The ease of the budgeting process has been the matters for arguments few years back. In their 2003 book, Beyond Budgeting, Jeremy Hope and Robin Fraser suggest that the traditional budgeting process is outdated and dysfunctional and, therefore, should be abandoned. Besides, Ahmad et al.(2003) also commended that "Budgets are less useful in today's highly challenging business environment". Simultaneously, the evidence offers by Theresa Libby and R. Murray Lindsay (2007)'s survey that senior accounting and finance managers find the budgeting process to be more helpful than harmful overall and that there is a perception that managers from the operating sector could not function well without budgets. I am strongly agree with Libby and Lindsay (2007) by the creation of new and advanced budgeting system to suit this taxing business environment, but still, budgets can useful to current businesses. (Budgeting: Perspectives from the Real World)
Due to the fast movement of environment development, the companies which operate in information technology and digital era are no longer tight-up by land, labour or capital investment like olden days' agricultural and industrial age. With manufacturing flexibility, products and services which are short product life cycles and highly customized, modern businesses invest little capital and owns limited assets than traditional kind but assemble resources as and when is needed to meet customer only during demand. The keys to their survival is flexibility and prompt response whereby companies are able to move quickly to develop opportunities as they arise and does not operate according to complex business plans. As a result, it indicates that the traditional budgeting was no longer valid. Traditional budgeting moved into the process for incremental improvements to establish new tools and techniques. Figure 2 below shows the whole process on how a budget was started, grew and evolved from the 17th century of agricultural era to the 20th century of informational wave around the World.
Get your grade
or your money back
using our Essay Writing Service!
3.2 TRADITIONAL BUDGETING
According to SAP AG, which is the largest software enterprise in Europe, in their White Paper titled "Beyond Budgeting" (2001), the traditional budgeting model was establish in the 1920s to assist the financial controllers to control costs in huge organizations. It is as the periodic practice process by which the organization tends to predict their future operational expenditures and forecasted income. It covers a whole year period and presents forecasts that do not change during the budget cycle. Traditionally, budgets reflect historical data and are set after managers engage in a lengthy process of trying to establish what that data indicate about the future. This process is usually protracted, often due to managers' self-interested wrangling (Van Mourik, 2006).
Traditional budgeting helps in measuring next year's budget with last year's expenditures and plot in an inflation percent, making them justify only those incremental increases while automatically accepting current levels of spending and achievement without question. Most companies prefer a traditional budget because it is less complicated method of budgeting. They are easy to put together and simplify coordination of budget assumptions across different departments. However, in this modern environment, traditional budgeting illustrates more disadvantages than the advantages to an organization. As a result, it becomes useless.
3.2.1 Usefulness of Traditional Planning and Budgeting
The issues raised in Traditional Budgeting are it is time-consuming and costly to be put together. In most of the organizations, the planning and budgeting process will consume approximately 20 to 30 percent of the management time. Generally, the budgeting cycle took 10.3 weeks to complete in the responding organizations, with each individual manager is spending about two to three weeks preparing the parts of the budget under the control. (beyond budget or better budget) A benchmark study by PriceWaterhouseCoopers (PWC) in 1995 also found that preparation of budget will take about an average of 110 days from start to completion and reported that profit forecasts varied from actual results by a median of 10 percent. The same PWC study also reported that budgeting costs large multinational enterprises a median of $63,000 for every $100 million of base revenue within finance departments alone.
Another study which conducted by Trapp (1999) found that most of the time the finance department will spend on the budget for putting budgeting data together, while only 27 percent of the time is spent on analyzing the datas. It is usualthat for line managers and their staff to spend weeks preparing their budget submissions; and for central budget managers or management accountants to spend even more time consolidating, revising and redistributing budget plans. Besides, required a lot of time to prepare budgets, it adds only little value. (beyond budgeting)
Always on Time
Marked to Standard
In tradition, the attention is focused on achievement of the specific plan or budget and this resulted in organization's vision to continuously focusing only on achieving and beat the budget. It has also been criticism in budgeting as it produces and presenting the wrong target. IN the business environment, the aiming of a company should not be achieving the budget but to beat the competition. This indicated that there are unrealistic goals set for the budget. Thus, it raises the problem of linking the budget with strategic plan. Studies by Norton and Kaplan (2001) have revealed that 60 percent of the surveyed companies do not link strategy and budgeting and 85 percent of management teams spend less than one hour a month discussing strategy.
The traditional budgeting of is often a barrier to change and less flexibility. There is almost impossible opportunity to amend, change or update the traditional budget once it has been approved. Especially in this fast changing environment, the traditional budget focuses can act as a limitation, decreasing the flexibility of the firm and ability to adapt and deal with new opportunities, threats or changes in customers' requirements. Moreover, this approach acts as a barrier to continuous improvement and success, due to less focus is given on how to maximize the organization's potential.
The research by Libby and Lindsay (2007) explicitly addressed the issue of budget encourage gaming and perverse (dysfunctional) behavior. Hope and Fraser (2003) argued that tying budget targets to compensation contracts encourages managers to match the budget, especially when it comes to meeting the budget which is directly linked with rewards and incentive payments, such as bonus to individuals and/or team. Therefore, the majority of the respondents surveyed indicated that three "gaming" phenomena occur at least occasionally: spending money at year-end to avoid losing it in next budget period, deferring necessary expenditures to meet budget target, accelerating sales near the end of the reporting period, taking big bath and negotiating easy targets (eg. sandbagging). Figure 3 illustrates the result of the research on "Budget Gaming". The research has shown significant that most of participants seek to maximize their personal gain during the process of setting budgets. When this mentality is pervasive throughout the organization, the drive to improve and develop is lost.
Figure 3: These budget games frequently exist in most of the surveyed organizations, but deferring necessary expenditures and sandbagging occur most frequently.
Gartner Group, an industry analyst firm, has considered budgets as "a painful annual ritual" ("Does Budgeting Have to be so Painful", Hyperion Solution). Typically, budgets have an annual time horizon and tend to remain unchanged in that 1-year or 12 months period. There is a necessity to review or update the budget which at the time was based on a certain set of circumstances or best information. (basic college accounting) Despite the fact that traditional budgets are developed and updated infrequently. Thus, they are often out of date at the end of the first month of budget implementation.
Budgets forecast reflect the structure of the firm's organization which reflects the performance of the organization and thus it focus on the performance of functions, departments, cost centers and divisions. This results in a focus on managing by the numbers. However, this differentiates with the emphasis companies now place on managing processes as the cornerstone of value creation. Pioneering companies take a horizontal view of customer interests rather than a vertical view of the enterprise. In a vertical view on an organization, budgets are generally dictated by senior management to ensure that all the conditions are remained. Hence, budget is used as the mechanism in order to strengthen vertical command and control employees rather than encourage them. Sometimes, budgeting can be pressures for employees to achieve targets.
On the other hand, traditional budgets prevent empowerment and the opportunity for employees to contribute to the achievement of strategic objectives. This makes employees feel undervalued. Most of the organizations treat employees as costs to be minimized very often, rather than assets to be developed. As a result, retrenchment of staffs during economic crisis is the first solution the most organization will take. Furthermore, abandoning budgets was suggested that can help attract good quality managers to join who value 'freedom and autonomy' and 'exciting challenges'.
This Essay is
a Student's Work
This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.Examples of our work
A main matter in some of the literature on budgeting is that planning processes traditionally used in many organizations are failing to deliver results. Basically, the problem is that they place in limited value to management of businesses. Budgeting inefficient to measure, and might even make growth process of intangible assets a tough one, which are now widely seen as key drivers of future cash flows and shareholder value. Budgets tend to be technical and often focus on cost reductions rather than value creation.
The budgeting and planning systems and processes used in many firms today were developed many years ago for an industrial age, which was relatively developed and less complicated. Today's economy is much more disordered, and attempts to develop long-term, fixed plans based on old business model are naÃ¯ve. Hope and Fraser (2003) argued that traditional budgeting "is out of the kilter with companies' competitive environment". Eye-catching titles such as "The Budget - An Unnecessary Evil" (Wallander, 1999), "Bye, Bye Budget - The Annual Budget is Dead" (Gurton, 1999) and "Corporate Budgeting is Broken - Let's Fix It" (Jensen, 2001) shows the anti-traditional budget campaign led by some budget advocators.
WILL BUDGETS ADDING MORE VALUE?
The previous analysis shows that the majority of organizations will stay on to use budgets. As for the observation, to which extend the respondents viewed budgeting processes as adding value, so we asked respondents to assign an overall grade to their budgeting system using a scale of 0 (disaster) through 100 (excellent), with scores below 50 indicating a failing grade. In assigning this grade, the respondents were supposed to take into consideration of the amount of working time spent on the budgeting process, the effectiveness of the budget systems towards assisting the business unit to achieve its objectives, and any dysfunctional behaviors that the budgeting system might cause. Most of them assigned to the budgeting system in average was 70 out of 100, indicating that, on average, good value was being obtained from the budget-even after considering the time and cost of budgeting and the dysfunctional behavior it can motivate. As Figure 4 shows, 66% assigned their budgeting system a grade of 70 or above, indicating they received good to excellent value from it. Of the remaining respondents, 25% indicated that the budget was more helpful than harmful, and only 8% indicated they received no value or negative value from their budgeting systems.
In conclusion, traditional budgets is criticized as being out of touch with the needs of the modern business and faced growing attack from those who feel that they no longer serve modern organizations' needs.