Budgeting approaches and obsolescence in 21st century organizations

¶ … budgeting an adequate tool for planning and control in organizations and when should alternative approaches be considered? Is budgeting obsolete in the 21st century?

Starting with the last question first, although budgeting does seem to have its problems with it, and although it fails to produce results, nonetheless studies find that the majority of managers still turn to budgeting as means of conducting their business unable to surrender the system.

Criticisms against budgeting includes the following: (a) that they are too time-consuming; (b) that they are slow to detect problems; (c) that they are not reliable for performance management; (d) they are rapidly outdated; (e) the process lacks rigor; and (f) it disrupts cooperation.

Assessing, however, whether these factors persuade 21st managers to adopt replacement schemes, Libby and Lindsay (2007) discovered that more than 50% of the 212 Institute of management Accountants (IMA) members whom they surveyed in 2006 affirmed their reliance on budgets (in response to the question "budgets are indispensable we could not manage without them") with only a bit more than 10% disagreeing. IMA members were senior managers in for-profit organizations. Furthermore, whilst criticisms against budgets may have contained points of validity these criticisms were far from universal. Respondents not only indicated that budgets were indispensable to them but they chose to rather address and modify inherent problems than surrender the budgeting process.

An updated and expended survey conducted by Shastri and Stout (2008) in 2007 to 815 IMA members, provided similar results to that of Libby and Lindsay (2007). They discovered that the majority of respondents believed that the budget was either "very useful" or "useful' when used for general business objective although a small minority (10%) demurred. Problems were found in certain aspects f the budgeting system and in certain practices but most -- 77% in fact -- indicated that they believed that budgeting could be integrated into modern industrial practice. That banks amongst other businesses are taking this approach to apparently happy results was indicated by the research in With and Dijkman (2008) on Dutch banks who did not find the beyond budgeting approach useful and chose instead to institutionalize changes into current budgeting process. We may, therefore, conclude along with Libby and Lindsay (2007) that rather than budgeting being a disappearing phenomenon, it is an evolving and developing one.

Recommended future research for discovering reasons for dissatisfaction with budget and the context in which such dissatisfaction occurs. Mitchell's (2005) article on 'beyond budgeting' banks may provide the answer.

Banks that found themselves hindered by the budgeting system and opted for change actually found their replacement models and relinquishment of the budgetary system advantageous.

Their reasons for change were three following:

1. The desire for improved forecast accuracy -- forecasts are traditionally plagued with problems in timeliness and accuracy. Most banks preface their forecasts on expanded budgets but this rarely reduces the deficiencies in the system since subordinate management use the budget according to what they want to show not according to what they expect.

2. The need to instigate motivation on high business performance -- For competitive performance, in a highly competitive environment, further and more persuasive incentives need to be found than simply beating the budget.

3. The need for increased business response to changing market conditions and competitiveness - political or current economic factors can render a budget obsolete and difficult to adjust during unpredictable times. Managers, therefore, need an alternate approach that can be implemented in a timely and flexible manner.

4. The need and desire to increase the level gained from the budgeting and planning process -- Developing and planning the budget takes inordinate amount of time. One could short the budget cycle time or implement other alternative, but many agencies believe that by analysts focusing on actual performance instead of investing their effects in 6 months of budgetary planning, that, when completed, may be challenged by new government requirements, may be a more practical option.