Criticisms Of The Traditional Budgeting System

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Budget is planning for a variety of sale streams, a control method for a management to stay from over spending, a process of controlling it units, a procedure to manage various activities that organizations carry out, and a method to communicate to every stakeholder with summarization of activities that different component will undertake. Moreover, budget is a technique for setting an organization's priority by allocating limited resources to those activities. The aim of the budget is to modify plan and re-allocate resources to make sure achieve the strategic plan of an organization. The allocation of resource through budget is able to done in several ways. An organization need to well understanding about the functions of the system so that they able to minimize the negatives and to gain advantage. Purpose of create a budget is to determine the direction for an organization and its future achievement or failure (Goldstein, 2005; Maddox, 1999; Martin, 1993; McCabe, 1984) [4]. It is very important to creating and following the budgetary priority even during the relatively positive financial times, this is only more difficult while downturn in financial conditions.

However, an organization would difficult or may not to achieve the sales target or budget due to uncertainty economic. An organization makes a good decision need to consider the factor like economy. During the uncertainty economic, there must be either recession or inflation. Once the economy going through recession, many people regular in saving and are not willing to spend money due to high unemployment rate and fall in household income. Consequently, an organization's sales volume and profit would drop. However, many people is high in purchasing power and willing to spent money if the economy going through inflation. Therefore, an organization would increase in sales and achieve the target. The economy uncertainty would cause organizations' sales and profits change uncertainty, this would impact their decision-making and performance.

Why required more flexibility budgeting system instead of traditional budget system?

Criticisms of the 'traditional' budgeting system

Since the economic is uncertainty, the organization is requiring more flexible approach in estimating budget and instead of using traditional budget method. The first reason is when using the traditional budget, the way an organization allocated cost had not changed in previous 60 years and this is ignoring the fact that the economic atmosphere of the organization had significantly changed (Johnson and Kaplan 1987). If economy going through recession or inflation, this would caused different result from the budget.

Generally, the traditional budget is made for one or more years to achieve the strategic function and it is based on calendar year. The organization would not change the budget anymore once it was prepared. If any unexpected events appear, the traditional budget would still provide same information, which becomes inaccurate information and this would caused an organization making a wrong decision. There would be unrealistic report if the organization continue analyze the inaccurate budget. The performance indicator is not incorporated into an existing budget process and hence traditional method is very slow and backward looking. Mostly, the traditional budget is referred to 'historical' approach, which means based on previous year's revenue and expenditure. The traditional budget is ineffective because the information is out-of-date and this would impact on decision-making of an organization.

The traditional budget is not suitable for the modern businesses because its procedure is failed to classify waste, does not maintain continuous improvement, does not classify the cost driver, and does not classify the incoming workload (Cassell. M, 2003). Since the traditional budget system is providing ineffective in nowadays' unpredictable and the fast-paced business environment, the organization is required a budget system which is more flexible.

Require more flexibility budgeting

An organization is required a more flexibility budgeting system, which is continuous budgeting. Continuous budgeting is more flexibility compared to the traditional budgeting. Continuous budgeting is frequently reviews to identify what they need to attain and this is able to analyze on what they have been done, and then carry out what they are going to perform in-order-to achieve the plan in future. Moreover, this budget is updated projection in every month or three months once and re-evaluates the organization's position few times a year [6]. Hence, these frequently review and re-evaluation are concerning the opportunity of achieving the target, monitoring the progress to them and to create where management action is required. This is enable an organization to well planning and reallocation of resources in-order-to achieve the objective.

In addition, continuous budgeting enable to dealing with dilemma and the unpredicted events that organization would encounter as they looking for both to attain a set budgetary target and to manage flexibly in respond to fast changing circumstances (Natalie Frow, Stuart Ogden, David Marginson, 2010). Processes of continuous budgeting encouraged organization to use their carefulness in an operational matter when facing unexpected events. Consequently, an organization can respond more quickly for changing the economic development or business circumstances.

Continuous budgeting is aim to prevent the essentially restrictive nature of the budgetary controls by enabling organization, when confronted unexpected events, for example, problems with research and launching of a new product, to consider, if needed implement, review of plans and reallocate the resources in achieve of strategic organizational goals (Natalie Frow, Stuart Ogden, David Marginson, 2010).

Budgeting is effectively in flexibility and the financial discipline needed for effective strategy implementation.

Once an organization is not able achieve the plan, their first step to perform is measure and understands the reason of failure by the review process.

Companies that decide to step up to rolling budgets may want to take advantage of the decision to make a change and consider what else they can do improve the process (they may search for new ways to speed up the budgeting process and make it more useful). After all, if a company can get everyone on board to make such a fundamental change, a further nudge o make the process more effective and efficient in other ways may be possible, too.

For rolling budgets to work, management must access and process information more quickly and that often means acquiring special software that does the job.


Budgeting has 3 main purposes or objectives, which are provide an organized process for planning; provide a means for managing the activities of the diverse components of the business; and provide a basis for cost control [5]. These three purposes or objectives (planning; coordination; and cost control) cannot be entirely achieved by an estimate budget only. However, an organization can be entirely achieved by a flexible budget only.

Conclusion, Flexibility budget is seen as important to an organization's ability to react effectively and quickly to changing the circumstances and they are still responsible for attaining their budgetary aim (Natalie Frow, Stuart Ogden, David Marginson, 2010).

Firm have sought to attain competitive advantage through a greater emphasis on innovation and learning and flexibility and adaptation (barlett & Ghosal,1993; Otley, 1994). -pg 444

Annually determined budgetary targets, and the delineated responsibilities associated with them, are seen to limit the scope of empowered managers to operate flexibly, militate against team-working within and between departments, inhibit innovative responses to unforeseen contingencies, and stifle the creativity required for innovation and learning occur. - pg 445

Budgets are increasingly inappropriate for organizations desiring to achieve high performance in competitive conditions and should be abandoned. Nevertheless, notwithstanding their limitations, budgeting practices are still regarded as an organizational imperative if costs are to be controlled and predicted financial performance achieved. -445

To apply to organizations facing market conditions which required a capability for a high rate of strategic adaption and flexibility as they too will encounter competitive pressures to ensure 'tight' cost control.

Managers combine budgeting with other management controls to meet the potentially competing objectives of flexibility and adaptation required for strategy implementation on the one hand, and the achievement of specified financial targets on the other. -445

'mechanistic' control systems which emphasize efficiency and 'organic' control systems which prioritize flexibility ( Brown & Esienstadt, 1997; Chapman, 1998; Dent, 1987; Marginson, 2002). -445

These contexts controls are primarily used 'diagnostically' but may also be used 'interactively' when managers need to discuss what is the 'best' action to take.-454

They are used, firstly, to gather, interpret and distribute the information necessary to understand the current position of the 'outlook'; and secondly, to consider how gaps between planned performance and actual results may be closed. While these processes encourage a flexible response to how goals are achieved, they are not intended to detract from an individual's accountability for budgetary targets. Rather, they serve to reinforce the idea that it is the responsibility of the individual manager to ensure that his or her budgetary targets are achieved. -454

If I don't hit my targets then I certainly would get an increased amount of discussion about how going to fix it, it would be a continual review.-455

Taking corrective action frequently entailed securing the support of other managers to investigate what problems have arisen and devise appropriate remedies to pursue. -455

Managers are expected to react flexibility to take advantage of opportunities to attain outcomes that best fit with the overall strategic objectives, it remains incumbent on managers to demonstrate what other actions they have taken to ensure their budgetary targets are met. This is tracked both formally through the review process and informally through managing 'in-process'. -456

Managers are both accountable for 2 related but distinct activities: they are expected to take advantage of budget flexibility to pursue strategic corporate goals; secondly they are expected to achieve their own budgetary targets. Inevitable tensions will arise from pursuing both simultaneously, but it is expected that these can be mediated effectively through securing managers' commitment to organizational objectives. -456

Managers at Astoria are constantly engaged in reviewing what was happening to their performance in relation to their targets, and responding to problems associated with their own performance shortfalls or unexpected changes in circumstances affecting them, or their colleagues. -457

A transfer of 'power and authority from the centre to operating managers, vesting in them the authority to use their judgment and initiative to achieve their goals without being constrained by some specific plan or agreements'. This decentralization of control and responsibility for performance is intended to empower front line managers in order to 'foster innovation and responsiveness' and 'increase adaptability'. -458