Budgetary Accuracy Improves Managerial Performance

By Foote, Paul; Petruzzi, Christopher et al. | The Journal of Business Forecasting Methods & Systems, Spring 1997 | Go to article overview

Budgetary Accuracy Improves Managerial Performance


Foote, Paul, Petruzzi, Christopher, Al-Maskari, Fathiya, The Journal of Business Forecasting Methods & Systems


Corporate performance measured by such things as profit, earnings per share and total return to investors improves with an improvement in forecasts ... better forecasts not only improves managerial performance of the current period but also after a lag of one and two months... demonstrates with a simulation model, using students as a proxy for managers.

Many managers dispute whether accurate forecasts improve managerial performance. As such, corporations often reward managers for performance measures other than budgetary accuracy. This article shows that budgetary accuracy plays an important role in improving the managerial performance. Therefore, corporations should pay special attention to budgetary accuracy in rewarding their executives for managerial performance.

Some of the problems with budgetary forecasts include events that influence the company's performance but are difficult to predict. The events such as fires, machine breakdowns, snowstorms and price wars can distort short-term forecasts while recessions and booms can distort medium term forecasts, especially of firms with cyclical trends. Major technological innovations can change the patterns and relationships assumed in long-term forecasts. The behavior of competitors is another element that can cause a problem in forecasting.

DESIGN OF THE EXPERIMENT

While top managers could evaluate the forecast accuracies of their managers, they need not to publish their findings. Firms may choose to disclose only a small number of budgetary data items. Furthermore, a firm may disclose budgetary data one year but not the next. This lack of real world data limits external researchers to simulation experiments. This study addresses the relationship between budgetary accuracy and managerial performance by using the data from a simulation experiment involving business school students at Sultan Qaboos University in the Sultanate of Oman.

This study employed a large set of managerial performance measures in order to allow evaluation of many dimensions of performance. A literature review resulted in 64' performance measures, which are given in Table 1.

SIMULATION METHODOLOGY

We used simulation because students did not have access to real data to manage a real firm. There are many computerbased corporate simulation packages available for managers and researchers. The package we used was Kenneth R. Goosen's Management/Accounting Simulation (MAS). It is superior to many other simulation packages because financial statements generated by it contain far more details than many other packages available in the market. In this study students are used as a proxy for managers. Here are the steps followed in this study: Step 1: We assigned one company to each student.

Step 2: Each student received information about the prior management's marketing, production, and financial decisions plus the resulting financial statements for the first 3 months of the year. Marketing decisions included information about prices of the product, amount of advertising in each territory, number of salespersons in each territory, salary per salesperson, commission rate per salesperson, and credit terms. Production decisions included information about budgeted production level, additional equipment requirements, number of factory workers to be hired, labor wage rate, order size and number of orders to be placed per month for raw materials, choice of suppliers of raw materials, replacement of factory equipment, scheduling of overtime or of a second shift, and acceptance of special orders. Financial decisions included information about payment of accounts and notes payable, retirement of bonds, bank loans requested, issuance of stocks and bonds, payment of dividends, factoring of accounts receivable, and investment of excess cash. …

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