Case 1: Citibank Indonesia

1.Citibanks budgeting process is based on a bottom-up method. It is not compromised of

specific goals to be attained by individual operating units, but is composed for the
corporation as a whole. Citibank was aiming for long-term goals, which call for profit growth
of 12-15% per year, 1.25% return on assets, and 20% return on equity. These standards are set
for the entire company, and individual sectors, such as international branches, usually set
their own higher goals because they expect to exceed the norms. Headquarters send out
budget instructions mid-year with all the financial information from January through June. It
is the operating managers job to prepare a forecast for the remaining period of the year, and
also construct a budget for the following year. In order to compose the budget, managers
begin by examining the projections from each major account relationships, and hold
discussions about those accounts until the account relationship projections add up to coincide
with the desired profit bottom line. Every level of management is involved with the
budgeting process. Subsequent, the cost projections are also considered. Formal reviews of
the annual budgets are held at different times of the year depending on the division, group,
and institutional bank levels. Budgets are submitted with the assumption that sovereign risk
will be approved; however, if the sovereign risk is erroneously incorporated, then the budget
has to be re-evaluated. Each quarter a new estimation for the remainder of the years budget
is made. Management oversees performance by comparing it against the budget each month
throughout the year. Budgets are important to the functionality of the company. The budget is
significant because it evaluates success, and because it is directly linked as a major incentive
for managers bonuses.

2.The process Citibank uses is participative budgeting. In this process, accounting managers
from subunits are involved with the company-wide budget. They are set according to the
information and feedback received from high level accounting managers. In this way, budgets
are not merely dictated by top management, but it is cooperative composed. In our case,
Citibank headquarters requires each country managers, like Mr. Mistri, to come up with an
accounting budget for their country. In addition, Mr. Mistri collaborates his efforts with other
accounting mangers within the firm to come up with a budget. Constituting employee
personnel at different levelsof management as apart of the budget emphasizes a personal
ownership of the final budget. In turn, managers can relate to the budget, and put forth greater
efforts in achieving company goals.

3.Corporate managers at Citibank increased South East Asias profit goals by $4 million for
1984. They decided that Indonesias portion of the profits is projected to be between
$500,000 and $1,000,000. Mr. Mistri, Citibanks country manager for Indonesia, is faced with
the problem of meeting expectations because the budget he made was already aggressive. He
had set a high target in the first place considering growth and profits expected along with the
risks involved. Yet, he is instructed to reach for a higher goal. One issue is the risk-return
ratio and the governments correction steps for the balance of payment problem caused by the

instability of the government and the nations economy. Indonesia had fallen into recession
when oil prices dropped. It is uncertain that the capital invested in the foreign country will be
recaptured. Another problem was the high staff turnover, especially since there are now three
unfilled spots at the management level. The company spends several of its resources to
provide their employees with the best training available in the country. Many employees use
the training to their advantage by accepting better offers at other banks. Mr. Mistri is
restricted in his efforts to improve staff turnover because it cannot afford to pay employees
more and because of jurisdiction limitations. Mr. Mistri has a few options that he could
implement facing these problems. One is just to accept the changes and increase the budget.
He would have to adapt to the new budget realizing the risks associated have to be taken.
Another possibility is to reduce to a minimum Citibanks loans to government or private
enterprises because of lower returns. Also, he could increase the loan amounts given to
commercial enterprises to boost profits. Mr. Mistri could talk with Mr. Gibson and negotiate a
better budget based on further information of the current conditions. Last option would be to
reject the proposed budget and continue pursuing the current budget. This method may cause
problems between management and is not favorable.

4.Mr. Gibson needs to set up meetings among subordinate managers and take into
consideration more factors, such as sovereign and return risks, market conditions, and
employee turnover ratios, to appropriately allocate the $4 million. Managers need to
communicate at all levels in order gain insight of all the aspectsof the situation through
several discussions and negotiations. Mr. Mistri and other country managers should be been
given a chance to give their feedback on the newly purposed budget. In this way, a more
informative budget can be processed that better represents future expectations of the company
that has its own unique situations. Mr. Gibson could better allocate the budgeting objectives
between the countries by evaluating and incorporating sovereign and return risks into
budgeting projections. The exchange rates, stability of the economy, political barriers,
attainability of profits, and competitive markets need to be analyzed when constructing
budgets. Countries with greater business risks and unstable economies should be given less of
the overall budget goals compared to countries with fewer risks. Also, the aggressiveness of
previous submitted budgets has to be asserted when giving out budget requirements.

5.There are a few precautionary steps Citibank could take in preventing country managers
from taking advantage of long-term objectives to meet short-term targets, such as, enhancing
internal controls, strengthening performance evaluation measures, and encouraging
participative budgets. Managers need to be reminded about long-term goals that call for
growth, future profits, and customer relationships. Maintaining a well-defined internal
controls system discourages managers from misrepresenting financial statements through
constant examinations of processes risks. Give managers less incentives to manipulate the
system by doing things like producing inventory by setting up a scheme of checks and
balances. Making sure managers are abiding by accounting standards by the use of extensive

audits, induces confidence of the company in the marketplace. Holding company-wide

trainings and conventions throughout the year about policies and new regulations encourage
employee knowledge, morale and company spirit. Performance evaluation measures should
not only be based on achieving quantitative factors such as growth, profits, return on assets
and return on equity, but also include qualitative factors such as customer retention, customer
satisfaction, and employee morale. Give managers other incentives like, rewards and benefits
based on attaining long-term objectives along with monetary bonuses. To do this, Citibank
should set budgets that are longer than an annual period. In addition, multi-directional
communication among management must be present, and a sense of ownership needs to be
instilled in managers to make betterdecisions. Thus, participative budgeting can lead to future
growth.