For many decades, empirical research has documented extensive use of budgeting systems (Scarborough et al. 1991). Hence, budgeting had been considered, in the past, as an integral element of the management control system (Ahmad et al. 2003).
1.1. Resource allocation and coordination
Budgets help to allocate resources and coordinate operations (Blocher et al. 2002). Different departments will make different decisions, believing that they are working in the best interest of the organisation (Drury 2000). Consequently, budgets help to align and reconcile these different needs for the benefit of the entire organisation (Drury 2004). Nonetheless, budgets encourage 'defend own turf' attitude (Hope and Fraser 2001). Departments are not willing to share their expertise, skills and information with others (Hope and Fraser 2001). Hence, the company should adopt an organic structure with an emphasis on learning and innovation (Marginson and Ogden 2005).
Budgets are a form of workforce motivation tool (Ahmad et al. 2003). It can influence managerial behaviour so that they would perform in-line with the corporate objective and not make sub-optimal decisions (Drury 2004; Hilton 2005). Alternatively, if the budget does not serve this purpose, then it will impose a threat rather than a challenge (Drury 2000; Hope and Fraser 2001). Maintenance schedules may be postponed in order to meet the annual targeted expenses. This would encourage in an early asset replacement program (Hilton 2005).
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Budgets help managers plan ahead (Hilton et al. 2000). Without any budgets, managers who are often overloaded with work will not be tempted to plan for the future (Drury 2000). However, managers may become more short-term oriented because most budgets are conducted annually (Hayes and Abernathy 1980). Moreover, a research conducted in Ireland proved that companies which emphasized most on budgets actually had the shortest time horizons (Prendergast 2000). To overcome this obstacle, a top level review associated with rewards and pain should be conducted to remunerate those who have worked in the best interest of the organization even though this has made the managers miss their Key Performance Indicators.
1.4. Performance measure
Budgets are also used as a performance measure (Blocher et al. 2002). Managers can evaluate their own performance and those of their subordinates' to see how well they are performing to meet the corporate objective (Drury 2000). However, this is not without its repercussions. Human behaviour will encourage a 'gaming aspect' between superiors and subordinates during the target setting (Bourne et al. 2002). Superiors will try and get the most out of their subordinates while the subordinates will try and bargain for the lowest achievable target (Prendergast 2000). Therefore, the best approach would be to set a challenging but possible-to-achieve target, so that subordinates can pull out all their stops to achieve the target, and reap the benefits awaiting them.
1.5. The limitations
Indeed, one cannot deny that budgets have its usefulness. Alas, the benefits of budgets can only be stretched so far because the consistently changing environment will hinder their effectiveness. Therefore, budgets have been scrutinized and condemned over the past few decades.
2.0. The revolution
Budgets are said to be no longer useful or appropriate in this dynamic and changing environment (Jensen 2001; Stewart 1990). Amongst the criticisms are that budgeting are time consuming and costly, major barriers to flexibility, add little value, focused more on cost rather than on value creation, strengthen vertical command and control, updated infrequently, reinforces departmental barriers rather than encouraging knowledge sharing (Bourne et al. 2002), prepared in isolation form instead of aligning to company goals, focus on financial outputs and excludes other performance measures and tend to be manipulated by managers (Hope and Fraser 2001). Most companies were adapting their planning and budgeting processes but not using the term 'budget', new approaches were widely used. Examples of such approach are rolling forecasts and separation of re-forecasting and budget to increase speed and accuracy. Hence, budgets have to be reengineered in order to maintain its usefulness and to survive in the changing and competitive business environment.
2.1. Flexible budget
The tool used most to control overhead costs now is called a flexible budget. This budget is based not only on one level of activity. The flexible budget analysis gives correct basis for comparison between actual and expected financial costs, give actual activity. Traditionally, most companies used standard costing as part of their budgeting process. This is found to be concentrating mostly on financial numbers, short term and performance was based on variances to the budget. Therefore, more strategic approaches have been adopted to enhance budgeting and performance measures.
2.2. Activity-Based Costing and Zero-Based Budgeting
Always on Time
Marked to Standard
One of the early works in reformatting budgets is the ABC. In making changes to budgeting, ABC has been constructed to further enhance the master budget. With the elements of ABC in budgeting, it provides solid reasoning for budgeting costs at particular levels which is more useful for management, because it reveals the cost level along changes with cost drivers, if changed (Hilton 2005). Besides that, the zero based budgeting (ZBB) introduced by President Carter (McGill 2001), highlights ranking instead of categorization which would force managers to rethink each phase of operations before allocating resources.
2.3. The Basic 5 and The Four Cornerstones
Budgeting is still a worthwhile method as long as five principles are stick by (Howard 2004). First, budgets should be planned from bottom up making sure no communication break down which would lead to worthless budgets. Secondly, to make sure the budget is realistic because if it is not, the whole point of budget would be lost as one knows well the target is not achievable. Next is that employees must clearly know where the business is going and align departmental objectives to it. Recognizing the concept of flexibility is important as well. Finally, is to learn from mistakes. In the ever changing world of business, mistakes are unavoidable. Hence, the smart way to tackle this is to learn from process and work on it afterwards. Companies which still prefer to use budgets as their means of planning should adopt four principles to boost budget performance. These four cornerstones are the application of strategic framework to avoid redundancy, public annual reporting to trace the connection between outputs and impact, to allocate resource against future intention [plan] and to test inputs, outputs, efficiency and impact (McGill 2001).
2.4. Beyond Budgeting Round Table
Most recent development is the Beyond Budgeting Round Table (BBRT) which focuses on new organizational and behavioral changes such as delegation, coordination, leadership, resource management and motivation (Hope and Fraser 2001). Successful companies now shift from 'make and sell' to 'sense and respond' (Haeckel 1999). Therefore, managers need to create a climate for fast response, generate new business concepts, operate with low costs, find and keep customers and shareholders satisfied and engage the best people. BBRT principles strengthen these key success factors. Due to the falling prices and costs as well as demanding shareholders, BBRT seeks to operate with low costs and places customer value needs at the center of strategy and this leads to consistent shareholder value creation.
2.5. Benchmarking and Key Performance Indicators
Currently developed performance measures are benchmarking and KPIs which improve internal performance and establish the best practice amongst companies. Return on Investment and Residual Income are common performance measures which relate profit earned from selling to capital required. The economic value added is also a contemporary measure used. However, all three can result in incorrect decision-making as they focus solely on short term (Hilton 2005).
2.6. Just not enough
Therefore, the above changes in budgeting would still result in problems as they only value financial measures. Non-financial numbers are important as well. Hence, the Balanced Scorecard (BSC) which considers non-financial measures is introduced.
Then came along the Balanced Scorecard
The BSC provides a more balanced view of company's overall performance (Dorweiler and Yakhou 2005; Smith 2005). BSC identifies company's value drivers and ensure correct strategies have been adopted. It translates an organization's mission and strategy into four different perspectives: financial, customers, internal, learning and growth (CIMA 2001; Wingren 2004). BSC focuses on providing systematic tool, which attempts to maintain a balance between financial and non-financial performance (Hasan and Tibbits 2000; Voelpel et al. 2006). It creates a shared understanding of organization's strategy to whole organization (Hasan and Tibbits 2000). It can assist top management by gaining a better understanding of organization's success factors and value drivers (CIMA 2001; Prendergast 2000). On the other hand, employees are able to see how well their contribution links to the organization's success and strategy (Hasan and Tibbits 2000; Prendergast 2000). Many organizations suffer from information overload while collecting reports on performance measures (Drury 2004). However, the systematic way of BSC enables managers to prioritize important issues more easily and reduce information overload (Voelpel et al. 2006). In order to sustain in a rapidly changing environment, organizations must react quickly to the changes and customer needs (Hope and Fraser 2001). BSC can improve strategic feedback and learning, hence the managers are able to adjust or change their strategies whenever needed (Drury 2004). BSC has been described as a power approach and is the most popular with management accountants (Smith 2005). However, it still has its limitations and criticisms when facing a dynamic environment.
3.1. Time and costs
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It has been argued that the development of BSC is very complex and time-consuming. The time and costs for the development and design process may outweigh the benefits when coupled with a rapidly changing environment. When the environment changes faster than the ability to develop organization-wide measures, partial implementation will be well encouraged as compared to BSC (Dinesh and Palmer 1998).
BSC focuses on translating strategy into the four perspectives which attempt to align company activities to achieve goals. It may lead to inflexibility and as it cannot be classified into those four dimensions, it may be omitted and there is an intention to focus on given goals. There is danger of resulting in bias as the managers try to attach to the given dimension by ignoring the changing nature of business environment (Voelpel et al. 2006). The major weakness of BSC is that it lacks the 'how' component, it does not indicate how the new customers and market can be identified although it is able to link the customer initiatives with organization strategy (Lee and Andrew 2000; McAdam and O'Neill 1999).
3.3. The Performance Prism
The performance prism provides a broader view of stakeholders than the BSC, which makes reference only to customers and shareholders (Anderson and McAdam 2004). They consider the value of stakeholders as well as shareholders (Smith 2005). Apart from that, they enable a balanced picture as the power of regulators and pressure group is put into consideration in the dynamic environment (Anderson and McAdam 2004).
Due to the several limitations of BSC, it is still not superior enough for companies to use BSC to compete in an increasingly changing environment. Thus, other methods have been proposed, such as The Performance Prism (Smith 2005) and The Dynamic Multidimensional Performance Model.