Citibank Indonesia

Case 1: Citibank Indonesia

1. Citibank’s 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 manager’s 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 year’s 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 levels of 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 Asia’s profit goals by $4 million for 1984. They decided that Indonesia’s portion of the profits is projected to be between $500,000 and $1,000,000. Mr. Mistri, Citibank’s 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 government’s correction steps for the balance of payment problem caused by the instability of the government and the nation’s 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 Citibank’s 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