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ANALYSIS OF BUDGETING AND CONTROL ERRORS IN LITHUANIAN ENTERPRISES

Автор Доклада: 
G. Lionius, S. Rimvydas
Награда: 
ANALYSIS OF BUDGETING AND CONTROL ERRORS IN LITHUANIAN ENTERPRISES

UDC 657.6

ANALYSIS OF BUDGETING AND CONTROL ERRORS IN LITHUANIAN ENTERPRISES

Gaizauskas Lionius, Assoc. prof., PhD
Skyrius Rimvydas, Prof., PhD
University of Vilnius

The paper analyses the problems of development and control of an important business management and control tool – budgeting in enterprises of the Republic of Lithuania. This area of management accounting, already recognized and widely applied in businesses of developed economies, is given a rather scarce attention in Lithuanian economic literature, and it encounters significant errors and problems of attitude, recognition and application. The avoidance of budget development and control errors should lead to a better coordination of activities, more rational use of financial, material and labour resources, which is rather important in the times of economic instability when market unpredictability grows and risks increase significantly. The experience of Lithuanian companies may be useful for other post-Soviet countries having a short experience of applying instruments to manage in a market economy.
Keywords: budgets, budget development, budget control, deviation analysis.

Introduction
Every business operating in an unstable market environment, regardless of industry, needs a well-organized and coordinated system for planning, actual performance reports, target control and evaluation. The importance of planning to reduce uncertainty is increasing with growing uncertainty in the markets and society. An important integral part of an enterprise planning and management system is budgeting. A budget is a breakdown of a part of a strategic (long-term) plan, usually for one year, intended to precisely define activity goals and required resources. Budgets comprise a complex business planning system which will be viable only when equipped with feedback elements, allowing analysis of actual performance and correcting options when receiving signals about system behavior.
In theory, the methodology of budget development and control is not complicated, and its awareness in Lithuania is rather high due to the published work of foreign authors R. Anthony (Anthony, Govindarajan, 2006), C. Drury (Drury, 2007), C. Horngren (Horngren, Foster, Datar, 2000), R. Garrison (Garrison, 1997) and others, as well from the works of Lithuanian authors J. Mackevicius (Mackevicius, 1994; Mackevicius, 2003), V. Bagdziuniene (Bagdziuniene, 2006) and others. More significant problems of budget development and control arise when the methodology is applied at the practical level. The methodological problems are well-defined, but it is often unclear how to solve them in real time in a value chain of a given enterprise. For this reason the processes of applying budgets in Lithuanian enterprises are marked with bigger or lesser errors that reduce the efficiency of budgeting. A complicated business environment makes it hard to avoid mistakes, so one must learn from own mistakes, or even better – from somebody else’s mistakes.
Research object – budgets and budgeting processes in business companies operating in post-Soviet countries.
Research goal – to analyze the experiences of budget development and control in Lithuanian enterprises, pointing out the most common mistakes in budget fulfillment control and the ways to avoid them.
Research methods – publication analysis, summarization and comparison; over 50 interviews with managers of various levels at Lithuanian enterprises; analysis of budgets in actual use.

Historic heritage in Lithuanian economy
After the declaration of independence, from the era of “mature socialism” Lithuania inherited Soviet-style planning skills, and a numerous army of economists-planners. The transition to market economy for most enterprises and their employees has been painful, accompanied by probing, inevitable mistakes and changes in values. The Soviet economy had implemented a hyped-up image of planning, together with numerous people employed for this function, and this had produced the first mistaken assumption about very good planning skills. A look at the Soviet textbook definitions of the planning function, they (ideological rhetoric aside) do not differ much from planning definitions in market economies. However, here the similarity ends: there had been no planning in a market economy sense of the word, and the budgeting of market economy enterprises cannot be compared to Soviet planning methodology.
The second remaining assumption is that a plan (budget) is a legal act, and its execution is compulsory. Besides, the owners-managers frequently have the attitude that planned goals should be inflated, so that the employees would show more effort in reaching them. In reality, a plan (budget) is not a law, but a goal to achieve targets on time, in the right place and with the right features. If some reasons force to deviate from the plan, it may become evident that its execution is no longer possible, and it should be corrected or a new plan should be developed.
The third assumption is that actual deviations from the plan are the subject of everyday analytical activities. Such a picky attitude is incorrect, because the analytical tools that analyze past data will not solve the profit growth problem. One may find the reasons of certain results, but there is no “new” profit in the past. Analysis is required when developing a budget, and there is no time for it later on, while various cases of future deviations have to be analyzed before they come out. The execution of a budget will certainly invoke some deviations, and here we encounter what is called control in management accounting: the definition of a factor that caused the deviation (whether positive or negative) and its use to increase the profit.
A fourth mistaken assumption that came out in the first years of restored independence is that budgeting in small and medium enterprises is not feasible, and the owners usually say: “we can do without budgets”. Sure, management differs significantly for large and small enterprises. In small enterprises, because of the small volumes of business and information about business, the decisions are based on managers’ experience, intuition, other practical aspects. There are not that many large enterprises in Lithuania, and small and medium enterprises dominate (over 99% of registered companies). However, small businesses are much more affected by market risks, and they go bankrupt more often. A frequently used expression is “few people plan failures, but a lot fail without a plan”. Especially now, when the economy is complicated and unstable, the importance of budgeting for any enterprise gets even more important.
Market changes fast, especially under crisis: technologies and user habits change; product lifecycle gets shorter; competition builds up power and so on. When the owners realize this – or they are replaced by new owners, who do not want to face the everyday solving of newly emerging business problems, a need will emerge to plan and control business processes in order to be sure that a business is moving along a well-understood direction and towards a known goal. To an extent possible under market conditions, such possibility is provided by budgeting – a practice that is historically tested in many Western countries.

Budget development mistakes in Lithuanian enterprises
The two most common budget development mistakes in Lithuanian enterprises, contradicting the very concept of budgeting, are:
1. The absence of strategic planning, also of clearly stated and explicit future goals. Budgets are developed quarterly, or annually in the best case; they are fragmented, incompatible, based on various information sources; deviation adjustment is not an option. Such budgets with short-term priorities usually destabilize long-term goals, and disturb the activities of departments and their managers.
2. The budget development is related to financial accounting standards only. In practice, the development of such budgets is mostly reduced to projections of profit-loss and balance data into the following year: income, costs, profit and other reported indicators are increased (usually by top management) by a certain margin. The attempts to relate budgeting to financial accounting standards may be explained by two reasons: firstly, the financial accounting standards are a well-known and reliable “brand”. Secondly, even in professional environments there are shortages of budget development knowledge, especially regarding practical experience; therefore financial accounting, which is standard and clear, is applied to the theoretical and practical base of budgeting. However, the historical financial accounting information is insufficient if not harmful for enterprise management needs, so it cannot serve as an enterprise management tool. So, budgeting based on financial accounting standards is hardly something to be proud of; in reality it is more of a work in vain.
The other common mistakes by Lithuanian enterprises in the stage of budget implementation and development are:
• “Bicycle invention”. The attempts to develop exceptional, own, hard to interpret and therefore dysfunctional budget formats are commonplace. That might be a way for budget developers to express their creative potential, but it reduces rationality, complicates report analysis and management decision making, and often violates even the economic principles of calculating the data.
• Terminology differences. If, after the implementation of national financial accounting standards, the vocabulary of financial accounting is more or less harmonized, this area is quite problematic in management accounting, including budgets. Managers, accountants, economists and financiers have to speak a single and explicit language. This is why, at least in the company boundaries, a vocabulary of commonly used terms is required, drawn along the principle “the terms are not argued, but agreed upon instead”.
• Non-compliance to the budget development rules. Most often the budget development schedule is broken: data and draft budgets are late; often the final budget is approved after the budgeting year has started or even is well into its middle. This is usually explained by other urgent work or delays of additional, more accurate information.
• The attempts to include and then calculate as many budget elements as possible. Possibly to provide extra insurance, enterprises often include too many financial and economic indicators and ratios into the budgets. The use of a large number of indicators, which might have opposite dynamics, complicates the evaluation of activities.
The management of a contemporary enterprise is hardly imaginable without the use of information technology. A number of companies in Lithuanian market are offering assorted software products, including ones for budget development. When acquiring and applying budgeting software, the common missteps are:
• Own development of an original budgeting system. This usually costs significantly more, and the results are disappointing for the users.
• Acquisition of off-the-shelf software without evaluating the company’s specific needs. The market is offering many accounting software products from simple to sophisticated that include budget development tools.
• The expected results of implementing IT are overvalued. This is an attitude of “press the button, get the answer”. A software product itself is not a budget – it’s only a tool to save time for budget developers, and to have a well-thought-out budget system that is operating faster.
Budget control errors in Lithuanian enterprises
There are a number of objective and subjective reasons for mismatches between planned and actual budget data. In budget execution control and evaluation, it is important to point out the principal reasons of such mismatches, as they define the actions to be taken currently and in the future.
The errors made in computing the budgets and evaluating the actual data, while quite common and at first glance simple and unimportant, create numerous problems for enterprises. Although at this time budgeting is mostly done by using information systems that correct most mistakes, some computing errors are inevitable; e.g. missing or doubled numbers, mismatches while joining departmental budgets etc. Far more important are the errors made when omitting the activity factors, such as failure to record discounts to buyers, cost reductions for various reasons etc. For computing errors, time factor (time to correct the mistakes) is of prime importance. A late correction may lead to wrong decisions in evaluating budget execution.
Regarding budget efficiency, a much more important factor than computing mistakes is the company’s approach to budget control. Human factors are the main reason of incorrect approaches to budget control and analysis of deviations. These errors, as opposed to computing errors, are hard to correct without changing the beliefs of a controlling person and an adopted evaluation system. The influence of a human factor may significantly reduce or completely wipe out the advantages of budget application.
The most common budget control mistake in Lithuanian companies most likely is an inappropriate distribution of managers’ responsibilities that sometimes are not specified at all. As a consequence, managers are experiencing demands of responsibility that exceed the authorized levels. Evidently, managers cannot be responsible for income or cost items that they do not control; however, responsibility for all deviations can be “loaded” onto them. Besides, an observed feature of Lithuanian business executives, and owners in particular, is to make all decisions themselves, and to discharge the responsibility on managers in the case of failure. In such case lower-level managers do not exercise control upon anything, and cannot be held responsible for other peoples’ decisions and actions beyond their control.
In practice, budget control is often overemphasized, and therefore too detailed. An overly detailed budget control might lead to larger costs than received benefits. Apart from this, a picky control limits the freedom of action for lower-level managers, although in most cases they have better awareness of their business situation and can make better decisions. This attitude is complemented by an erratic opinion, especially by owner-managers, that a top manager might have a total control over lower-level managers. Under these limitations, managers lose motivation to take initiatives and reach for better results. An opposite attitude is a lax and superficial control of budget execution. In both cases, instead of being a management tool for achievement of planned results, budgeting becomes a meaningless task that impairs the execution of managers’ direct duties.
A still valid point of view (probably influenced by a Soviet planned economy habit that a plan is a law that has to be executed) is that a budget has to be executed 100%, or above that, which is even better. Budget is not a legal act; if the activity factors have changed, budget has to be adjusted to achieve real results, not virtual. This point of view is often followed by another erratic attitude that one should look for someone guilty, instead of looking for deviation reasons. The search for someone guilty turns into witch hunt, and the hidden reasons of negative effects continue to impair the results. The principal attention to reprimanding hurts employee motivation, damages interpersonal relations and work climate; managers may even hide or alter data to conform to the budget.
The most important link in budget control is deviation analysis, whose principal goal is, as a rule, to define reasons and persons in charge for most important deviations, and to remove factors having caused these deviations. In deviation analysis, the following mistakes are noted in Lithuanian companies:
• Reaction to any deviation. This takes much time, leaving less time for the analysis of significant deviations and the factors that caused them.
• Detailed analysis of insignificant deviations.
• Analysis of negative deviations only, while positive deviations are considered achievements. Significant positive deviations show that errors have been made while planning the budget, the activity conditions and options have been misjudged, and these issues should be considered while adjusting strategic goals and compiling the budget for the next year.
• In deviation analysis, fixed comparisons between planned and actual data without applying the principles of flexible budgeting. Static evaluation of deviations without cost recalculation for actual production volumes is incorrect, and further analysis will lead to wrong results.
• Non-evaluation of factors beyond control. Although the company cannot influence them, their awareness and constant monitoring may reduce their influence in the future.
A budget control system will be complete only when related to employee motivation for achieved results. A look at the motivation of budget execution in Lithuanian companies reveals the most observed mistakes:
• The budget goals are set too high for employee motivation and impossible to achieve;
• In the case of successful budget execution, the bonus requirements are adjusted” with an explanation that “planned budget goals were too low”;
• A regular adjustment of budget goals during its execution, and raising them if the execution is successful;
• Set bonuses for budget execution for managers only, and do not give them to remaining employees;
• Pay bonuses only when reaching or exceeding planned budget figures. If the budget has not been met because of external, uncontrollable factors and without the employee fault, this might have negative consequences in the future.
To make budgeting effective, it is also important to consider the software used to compile the budgets. Large Lithuanian companies, as well as part of the medium sized companies, have implemented contemporary accounting systems – SAP, Microsoft Dynamics NAV and AX (former Navision and Axapta), Scala, who include budget compilation functions. Small and part of medium companies usually implement small accounting systems by local software producers – Finvalda, Konto, Solo; these systems are mostly intended for financial accounting functions and are hard to adjust for budgeting purposes. Such companies usually use Microsoft Excel spreadsheets. The use of spreadsheets or Excel, however, is not without risks: such use is prone to errors; tuning of relations between departmental budgets is complicated; primitive data access protection functions. This is why budgeting in small and medium companies gets more complicated and time-consuming.
Conclusions
Having evaluated the market experience, work culture and ethics of Lithuanian companies, labour and social relations between employers and employees, one of the most reliable management instruments should be application and development of budgets that has historically been proven in Western countries. The application of budgets, and especially budget execution control stage, supports matching of assorted company activity aspects: activity evaluation, planning, responsibility assignment, coordination, communication, motivation, employee initiatives, cost control.
The budget compilation errors that are the most common and typical for Lithuanian companies, and contradict the very concept of budgeting, are:
• Absence of strategic (long-term) planning and explicit company future plans;
• Budget compilation is related to financial accounting standards only;
• “Inventing a bicycle” – attempts to develop own budget formats that are proprietary, hard to understand and therefore mostly dysfunctional;
• Terminology differences. If financial accounting has normalized its terminology, the budget area terminology is quite problematic and impairs making clear decisions;
• Non-compliance to, or absence of budget compilation rules;
• Attempts to present, calculate and control more items;
• Seeing the compilation of budgets as a function of accountants or financiers.

The methodology of budget control is simple and well-suited for formal approaches, but it is often unclear how to make them work in real time and in the value chain of the company. The practical efficiency of budget control is mostly determined by organizational skills of company personnel, and an efficient motivational system.
The two essential issues defining the performance of budget control are responsibility distribution and deviation analysis level. The deviation analysis procedures by their complexity would fall between very simple procedures and thorough analytical procedures for important management decisions. The strategic analysis approach that has been under development in some companies was negatively influenced by the current economic crisis and vague financial prospects. The “survival” budgets currently in use can hardly be related to a strategic perspective.
The most common budget control errors in Lithuanian companies are:
• An inappropriate distribution of managers’ responsibilities that sometimes are not specified at all. Besides an observed feature of Lithuanian business executives, and owners in particular, is to make all decisions themselves, and to discharge the responsibility on managers in the case of failure.
• Calculation errors when compiling budgets and evaluating actual data; these errors are simple but create a number of problems.
• A still valid point of view (probably influenced by a Soviet planned economy habit that a plan is a law that has to be executed) is that a budget has to be executed 100%, or above that, which is even better. Budget is not a legal act; if the activity factors have changed, budget has to be adjusted to achieve real results, not virtual.
• employee motivation and rewards. The companies often are setting the budget goals that are too high and impossible to achieve; in the case of budget fulfillment rewarding rules are revised, explaining that “planned goals have been too low”; as well, budget goals are regularly revised and raised during execution; rewards are for managers only, bypassing other employees.
• Inappropriate accounting system and inadequate list of accounts. In Lithuanian companies, the list of accounts and an accounting system usually are oriented towards financial accounting and production of financial reports. The grouping, breakdown and time of presentation of financial information do not fit the information needs of budget control. This forces the managers to collect and process additional information and prepare budget fulfillment reports.
• Evaluation of budget fulfillment by static values only, without consideration of cost dependency upon changes in activity volume.

References:

  • 1. Anthony, R. N.; Govindarajan, V. (2006). Management control systems. Boston, MA: Irvin.
  • 2. Bagd?i?nien?, V. (2006). Biud?etai ir j? vykdymo kontrol?: teorija ir praktika (Budgets and the control of their execution: theory and practice). Vilnius: Conto litera.
  • 3. Drury, C. (2007). Management and cost accounting. London: Cengage Learning EMEA.
  • 4. Garrison, R. H. (1997). Managerial Accounting: concepts of planning, decision making. BOstin, MA: Irwin.
  • 5. Horngren, Ch. T.; Foster, G.; Datar, S.M. (2000). Cost Accounting. A Managerial Emphasis. Upper Saddle River, NY: Prentice Hall.
  • 6. Mackevi?ius, J. (1994). Apskaita (Accounting). Vilnius: Mintis.
  • 7. Mackevi?ius, J. (20030. Valdymo apskaita. Koncepcija, metodika, politika. (Management accounting. Concept, methodology, politics). Vilnius: TEV.
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