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Limitations of Traditional Budgeting

Question:

Critically Discuss the Criticisms of Traditional Budgeting and Evaluate the two Approaches.

The term budgeting came into existence way back in the 1920s when the need to have a control over the costs and the cash flows of a company arose amongst the various managers. With time, the same has become one of the methods to analyse the performance of the managers. However, with modernisation and globalisation, the age old ‘traditional budgeting’ wherein a year’s time is taken into consideration and portrays such forecasts that do not tend to alter during the lifecycle of the said budget. Organisations prefer the traditional method since it is a very simple one. Unfortunately, the said methodology has undergone various criticisms and is said to be unable to fulfil the requirements of today’s entities. As per critics, the traditional budgeting is too rigid and not timed appropriately i.e the time period is too long or short, is dependent upon such measures which are not apt and are either too rigid or extraordinarily flexible or too strategically placed such as the incentive scheme for the managers is such which ends up giving unwanted signals.

It is rightly being considered that traditional budgeting no longer enables meeting up with the modern needs of the businesses (Aydin, 2017). Therefore various researches have been conducted over the years by various researchers and practitioners which basically are very apt such as beyond budgeting, rolling forecasts and activity based budgeting, which are some of the newest and better defined methods of budgeting. Surprisingly, even though traditional form of budgeting has faced various criticisms, it is still preferred by many even now. It is understood that many organizations still prefer to use the said method. The discontentment is basically in two fronts, firstly amongst those who want to abandon it and those who wish to improvise upon the same. Budgets help to co-ordinate, plan and evaluate the performance of the company, acts as a mode of motivation for the employees and also enhance the already installed internal control systems’ performances. Around ninety percent of the organizations who belong to the developed and developing countries, ensure to use budgeting (Reka et.al. 2014).

-The uncertainty in the business environment is one of the main reasons why traditional budgeting should be abandoned. It has been found that the traditional method is not consistent with the association that exists between the environmental ambiguity and the dependence on accounting based performance measures. Basically the focus of the traditional budgeting is upon the fixed performance contracts wherein the success rate is determined basis the achievement of the set goals and aims. Hence it is very obvious that the juniors would always like to set such budget goals which is easiest for them to achieve. Lastly with regards uncertainty, this kind of indicator of employee performance, may force the staff to cater to such activities which are unacceptable thereby hampering the quality of the budget as well (Liang  & Wang, 2011).

Alternative Approaches to Budgeting

Another very prominent reason for the traditional budgeting being abandoned or should be abandoned is that the stability of the business environment and the competitiveness was not as tough as it is presently. Due to which a more strategic method is required. Centralisation no more works well with all organizations. As organizations grow, decentralisation seems to be a must, simply because it helps the organizations to adapt itself with the changing environment. Another very crucial reason why budgeting is loosing importance is that environments which are not certain, it is very difficult to forecast each single line item for a year or more in advance.

Whenever an entity adapts beyond budgeting, it basically discards the old budgeting method in favour of a range of techniques which would ultimately enable the entity to become more flexible to the changing scenario. Basically the said method of abandonment adopts a fundamentally decentralised way of control. Within the management accounting techniques which is a part of the said model, relative performance evaluation requires specific care. The said replacement was first suggested by the Swedish bank Svenska Handelsbanken, which contains a branch structure which offers within the branch benchmarking. Unfortunately the said method is not widely applied by various entities because measurement of the same lacks common-measure biasness. The functioning of Beyond Budgeting ensured more concentration towards setting up of targets in conjunction with a more detailed decentralised action. Those entities who are on the verge of or have already abandoned the traditional budgeting, yet have maintained a system for financial target setting (Sandalgaard, & Bukh, 2014).


In the case study of Borealis, they had to let go of traditional budgeting and adopt the concept of Beyond Budgeting simply because the product and the supplier market was undergoing such a fast change that the old method was becoming obsolete soon. There traditional budget which was prevalent used to cater various purposes which was successful in creating value but only in the past. However the same failed in the current scenario. Hence they decided to abandon the same. By doing so, Borealis discovered that the management ended up to gain a new intellect of empowerment and a more confident attitude (Tian et.al. 2015). In the process it enabled to reduce costs drastically.

The said alternative to traditional budgeting basically talks about the various improvements that can be done in the already applicable traditional budgeting, of which rolling forecast is said to be one of it. The practitioners of this method are more inclined towards revisiting the said set budget but for abandoning the same in totality (Raye, 2015). This way the entities prefer to re-visit and check their already set forecasts on a monthly or a quarterly basis and thereby update the same. However the same has been made easy due to the usage of various spreadsheets for ensuring compilation of the data of various scattered departments within an organization. Another technique which the Better Budgeting uses is ‘zero base budgeting’ wherein the old budget is not considered while preparing the new one thus starting the same from ‘zero’ as the name says (Waterlander et.al. 2010). The said technique was developed by Peter A. Phyrr when he was a part of Texas Instruments (Uyar, 2009).

Beyond Budgeting

The fact that budget is linked to strategy cannot be ignored in totality, thus if the budget prepared is not in line with the strategy of the organization then the entire objective of the same gets defeated. Even though in present day scenario the traditional budgeting offers various disadvantages, yet the same has some advantages also to offer such as planning, control and performance management due to which the same is becoming difficult to abandon it in totality by some organizations. Thus the only alternative in such cases are to ensure that the same is being improvised so that it can cope up with the present day competition.

Budgeting has always been a matter of concern and one of the most researched topics amongst various researchers and practitioners. Over the past few years, the traditional method of budgeting has been under criticism yet the same is widely used and entities still seem to be of the opinion of continuing with the same with improvements. The literature has made it very clear that the discontentment in basically in two areas- one who want to abandon it and the other who want to improvise upon the already existing one. In the year 2006, Dugdale and Lyne had conducted a survey amongst the financial and non-financial managers of 40 companies of UK and concluded that budgeting is still not dead and is hail and hearty. The participants have made it very clear that it is not possible to get away of it in full but yes the one already in vogue needs some improvements.

As per the present scenario it can be well said that beyond budgeting will not be adopted by all and hence portrays a mixed picture. However it has been found out that the Skandinavian Bank had abandoned traditional budgeting and post that it has become the largest bank in Skandinavia. It adopted decentralisation wherein the bank treated each branch as a separate independent profit centre. Thus on analysing the same, it is understood that the inclination is not one sided but mixed. It is organization specific and thus presently budgeting is standing at the crossroads.

Conclusion

Thus on a concluding note it can be said that in the near future as well as in the long term, beyond budgeting will not be able to wipe off the traditional budgeting. However if the same is analysed and studied in depth then it can emerge as a better solution. Yet, one cannot forget that the main aim behind budgeting is to help the management improvise upon the strategies it lays down and thereby ensure good planning. The alternative budgeting modals and ways gained importance since they answered to the issues spelt out by the traditional budgeting. Beyond budgeting offers an array of advantages, yet the same is at its nascent stage. The said concept still needs to be researched more before the same is accepted by all. Even though traditional budgeting has been criticised off-lately, but the same has not yet been proposed to be eradicated in totality.

References:

Aydin,E., (2017), The Usefulness of Traditional Budgeting in Today’s Business Environment, Available at https://www.turkishtaxnews.com/articles/the-usefulness-of-traditional-budgeting-in-today-s-business-environment/ (Accessed 01st August 2017)

Dugdale, D. and Lyne S. (2006), Budgeting practice and organisational structure, Research Executive Summaries, vol. 6, no. 4, [Online], Available at: https://www. cimaglobal.com/Documents/Thought_leadership_docs/Budgeting%20and%20planning/cid_ ressum_budgeting_practice_organisational_structure_may2010.pdf, (Accessed on 01st August 2017)

Liang,Y., & Wang,Y., (2011), Research on Budgeting and Abandoning Budgeting for Management, Available at file:///C:/Users/E-ZONE/Downloads/11.pdf (Accessed on 01st August 2017)

Raye,K., (2015), What is the Difference Between a Budget and a Rolling Budget? Available at https://smallbusiness.chron.com/difference-between-budget-rolling-budget-65435.html (Accessed 01st August 2017)

Reka,C.I., Stefan,P., & Daniel,C.V., (2014), Traditional Budgeting Versus Beyond Budgeting: A Literature Review, Available at file:///C:/Users/E-ZONE/Downloads/12.pdf (Accessed 01st August 2017)

Sandalgaard,N., & Bukh, P.N., (2014), Beyond Budgeting and change: A Case Study, Available at https://pnbukh.com/files/nyheder/JAOC_2014.pdf (Accessed 01st August 2017)

Tian,J., Ni,Q.L., Hao, Q., & Wu,D., (2015), The Application of the Beyond Budgeting to Organizations – An Example of Application of Borealis Company, Modern Management Science & Engineering, Vol. 3, no. 1 [Online], Available at file:///C:/Users/E-ZONE/Downloads/451-1000-1-SM.pdf (Accessed on 01st August 2017)

Uyar,A., (2009), An Evaluation of Budgeting Approaches : Traditional Budgeting, Better Budgeting and Beyond Budgeting, Available at file:///C:/Users/E-ZONE/Downloads/An%20Evaluation%20of%20Budgeting%20Approaches-Traditional%20Budgeting,%20Better%20Budgeting,%20and%20Beyond%20Budgeting-AKADEM-K%20ARA-TIRMLAR.pdf (Accessed on 01st August 2017)

Waterlander,O., Clark,A., Groves, S., & Nordahl,H., (2010), Zero-based Cost Management- A Holistic Approach to Managing Budgets, Available at https://www.strategyand.pwc.com/media/uploads/Zero-Based-Cost-Management.pdf (Accessed 01st August 2017)

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