ACCOUNTING FOR DECISION-MAKING

Every company, whether large or small, faces several dilemmas when confronted with the budgeting process. This essay traces the budgeting process from its beginning concepts to the budgeting of today by addressing the concept that budgets are sometimes referred to as "tools of repression and barriers to change."

It is shown that there was some truth to that statement historically but that today budgeting is an essential part of a company's strategic management process. The essay traces budgeting from its original concept of analyzing the past to its current status as a tool for predicting the future.

Along with an exploration of major theories, including the concept of Economic Value Added, there is a brief discussion of the role that budget projections played in a takeover consideration of a software company by a games manufacturer. The company name as used in the essay is hypothetical although the example is based in fact.

Proponents of the statement that budgets are "a tool of repression and a barrier to change" are as firmly grounded in reality as the Cheshire Cat from Lewis Carroll's Alice in Wonderland. In fact, the scene between Alice and the Cheshire Cat could be used to typify the dilemma every company, whether large or small, faces when confronted with the budgeting process.

It will be recalled that Alice, while lost, asked the Cheshire Cat "which way I ought to walk from here?" to

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ources to innovation (R&D, offerings or market). The Era of Projections In the 1920s, as businesses began expanding by merging with other businesses, and as the growth in private investment (from institutions and individual investors via the stocks and bonds markets) it became essential for budgeting to make a gradual shift from recording the past to predicting the future, a concept that led to the idea of spreadsheets. Originally done by hand, the spreadsheets would log all the cost elements of a company (overhead, sales, debt, and so on) and all of the profit elements (sales, net sales and other income). This logging of expenses versus revenues gave a company an idea of where it had been. And by applying projected growth formulas to the figures could make educated "guesses" about the future. The spreadsheet concept had the benefit of showing the interrelationship of all aspects of a company's organization. However, since it was done by hand and since it was a numerically complex document, budget planning was, of necessity, done on an annual basis. The implication for management strategy was that managers had to rely on documents that took a great deal of time to prepare to make strategy decisions about the future. I

Category: Business - A