Criticism of Traditional budgeting
Discuss about the Traditional And Beyond Budgeting.
Budgets were created to assist the managers in controlling cost and cash flows however it later became the fixed performance contracts between the supervisors of company and subordinates. Furthermore, budgets are considered as the key elements in planning financial values and transforming strategic ideas into understandable operative actions (Réka, ?tefan and Daniel 2014). The essay provides critical information of the traditional budgeting and beyond budgeting. It also discusses the rolling financial forecast and all the related tools in the organization.
Budgeting is regarded as one of the most vital, successful and useful tool that is used in managerial accounting (Amato 2013). In the present age of modernization, every organization depends heavily on budgets and budgetary systems to attain strategic goal and it can harvest handsome amount of rewards given they are properly understood and implemented.
Over the years, drawbacks relating to traditional budgeting have been identified. Traditional budgeting methods are regarded as time consuming and costly that hardly emphasises on the strategy and are at times contradictory. Traditional budgeting add little value and focuses on cost reduction instead of creation of value by strengthening vertical command and control (Bogsnes 2016). Though, traditional budgets have changed over the years it is understood that they could not face the changes in the economic and business environment. Therefore, traditional budget must be reshaped and alternative methods of budgeting should be created. Critics have claimed that traditional budgeting prevents the response of constantly changing the environment. Further, it focuses on controls instead of helping the organization in achieving its strategic objectives. The political power in the organization drives resource allocations rather than addressing the strategic needs that drives the traditional budgeting.
Bourmistrov and Kaarbøe (2013) has criticised traditional budgeting for its inefficiency. Traditional budgeting consumes huge amount of time and large amount of management resources. So far only a small percentage of parties that are involved in the budgeting procedure assumes that the time spend is valuable. One of the main reason behind the criticism of traditional budgeting is that it consumes huge time by using spreadsheets. Despite spreadsheet is an important tool in companies, spreadsheets have intrinsic inadequacy. They are prone to data entry errors and cumbersome in devising accurate formulations.
Most of the businesses have annual budgeting cycle and the annual emphasis often make the budget out of date soon after it has been created. The traditional budgeting system falls short in motivating individuals to act in the interest of the company and it is criticised for the unprofessional attitudes in budget cost centre of the managers (Henttu and Järvinen 2013). Perhaps traditional budgets have been criticised for preventing knowledge sharing and reinforces departmental barriers. As the managers are obsessed with the hitting the numerical figures right, they generally miss out the strategic purpose of budgeting. Traditional budgeting procedure emphasises on the cost reduction instead of value creation, which ultimately means that strategic initiatives are unjustly given lower priorities.
To improve traditional budgeting
Budgeting is regarded as one of the vital, successful and useful tool that is used in the management accounting. Even though traditional budgeting has numerous shortcomings, it is still considered as the indispensible process. Traditional budgeting is considered as the framework of control as it helps in corporate budgeting to coordinate the financial activities of the company since it creates a reference point (Cardo? 2014). It offers a framework of control, which makes it easier to administer the activities with stability. Few organizations particularly banks and other types of financial institutions identifies the benefits of decentralization by maintaining the standard operating process. Therefore, traditional budgeting and the use of cost centres provide the managers the liberty of running their operations as long as they meet their set parameters.
Traditional budgeting suffers from several weaknesses in the areas of efficiency and responsiveness. Traditional budgeting consumes large amount of time with huge sum of management resources (Henttu and Järvinen 2013). However, only a small percentage of the parties involved in the process of traditional budgeting believe that the time spent is worthwhile. One of the prime weakness of traditional budgeting is that it takes up huge amount of time in the use of spreadsheet. Even though they are regarded as the most common tool among companies spreadsheet comprises of inherent shortcomings which is prone to errors of data entry with difficulty in devising accurate formulations. Furthermore, the prolonged drawbacks of traditional budgeting extend towards low responsiveness in change. A large number of companies have annual budgeting cycle and this annual focus often makes the budget very obsolete soon it has been created (Ouda and Makhlouf 2014). Reviews are not conducted on regular basis under traditional budgeting to consider change. Therefore, budgets reviews often considers longer than the needed that defeats the objectives of change adaption.
In electronic companies traditional budgeting has been used as the forecasting tool that have turned out to be more forward looking with better linkage to the strategic planning. Several contributors believed that forecasting is more important than budgeting (Pietrzak 2013). Since the assumptions on which the budgeting numbers forms, their basis often changes very quickly. They are dependent on the forecast that are updated more frequently. However, the traditional budgeting yet serves as the basis of work particularly when something goes wrong (Réka, ?tefan and Daniel 2014). Traditional budgeting acts as the anchor even though things does not remain same in the long way but it is necessary not to lose sight that was budgeted in the first place. Forecast is considered for its high-level plans whereas traditional budgets comprises of more detail.
Recommendations on suitability of traditional budgeting
In corporations like Guardian Industries, traditional budgeting acts as the collective process under which operating units organize their plans in agreement with the corporate goals that is published by the top management. Each unit at Guardian Industries is intended to contribute in the achievement of the corporate goals (Sandalgaard and NikolajBukh 2014). The unit managers at Guardian Industries prepare sales, operating costs, overhead cost and capital requirements. They also calculate their operating profits and return on the investment which the company intends to make use of. The traditional budgets used at Guardian Industries itself forms the projections of these values for the next calendar or financial year. Considering this as the part of this process each unit offers the company with the plan and budget to the panel of upper management.
Even though traditional budgeting has faced intense criticism it is yet used universally, it appears that most of the companies have the plans of abandoning the traditional budgeting. There are few companies that wishes to abandon the traditional budgeting and those that wish to improve the traditional budgeting (Stea and Andresen 2017). Considering the advantage of traditional budgeting, it helps in planning, coordinating and evaluation of the activities. however, traditional budgeting serves as the greatest barrier to change. One of the prime reason of abandoning traditional budgeting is that it can quickly become very irrelevant. The economy might change or the market conditions may change however the budgets only looks at the things as they were back when it was created.
Over the years, studies have been conducted to assess whether traditional budgeting or alternative budgeting methods is better and creates a positive impacts on the businesses. It appears that companies have the plans of abandoning it. According to Cardo? (2014) dissatisfaction on with budgeting occurs on two fronts those that takes into the considerations of abandoning financial budgeting and those that considers to improve it. Traditional budgeting served several different purposes and might create a value in past however traditional budgeting fails to work in current age highly competitive environment. Abandoning traditional budgeting in favour of beyond budgeting noticed that management have gained a new sense of power. In addition to this, they have gained benefits from faster and highly adaptive decision-making, reduced bureaucracy and lower costs.
Beyond budgeting can be defined as the detailed notion of abolition of the traditional process of budgeting with the objective of improving the management control in the organization.
Abandoning traditional budgeting
Beyond budgeting enables the organizations to operate with speed and simplicity. Simplicity originates from lowering of complexity in the process of management (Zeller and Metzger 2013). Beyond budgeting helps in lowering cost by observing the supplier customer relationships in order to respond with to the demands for enhancing the quality and cost.
On the basis of the analysis conducted it is not necessary to use the model of traditional budgeting since it brings down several implications on the path of successful management of the company and achievement of goals. It is obligatory to change the traditional strategy under the one that is presupposed by the beyond budgeting approach. It is proved that it positively creates an influence on the overall efficiency on the management of the company and introduces numerous benefits. Several companies such as Google, Toyota and American Express with success of these organizations forms the model as the edge over the traditional budget.
To conclude with budgeting is regarded as the important management activity so that it can support the main strategy implementation of the management in planning and monitoring sales. Despite the essay provided advantages of beyond and rolling budget however the programme is still in the initial stages of growth. The concept needs further research, development and practical implementation prior to the actual breakthrough is achieved through managerial accounting.
Amato, N., 2013. Forward roll: How companies can move beyond traditional budgeting. Journal of Accountancy, 216(4), p.26.
Bogsnes, B., 2016. Implementing beyond budgeting: unlocking the performance potential. John Wiley & Sons.
Bogsnes, B., 2016. Implementing beyond budgeting: unlocking the performance potential. John Wiley & Sons.
Bourmistrov, A. and Kaarbøe, K., 2013. From comfort to stretch zones: A field study of two multinational companies applying “beyond budgeting” ideas. Management accounting research, 24(3), pp.196-211.
Cardo?, I.R., 2014. NEW TRENDS IN BUDGETING-A LITERATURE REVIEW. SEA: Practical Application of Science, 2(2).
Henttu-Aho, T. and Järvinen, J., 2013. A field study of the emerging practice of beyond budgeting in industrial companies: an institutional perspective. European Accounting Review, 22(4), pp.765-785.
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.
Pietrzak, ?., 2013. Traditional versus activity-based budgeting in non-manufacturing companies. Social Sciences, 82(4), pp.26-37.
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).
Sandalgaard, N. and NikolajBukh, P., 2014. Beyond Budgeting and change: a case study. Journal of Accounting & Organizational Change, 10(3), pp.409-423.
Stea, V. and Andresen, J., 2017. The Fixed Budget: Outdated or Underrated?: How Swedish Privately Owned Companies Perceive The Fixed Budget And How It Is Used.
Zeller, T.L. and Metzger, L.M., 2013. Good Bye Traditional Budgeting, Hello Rolling Forecast: Has The Time Come?. American Journal of Business Education (Online), 6(3), p.299.
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