goals, can simply manipulate what they report to upper management to match more closely make what was expected of them. When this occurs, it is considered budget padding. This term simply means that managers either inflate the numbers or deflate their numbers in order to reach the goals of the organization’s budgets. (Adler 2009) When this form of decision making is done, differences will undoubtedly ensue with upper and lower management. This creates a budget slack. This occurs when upper-level management takes any kind of action based on the false information provided to them. When this occurs, the information becomes worthless and puts the organization at risk. For this reason, the more employees that are engaged in creating the company’s budget, the less likely employees would be to report false information. If an organization uses a flexible budget, the company is more likely to have a budget that provides better control of their own strategies with fewer employees tempted to falsify the data. Conceivably, the most persuasive argument for responsible accounting practices is that it provides a means for upper management to manage an organization that otherwise may not be able to be managed successfully. Additionally, giving lower management the tools they need to succeed and ensure motivation is stays steady and high.   References Adler, Ilya. (2002). Walking the Walk. Mexconnect. Retrieved April 17, 2002, from http://www.mexconnect.com/en/articles/1750-walking-the-walk