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determine the impact of specific projects on the achievement of the general goals of the organization.
For example, three organizational goals may be stated as follows:
1. Earn a satisfactory profit.
2. Maintain sufficient funds for liquidity.
3. Provide high-quality products for customers.
These goals, which use subjective terms such as satisfactory, sufficient, and high-quality, are not
tangible goals. The goals stated here may be interpreted differently by each manager. To be effective,
goals must be more specific and provide clear direction for managers. For example, these same three
goals can be made operational as follows:
1. Provide a minimum return on gross assets invested of 18%.
2. Maintain a minimum current ratio of 2:1 and a minimum quick ratio of 1.2:1.
3. Products must receive at least an 80% approval rating on customer satisfaction surveys.
Effective Budgeting
For firms to use budgets as effective tools:
• Budgets should be goal-oriented so that they help a firm accomplish its goals and
objectives.
• Budgets must be realistic plans of action rather than wishful thinking.
• Participative budgeting should be utilized to instill a sense of cooperation and team play.
• The control phase of budgeting must be used effectively to provide a framework for
evaluating performance and improving the budget-planning stage activities.
• Budgets should not be used as an excuse for denying appropriate employee resource
requests.
• The budgeting process should be used by management as an excellent vehicle for
modifying the behavior of employees to achieve company goals.
Goal Orientation
Some firms have more resources than others, but no firm seems to have all of the resources it needs to
accomplish all of its goals. Consequently, budgets should provide a means by which resources are
utilized for projects, activities, and business units in accordance with the goals and objectives of the
organization. As logical as this may sound, it is sometimes difficult to relate general, organizational
goals to specific projects or activities. Many general goals are not operational, meaning that it is
difficult to determine the impact of specific projects on the achievement of the general goals of the
organization.
A logical first step toward effective budgeting, then, is to formalize the goals of the organization.
Starting at the top, general organizational goals should be as specific as possible, carefully established,
and put in writing. Next, each major unit of the organization should develop more specific operational
goals. The process should continue down the organizational structure to the lowest level of budget
responsibility. This goal development process requires management at all levels to resolve difficult
issues, but it also results in a budgeting framework that is much more likely to be effective. Even