Is Traditional Budgeting Still Relevant Today? A Critical Essay.

Budgetary Control has fast become popular among corporations soon after the publication of the first textbook on business budgeting in 1922 by James O. McKinsey, the founder of the famous McKinsey and Company. By the 1980s, it has become a ritual that companies performed annually.  

However, today’s business environment is a far cry from that in 1920s – 80s. Globalization and the 4^th Industrial Revolution have created an extremely hostile environment where innovation and nimbleness become key to any organization’s survival.

Critically evaluate whether “Traditional budgeting is still relevant today”. 

You must provide an informed (i.e. researched) opinion by reading the following article found in the link (https://hbr.org/2003/02/who-needs-budgets) as well as other references.

Defining Traditional Budgeting

A budget is an approximation of the total income and expenses over a given period of time. In Accounting, it is used as tool to help one in forecasting and analyzing business’s income and expenditures (Zeller and Metzger, 2013). Traditional budgeting is the act of being able to foresee your business’s income and revenue for the subsequent year based on the previous budget. For a company to remain in business, it has to strictly monitor and maintain its budget so that the expenses does not exceed the revenue and hence a good reputation to a company. By comparing the actual previous expenditures with the actual current expenditures, one is able to trace where there was unnecessary spending and reduce the expense incurred or look for a supplier that will supply the same product/service at a relatively cheaper price (Andrews and Hill, 2003). In addition, the budget can be used to obtain money from the financers. With the advancements experienced in the budgeting sector, this research work seeks to prove that traditional budgeting is gradually becoming irrelevant as new budgeting ways are shaping the business sector.

                                                                                 Source: (Ouda and Makhlouf, 2014).

Companies are forced to adopt the technological and environmental changes in order to thrive well in today’s economy. The directors are therefore left with no option but to ensure that the management and the budget systems are reviewed  from time to time so as to ensure that the planning and control as a function of management is achieved. (Zimmerman and Yahya-Zadeh, 2011).

Even though budgeting is one of the most widely used management tool for planning and controlling, however today, the traditional budgeting may not be as relevant as in the 20^th century due to the following;

Due to the unstable economy, customers cannot predict how much to stock for the future, moreover, their preferences also change from time to time hence rendering traditional budgeting un-useful (Popesko and Socova, 2016). For instance, a customer may prefer Infinix to Techno today but because he/she did not get the utility expected from infinix, the customer may switch to Techno or other brands (Ramey, 2013).

Factors That Make Traditional Budgeting Obsolete

Technology is a body of knowledge devoted to creating tools, processing actions and the extracting of materials (Ramey, 2013). Technology keeps on changing from time to time, and for a company to survive today, it has to adopt with the changing technology so as to guarantee quality products/services, maintain its customers and acquire new ones. The technology that was used in the previous year’s budget may not be necessarily the same technology that would be used in the current year’s budget. For example, if the actual current budget shows an increase in sales compared to last year’s actual budget say in the banking sectors. This increase in sales could be as a result of introduction of ATM which were not previously used. Automation has also led to the development of software that pulls numbers directly out of the general ledger and can also pull history instantly (Popesko, 2015).

This can arise as a result of political instability or inflation among others. Inflation is the long-term rise in prices of goods and services caused by the devaluation of currency

due to inflation it may not be possible to compare the previous year’s budget with the current year’s budget since it may not give accurate results. For example in July 2018, prices of commodities in the United States increased by 2.9% compared to July 2017.Traditional budgeting may not work well when comparing the sales of these two year’s and if used in this case, it will give unreliable results (Zimmerman and Yahya-Zadeh, 2011).

Similarly, when a country is politically unstable, this might affects its economic performance thus making comparison not practical. For instance, Kenya is known for political violence especially during elections. During this time looting takes place and so forth as a result this will impact the material budget. Kenya therefore does not realize the importance of the budget put in place (Njogu, 2009).

Most companies today have a narrow chain of command hence faster decision making. Such organizations are highly effective, can work as a team and pass information faster to the top down mentalities and hence cannot adopt the traditional budgeting system (Popesko, 2015).

Companies are competing against one another in order to remain at the top. Traditional budgeting being inflexible cannot cope up with this competition because for an idea (that requires resources) to be implemented it has to take a long period of time before it is approved just because it will interfere with the budget and as a result so many idea that would have benefited the company are left unimplemented (Libby and Lindsay, 2010). As a result today’s companies are doing away with the traditional budgeting and adopting other methods of continuous planning. Due to competition, most companies are forced to migrate from the traditional budgeting to other techniques such as Activity-Based budgeting system. For example, most listed companies in the Netherland have adopted the Activity based costing technique as a method of planning (Libby and Lindsay, 2010).

Weaknesses of Traditional Budgeting

The environment is changing very first, likewise the people. With the changes in Technology, people are ready and willing to learn and change. Today so many people are exposed to information and with this information the front liners and the decision makers have found it easy to implement new ways of doing things unlike the previous decades when the mind of people was so fixed into what they are used to (Hansen, 2003). For example, the managers do not have a hard time explaining to others the importance of using forecasting as a method of planning. With this mind, almost all companies have abandoned the use of traditional budgeting and are now venturing into other methods of planning such as forecasting (Hansen, 2003).

Today’s modern Organizations have changed their focus from cost reduction to value creation. The traditional budgeting has become obsolete in regard to this since it does not solve clients’ needs hence it has missed the strategic sole purpose of budgeting (Libby and Lindsay, 2007) (Neely, 2003).  For examples in the automobile industries, customers are looking for a car that is efficient in terms of fuel saving and also convenient. On the other hand, managers will try to cut down the budget so that they can satisfy their self-interest thus compromising on quality. Managers can also manipulate the actual projection so that they look more appealing yet this may not have a positive impact in the long-run (Libby and Lindsay, 2007).

The today’s markets are so complex and so requires a budgeting technique that is collaborative so as to meet the objectives of its customers in various markets and companies. The traditional budget however does not provide opportunities for the different business functions to work together in order to reflect the corporate overall strategy and position (Daum, 2002). Since the task of centralizing the budgeting process is normally given to a person in charge of Finance in the finance department, the person in charge may produce results that do not reflect the companies’ true image. That is to say that the person may project that the company is overspending when it is not and vice versa (De Waal, 2005).

Today most companies work on a set strategy in order to achieve their vision. According to Nolan (2005), it is argued that the top management lay out the strategy which is translated into numbers and carried out by different employees of the organization and hence the blame on the budget that it is not in line with the company strategy.

Advanced Budgeting Techniques

Conclusion and Recommendation

In as much as traditional budgeting is irrelevant but still it can be of use to most organization if they feel the need to. This is because organizations have got their visions and mission statements and if a company does not know its previous expenditures, then it means that it would not be able to predict future expenditures. This may result in overspending or under-spending hence interfering with the normal running of the organization’s activities.

Organizations need to work on the weaknesses of the traditional budgeting and come up with more advanced techniques to help solve organization’s financial problems that arise from inefficient budgeting practices.  To achieve this organization need not to completely abandon the traditional budgeting system because an organization is propelled forward when it can monitor its past and present financial requirements. The bottom line is, companies should know their environmental and technological needs, its culture and weaknesses before amending their traditional budgeting practices.

References

Andrews, M. and Hill, H., 2003. The Impact of Traditional Budgeting Systems on the Effectiveness of Performance?Based Budgeting: A Different Viewpoint on Recent Findings. International Journal of Public Administration, 26(2), pp.135-155.

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Business Jargons. (2018). What are Capital Budgeting Techniques? definition and meaning - Business Jargons. [online] Available at: https://businessjargons.com/capital-budgeting-techniques.html [Accessed 25 Aug. 2018].

Daum, J.H., 2002. Beyond budgeting: a model for performance management and controlling in the 21st century. Controlling & Finance, 5, pp.33-34.

De Waal, A.A., 2005. Is your organisation ready for beyond budgeting?. Measuring business excellence, 9(2), pp.56-67.

Hansen, S.C., Otley, D.T. and Van der Stede, W.A., 2003. Practice developments in budgeting: an overview and research perspective. Journal of management accounting research, 15(1), pp.95-116.

Libby, T. and Lindsay, R.M., 2007. Beyond budgeting or better budgeting?. Strategic Finance, 89(2), p.46.

Libby, T. and Lindsay, R.M., 2010. Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management accounting research, 21(1), pp.56-75.

Neely, A., Bourne, M. and Adams, C., 2003. Better budgeting or beyond budgeting?. Measuring business excellence, 7(3), pp.22-28.

Njogu, K. ed., 2009. Healing the Wound. Personal Narratives about the 2007 Post-Election Violence in Kenya: Personal Narratives about the 2007 Post-election Violence in Kenya. African Books Collective.

Nolan, G.J., 2005. The end of traditional budgeting. Journal of Performance Management, 18(1), p.27.

Ouda, H. and Makhlouf, S., 2014. Beyond Budgeting: is it a Substitute or Complimentary to Traditional Budgeting? An Empirical Evidence from Telecommunications Companies in Egypt. British Accounting & Finance Association (BAFA), 14(16), p.04.

Popesko, B. and Socova, V., 2016. Current trends in budgeting and planning: Czech survey initial results. International Advances in Economic Research, 22(1), p.99.

Popesko, B., Novák, P., Papadaki, S. and Hrabec, D., 2015. ARE THE TRADITIONAL BUDGETS STILL PREVALENT: THE SURVEY OF THE CZECH FIRMS BUDGETING PRACTICES. Transformations in Business & Economics, 14.

Ramey, Karehka, 2013. "What Is Technology - Meaning of Technology and Its Use." Use of Technology. Last modified December 12, 2013. https://www.useoftechnology.com/what-is-technology/.

Réka, C.I., ?tefan, P. and Daniel, C.V., 2014. TRADITIONAL BUDGETING VERSUS BEYOND BUDGETING: A LITERATURE REVIEW. Annals of the University of Oradea, Economic Science Series, 23(1).

Zeller, T.L. and Metzger, L.M., 2013. Good Bye Traditional Budgeting, Hello Rolling Forecast: Has the Time Come?. American Journal of Business Education, 6(3), pp.299-310.

Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.