Running head: memo

Topic: The CEO’s Memo to Budget Managers Type: Memo Subject: Accounting and

Finance Academic Level: Masters Style: APA Language: English (U.S)

Number of pages: 3 (double-spaced, Times New Roman, Font 12)

Created by: https://writersperhour.com

Number of sources: 1

Sample case

Budgets positively and negatively affect how the management act and perform. Managers

commonly increase spending, especially at the end of the budget period, a process called "use it

or lose it." However, this process can negatively affect an entity's goal. Managers spent this

amount with fear of the amount being reduced by supervisors in the following financial budget.

As such, managers tend to overspend at the end of the year, even it if it means spending

impulsively.

Requirement: As the CEO, write a memo to the budget managers directing them not to employ

this method. You should offer a logical rationale and if possible, an alternative to this approach.

Memo ! 2

TO: Budget Managers

FROM: CEO

22nd October, 2014

RE: CHANGE OF BUDGETING PRACTICES

“Use it or lose it" Approach

This memo serves to advise you on the need to refrain from the “use it or lose it” practice

of time-limited budget. This approach leads to unnecessary and wasteful spending of the

available resources meant to gear our organization ahead if effectively utilized. In addition, this

spending potentially results in lower value spending as the opportunity cost to our entity by using

about-to-expire finances is effectively zero. The low-quality spending at the end of the budget

period is driven by the fact that various departments in our organization tend to spend funds on

low-value undertakings. In addition, they are likely to engage in so many transactions, thereby

compromising effective management of these transactions.

Available Options to Address "Use it or lose it."

Use of rollover budgets

As the budget managers, this memo advises you to adopt the practice of rolling over the

budget as this would potentially increase efficiency in resource utilization and avoid the

inefficiency from the wasteful budget-end spending. Under this system, you would carry out the

Memo ! 3

budgeting on an annual basis as is the norm, but instead of expiring at the end of the fiscal year,

unused finances are added to the newly formulated budget in the forthcoming period. You are

solely required to break the annual budget into months or quarters and then add each in the future

after the just ended one is dropped. Intuitively, our various departments will not engage

themselves in a wasteful fiscal year-end spending as these funds would be used for higher value

undertakings in the next budget period. This rolling budget will always make you remain focused

on the future as it makes you think about the next full term and not just the remaining part of the

current fiscal year. In the same context, the continuous budget makes the budgeting process an

ongoing process and not a once-a-year exercise.

Participative budgeting

This memo also views it prudent to advising you on the need to adopt and embrace a

bottom-up approach to the budgeting process. This is where, as the top managers, we need to

greatly get the input of lower level employees in our budgeting process. As the top management,

our core role is just offering general budget guidelines and leaving the lower level to drive the

development of their units’ budgets. The various budgets will then be grouped into the middle

level to form a divisional budget that is eventually submitted to you as the budget managers or

committee and later to the top management for review for consistency and coordination.

The purpose of engaging all people in our entity is from the understanding that there are

behavioral implications in budgeting other than the technical aspects. Whereas the technical

aspects of budgeting concentrates on mathematical computations of projected revenues and

costs, their implementation and achievements rely on the behavioral aspects, use of people. This

Memo ! 4

implies that the behavioral aspects and technical aspects of the whole budgeting process should

not be separated.

You are therefore advised that, the efficient use, as well as the application of the budget,

is profoundly influenced by employees' commitments and attitudes to the ideals of the budgetary

process. The budget so developed should be the one that encourages all levels of employees to

exhibit behavior that is in line with the objectives of the organization. This will prevent them

from engaging in unnecessary and wasteful spending of funds and other resources. Employees

also see participative budgeting as self-imposed and thus improve their morale, performance, job

satisfaction and commitment to our organization’s goals and targets. Therefore, a meaningful

participation of the lower level managers and subordinates in the budgeting process offers them a

chance to participate in the decision-making process on goals that suit them and the firm.

The participative budgeting also fosters a great sense of care and responsibility making

employees carry their duties with the required due care and diligence as they would like to

identify with the achievement of budgets. If conducted in a sensitive and positive manner, the

budgeting process leads to increased motivation as well as improved goal congruence between

the entire organization and an individual.

The advantages we stand to Enjoy through Proper Budget Process Formulation

Our organization will have a well-orchestrated roadmap to guide its employees in

achieving its objectives. This will make it easy for results interpretation and the ability to foresee

potential problems. It will also enable us to evaluate activities to assess whether they will help

Memo ! 5

our organization achieve its goals. We will easily be able to establish whether a given plan

optimally allocates resources among the entity’s various activities. Another advantage is that a

proper communication of strategic goals from the top management and feedback from employees

and lower-level managers on the goals is supported. Performance evaluation will also be

enhanced by comparing the budgeted performance goals against the actual results.

Memo ! 6

References

Horngren, C. T., Sundem, G. L., Burgstahler, D., & Schatzberg, J. (2013). Introduction to

Management Accounting. New Jersey: Pearson Education, Limited.

Created by: https://writersperhour.com