Rigidity Of The Traditional Budget Model Essay

Length: 7 pages Sources: 20 Subject: Business - Management Type: Essay Paper: #4900369 Related Topics: Budget Management, Capital Budgeting, Activity Based Costing, Year Round School
Excerpt from Essay :

Traditional Budgetary Model

Organizations have for a long time been using budget as the main tool in management control. Using budget control as the sole method of management control has several demerits. Budgets, for example, cost a lot to prepare. It has been noted that budgets often limit an organization's responsiveness and may be a road block to change. Another disadvantage of budgets is that most focus on reduction of costs instead of focusing on the addition of value. In view of these disadvantages, some people have proposed that budgeting be entirely done away with. Hope and Fraser with the clarion "Beyond Budgeting" are notable proponents of this push to do away with budgeting.

The "Beyond Budgeting" approach and the "Balanced Scorecard" Framework

The "Beyond Budgeting approach (BB)" has been proposed by European practitioners as a way of solving the problems inherent in the traditional ways of budgeting. The literature describes budgeting as one of the key pillars of management control (Anthony, 1998). The approach Anthony took was based on accounting. Under such an approach, strategic planning would be taken as a different or separate discipline (Hansen et al., 2003). Practitioners have argued that the use of budgets is a roadblock to efficient and sound allocation of resources in an organization and also encourage short sighted decision-making. Other harmful games may also result due to budgeting in the organization (Wallander, 1999; Fraser and Hope, 2003a, 2003b). More and more research papers have also been focusing on the demerits and challenges of organizations relying solely on budgeting as a means of management control (Hansen et al., 2003; Lukka, 1988). Some organizations have therefore begun to look into this and are replacing budgeting with other alternative systems. Some other organizations are complementing budgeting with other systems. Those who are credited for launching this change of perception is Hope and Fraser through their work "Beyond Budgeting" approach (2003a, 2003b) as well as Kaplan and Norton through their Balanced Scorecard Framework (2001). The Balanced Scorecard marries performance with the set strategies of the organization so as to reduce the tendency of organizations divorcing operational management and strategic plans. Despite the fact that there are several critiques and well intended insights against budgeting as a tool of management control, there is not much evidence on the effects of doing away with budgets in organizations (Kaplan and Norton, 2001).

The strengths and limitations of the traditional budgetary model

Throughout the different propositions presented by the various groups, emphasis is made of how budgeting in the traditional sense is used to gauge performance, motivate workers, plan and to make sure that internal control is working. Traditional model of budgeting has been in use for several years but it still has several weaknesses. It takes a lot of time, it might take up to half a year to come up with budget figures for the coming year and then the budget becomes obsolete due to the changing market dynamics and the budgets inflexibility to adapt to a rapidly changing operating environment.

While budgeting may have flaws, it should not be assumed that it does not have a place in the modern business operational environment. If that were the case then budgeting would actually be a thing of the past. In fact, there are several advantages of budgeting especially as a means of financial control. In controlling finances, budgeting ensures that goals for revenue are set and that expenses are reduced. With clear budgets, the goals set will be monitored closely all year round and any variances will be discusses and acted upon (Burns & Waterhouse 1975). With budgeting, management has better clarity on the goals of the organization and this directs their action taking as well as reducing the chances that such goals are subject to misrepresentation since budgets reduce goals to simple figures (Marginson & Ogden 2005). With the current criticism being directed at budgeting, people might lose sight of the basic goal of budgeting which is to lend support to the operations of the company. The company's operations are what ensures that it meets its set goals. By way of budgets, the company can communicate its goals to key players driving the company (Hansen & Van Der Stede 2004).

Traditional budgeting also has weaknesses and disadvantages. Critics of budgeting have always said that budgeting limits the ability of an organization to quickly adapt to fast changing dynamics in the

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Organizations should be flexible enough to react to sudden alterations in the market place (Bunce et al. 1995). Most arguments made by these critics is that budgeting enslaves an organization to the requirements spelled out in the budget. In fact, budgeting can be detrimental to the organization if managers' evaluation is based on their ability to meet those budgets. This may lead to blatant alterations and manipulation of financial figures to project a view that the organization is doing well and is meeting its goals (Libby & Lindsay 2003a). Fraser and Hope opine that budgeting is nothing but ungrounded promises made to investors. Through companies that have gone down like Enron and World Com, they argue the case for the dangers of using budgets. Budgeting was the cause of manipulation of figures in these companies, which eventually resulted in the companies collapsing.

Alternatives to the traditional budgeting model

Many alternatives to budgeting exist and could be adopted to replace traditional budgeting. Changes that have taken place have not only focused on the improvement of traditional budgeting but have also yielded an entirely new concept: "beyond budgeting." Several opinions exist on budgeting it has become overwhelming. Many suggest budgeting in its traditional sense should still be used even with its flaws since the advantages far outweigh the disadvantages. Also traditional budgeting should not just be discarded because that would mean that we are not creative enough to adjust it to meet new needs in the business environment. Others, however, hold the opinion that annual budgeting should be completely done away with to give way to more modern methods like beyond budgeting.

Beyond the Budgeting Concept

Users of BB-principles have formed an organization named Beyond Budgeting Roundtable where the use of beyond budgeting is discussed. A number of principles have been agreed to as true BB. The principles are classified into leadership principle and process principle. Under leadership we have a focus on customers, the organization of accountable and lean teams, the empowerment of every person to be able to espouse qualities of leadership, giving freedom to teams so that they are able to act independently, the organization enabling its leaders to lead under set boundaries and with clear goals to be achieved, and the promotion of open information to aid in self-management. The process principles are that relative aims and goals should be set for continuous growth and improvement, sharing of rewards, measuring success relatively based on performance, having an inclusive and continuous planning process, having controls pegged on prevailing indicators as well as trends, availing resources when needed and dynamically coordinating interactions.

Management accountants are concerned that even though they have put forth so much effort into understanding how budgetary systems work in organizations and how they can be streamlined to optimally operate in an organization to help it achieve its goals and how different budgetary systems operate in the workplace, organizations are finally giving up hope in budgeting and bringing forth new systems and techniques as replacements. It is not yet clear what techniques can effectively replace budgeting. Not even BB as confidently proposed by Kaplan and Norton in their 1996 work. The problem or challenge, methinks, is therefore how we can merge these new techniques with the techniques that had been operating before and have gone through rigorous testing. There is hope though. We can adapt the systems we used to try and test the old systems in testing the new systems to evaluate their competency (Otley, 2001).

Studies show that the critics' arguments apply mostly to organizations operating in environments prone to fast change (Bescos et al., 2003). High independence and very low predictability level seg. In the financial industry can make use of the dynamic planning methods. This, however, does not apply to less independent institutions that have manageable predictability like government institutions. Due to the views presented, other budgeting methods have been developed. An example is activity-based budgeting (Hansen et al., 2003). Further, other planning methods have come up. BB principles can be assumed to be the new way of budgeting. BB has all the activities associated with budgeting but it is more time sensitive.

Traditional budgeting was well grounded on facts and figures of the company. Numbers were drawn from the general ledger which contains all the company accounts. Uyar summarized the advantages of using the traditional method of budgeting. He stated that it is very effective in the planning of cash flows, coordination of activities, controlling costs and planning for the financial position the organization desires. The advantages explain why several companies have not dropped budgeting and adopted…

Sources Used in Documents:

Bibliography

Anthony RN and Govindarajan, V. (1998) Management Control Systems. Richard D. Irwin Banham, R. (2012). "Freed From the Budget," CFO, Vol. 28, No. 7, pp. 41-46.

Bescos, PL, E Cauvin, P Langevin and C. Mendoza. (2003) Criticism of budgeting: A contingent approach. Proceedings of the 26th European Accounting Association Conference, Seville, Spain, April 2-4, 2003.

Bruns, W.J. & Waterhouse J. 1975. Budgetary Control and Organization Structure. Journal of Accounting Research, autumn 1975, 177-203

Bunce, P., Fraser, R. & Woodcock, L. 1995. Advanced budgeting: a journey to advanced management systems. Management accounting research, 6, 253-265.


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