176 Understanding the Numbers
Performance Evaluation
Budgets serve as estimates of acceptable performance. Managerial effective-
ness in each budgeting entity is appraised by comparing actual performance
with budgeted projections. Most managers want to know what is expected of
them so that they can monitor their own performance. Budgets help to provide
that information. Of course, managers can also be evaluated on other criteria,
but it is valuable to have some quantifiable measure of performance.
Cost Awareness
Accountants and financial managers are concerned daily about the cost impli-
cations of decisions and activities, but many other managers are not. Produc-
tion supervisors focus on output, marketing managers on sales, and so forth. It
is easy for people to overlook costs and cost-benefit relationships. At budgeting
time, however, all managers with budget responsibility must convert their
plans for projects and activities to costs and benefits. This cost awareness pro-
vides a common ground for communication among the various functional areas
of the organization.
Legal and Contractual Requirements
Some organizations are required to budget. Local police departments, for ex-
ample, cannot ignore budgeting even if it seems too much trouble, and the Na-
tional Park Service would soon be out of funds if its management decided not
to submit a budget this year. Some firms commit themselves to budgeting re-
quirements when signing loan agreements or other operating agreements. For
example, a bank may require a firm to submit an annual operating budget and
monthly cash budgets throughout the life of a bank loan.
Goal Orientation
Resources should be allocated to projects and activities according to organiza-
tional goals and objectives. Logical as this may sound, relating general organi-
zational goals to specific projects or activities is sometimes difficult. Many
general goals are not operational, meaning that determining the impact of spe-
cific projects on the organization’s general goals is difficult. For example, orga-
nizational goals may be stated as follows:
- Earn a satisfactory profit.
- Maintain sufficient funds for liquidity.
- Provide high-quality products for customers.
These goals, which use terms such as satisfactory, sufficient,and high-
quality, are not operational: the terms may be interpreted differently by each
manager. To be effective, goals must be more specific and provide clear direc-
tion for managers. The previous goals can be made operational as follows: