Traditional Budgeting vs. Beyond Budgeting: Strengths and Alternatives

Introduction: Budgeting as a Management Control Tool

Organizations have for a long time used budgets as the primary tool in management control. Relying on budget control as the sole method of management control, however, carries several disadvantages. Budgets, for example, are costly to prepare. It has also been noted that budgets often limit an organization's responsiveness and can act as a roadblock to change. Another disadvantage is that most budgets focus on the reduction of costs rather than on the addition of value. In view of these shortcomings, some commentators have proposed that budgeting be done away with entirely. Hope and Fraser, with their clarion call of "Beyond Budgeting," are notable proponents of this push to abandon traditional budgeting.

The Beyond Budgeting Approach and the Balanced Scorecard Framework

The Beyond Budgeting (BB) approach has been proposed by European practitioners as a way of solving the problems inherent in traditional budgeting methods. The literature describes budgeting as one of the key pillars of management control (Anthony, 1998). The approach Anthony took was grounded in accounting, under which strategic planning was treated as a separate discipline (Hansen et al., 2003). Practitioners have argued that the use of budgets is a roadblock to efficient and sound resource allocation and that it encourages short-sighted decision-making. Other harmful organizational behaviors may also result from budgeting (Wallander, 1999; Fraser and Hope, 2003a, 2003b).

A growing body of research has focused on the disadvantages and challenges that arise when organizations rely solely on budgeting as a means of management control (Hansen et al., 2003; Lukka, 1988). Some organizations have therefore begun replacing budgeting with alternative systems, while others complement budgeting with additional tools. Credit for launching this shift in perception goes to Hope and Fraser through their "Beyond Budgeting" work (2003a, 2003b) and to Kaplan and Norton through their Balanced Scorecard Framework (2001). The Balanced Scorecard links performance measurement with the organization's set strategies, thereby reducing the tendency for organizations to divorce operational management from strategic plans. Despite numerous critiques and well-reasoned arguments against budgeting as a management control tool, there is not yet much empirical evidence on the effects of entirely eliminating budgets from organizations (Kaplan and Norton, 2001).

Strengths and Limitations of the Traditional Budgetary Model

Across the various propositions put forward by different groups, emphasis is consistently placed on how traditional budgeting is used to gauge performance, motivate workers, plan operations, and ensure effective internal control. The traditional budgeting model has been in use for many years, yet it retains several weaknesses. It is time-consuming — it can take up to half a year to produce budget figures for the coming year — and the resulting budget may quickly become obsolete given rapidly changing market dynamics and the model's inherent inflexibility.

While budgeting has its flaws, it should not be assumed that it has no place in the modern business environment. If that were so, budgeting would already be a thing of the past. In fact, budgeting offers several advantages, particularly as a means of financial control. It ensures that revenue goals are established and that expenses are managed. With clear budgets, targets are monitored closely throughout the year, and variances are discussed and acted upon (Burns & Waterhouse, 1975). Budgeting also gives management greater clarity on organizational goals, directing their actions and reducing the risk that those goals are misrepresented, since budgets reduce objectives to clear figures (Marginson & Ogden, 2005). Amid the current criticism directed at budgeting, observers may lose sight of its fundamental purpose: to support the operations of the company and to communicate goals to all key stakeholders (Hansen & Van Der Stede, 2004).

Nevertheless, traditional budgeting has significant weaknesses. Critics have consistently argued that budgeting limits an organization's ability to adapt quickly to fast-changing business conditions. Organizations need sufficient flexibility to react to sudden shifts in the marketplace (Bunce et al., 1995). A common argument is that budgeting enslaves an organization to the requirements spelled out in its budget, and that evaluating managers solely on their ability to meet budget targets can be detrimental. This may lead to outright manipulation of financial figures to project the appearance of success (Libby & Lindsay, 2003a). Fraser and Hope contend that budgets are little more than ungrounded promises made to investors. Citing the collapse of companies such as Enron and WorldCom, they argue that budgeting created the conditions for financial manipulation that ultimately led to those organizations' downfall.

Conclusion

When all is said and done, it remains important to acknowledge that the traditional budgeting system has undergone rigorous testing over many decades and has proven its worth. It may have disadvantages, but the advantages outweigh the drawbacks — and those drawbacks are not severe enough to justify the complete dismantling of the model. As noted above, many organizations continue to use the traditional budgeting model as their primary tool, while others complement it with elements of the beyond budgeting model, recognizing that the gap left by abandoning traditional budgeting entirely would be too large for any current alternative to fill. Organizations rely on budgets to develop comprehensive operational plans (Banham, 2012).

It is not only practitioners who have found the traditional budgeting model useful. Researchers too have defended its validity. Their call, however, is not to discard it but to find ways to update it and make it more applicable to prevailing business conditions. Activity-Based Costing (ABC), for example, has been proposed as an addition to the model. Some researchers have argued that the problem does not lie with the traditional budgeting model itself, but with how it is used. The conclusion, therefore, is that the usage of the traditional budgeting model should be reformed rather than the model abandoned (Vaznoniene & Stonciuviene, 2012). The traditional budgeting model remains very valid, and the difficulty of finding a credible replacement only reinforces its continued relevance.

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