Overview Of The Beyond Budgeting Debate Accounting Essay

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Budgeting is for everyone and it entails making spending much lower than income thereby planning for both short and long term. (Fontinelle, 2012). Traditional budgeting which is the main argument in this essay can be defined as budgeting which makes use of expenses and income from preceding month or year to predict the budget for the subsequent month or year and it is very easy to create. (Anon., 2012). Traditional budgeting encourages top down management style making top management handle decision making processes and handing plans down to units. (Matthews, 2003). Different researchers have had different views on traditional budgeting. Some researchers believe a little bit of traditional budgeting is necessary, some believe the beyond budgeting approach should be used that traditional budgeting is not effective and should be abolished and some believe that the actual budgeting should lie somewhere in between the traditional budgeting and beyond budgeting approach. A brief history, features arguments in favour of and arguments against traditional budgeting would be looked into and from there it would be noticed that a mix of traditional and newer budgeting system should be used by organizations.


Traditional budgeting which is designed to help people/organizations spend money as planned is also known as a top-down, control and command approach with authority seated at the executive level (Rothberg, 2012). It dates back to the 18th century and was gotten from the word "bougette" used to describe a wallet for keeping money and documents. In the early years, budget described a Chancellors annual speech on a country's finances but now is used for any financial statements or plan. It came up because from the 11th century, monarchs were seen to be mismanaging and squandering the country's finances (tax revenue) and they kept on incurring debts. Because of this mismanagement, there was a reform made for expenditures to be approved by treasury even after it has been approved by the parliament and this rule still stands today. Budgeting has been on since then and has come to be used by lots of organizations. (telegraph, 2007).

Traditional budgeting starts with analysing spending. Budgets are usually developed based on how money is currently spent and keeping track of expenses within a set period of time would help to get this. All expenses are then put into different categories e.g yearly, monthly, weekly and variable expenses. The next stage in the traditional budgeting would be to develop a plan. A traditional budget is done in a way that expenses do not exceed income after taxes and payroll deductions for that period. Plans could be developed based on the yearly income divided into each month. After a plan has been developed, the next stage is to create expenditure amount. From the analysis of current spending, an appropriate sum should be allocated to different categories. The final stage in a traditional budgeting process is to Fine-tune spending. The amount allocated for each category is looked into to see if any changes need to be made. (Sylvan, 2012)

Traditional budgeting is used by organizations because it is already a part of organizational culture. It has become a norm to use the traditional budgeting approach because it has been around for a very long time and seems like what should be done and is part of the fundamental process. Abolishing it might be a very risky decision as it would affect mode of operation. It also provides a framework of control. As its major function is to coordinate organizations financial activities, traditional budgeting provides a framework for controlling activities and making it stable and easy to manage. In addition, It accommodates the need to decentralize. Decentralization while maintaining standard procedure of operation is of so much benefit to organizations and many organizations have recognized that. With traditional budgeting approach managers are free to run the operations how they want as long as they can meet the set parameters. (Yvanovich, 2012).

There have been a lot of arguments and debates against traditional budgeting (beyond budgeting debate) and these arguments would be looked into below:

The beyond budgeting round table was set up with a vision of finding different mechanisms to replace budgeting and help organizations to be more adaptive to change. They wanted executives of organizations to have a new way of thinking about management and design a new management model which would drive organizational behaviour and influence bottom line. (Beyond Budgeting Round Table, 2012). Authority should be given to front line business units that closely deal with customers so that they can respond to customer needs faster (Rothberg, 2012) which would then add value to the bottom line.

Arthur Rothberg, the managing director of CFO Edge was one of the critics of traditional budgeting. He used 3key areas (management style, seat of authority and performance management) to show the differences between traditional budgeting and beyond budgeting. For management style, the traditional budgeting approach was command and control while the beyond budgeting was empower and coach. In the command and control style, the executive team assumes that managers and employees do not possess enough skill, honesty and motivation that support the company and so they translate the organizations objectives into goals, plans, and initiatives for all units and employees. This approach is more of a short term profit approach as it could build up dishonest and questionable behaviours which would affect the organization in the long run. In the empower and coach approach, executives roles move to coaching and thereby handing over to business units and supporting them where need be. Executives are seen to trust employees and this makes employees see their work form a holistic/partner based point of view and so they co-operate and act in more accountable and responsible ways. (Rothberg, 2012)

For seat of authority, traditional budgeting approach was centralized bureaucracy while beyond budgeting was decentralized team. In the traditional approach, top management makes all the decisions and plans and hands them down. This approach takes a lot of time because before decisions can be made the top management has to be consulted first. In a decentralized team, the business units/ employees have the power to act autonomously. Because they deal with customers daily, they are able to know what to do quickly when a consumer need arises. (Rothberg, 2012)

From the management style, traditional budgeting's approach used fixed target while beyond budgeting's was relative targets. In traditional approach, targets are set by executives for business units. Executives do not know much about unforeseen shifts that arise with consumers on daily basis and they set targets based on little they know. Using relative targets compares team performance to more relevant and dynamic performance indicators and their goal is usually to achieve success by co-operating as a team rather than trying to meet targets.

Arthur concluded that companies using the beyond budgeting approach experience continuous improvement in performance and shareholder value.

(Daum, 2002) deliberated upon the fact that budgeting efforts do not make sense if budgets are already out of date after few weeks because the budget was based on the occurrence in the period it was set and circumstances change. Managers saw traditional budgeting as an obstacle to progress. They saw it as being too complex, time consuming, inflexible and cannot adapt quickly to the market. It demotivates managers from setting ambitious targets for themselves and the time executives spend on preparing it is huge. From the traditional approach, budget is a central management element but what the ever changing market environment of today needs is the opposite. The market needs managers and companies to adapt to changes quickly. With this need, companies that are not just particular about producing and selling but want to compete for success in not only sellers markets but also buyers' market are important. Daum gave an example of Svenska Handelsbanken (a Swedish bank with branches all over Britain and Northern Europe) that has no budget, or fixed plans since the 1970's and is one of the most successful banks in Europe - outperforming its other Scandinavian competitors with regard to cost to income ratio, customer satisfaction and return on equity. Controlling is left to managers and employees, business responsibility is decentralized and targets are relatively defined. Even as beyond budgeting encourages the use of management principles that were more adaptive allowing high degree of flexibility and leadership principles that empowers managers, unlocking their full potential in order for the organization to react swiftly in an appropriate way to chances and risks Daum concluded that not all companies are able and prepared for the beyond budgeting project. He conceded that there is a possibility of an interim step i.e 'Better Budgeting' or 'Advanced Budgeting' which aims at having a more effective process of controlling and making planning faster (still using budgeting) and transiting to rolling plan/budget processes instead of one-off annual budget. As a result, the company would become more adaptable and the organization as a whole would always be on track especially with satisfying consumers. To achieve this, organizations should reduce the level of detail of planning (too much detail should not be in the plan because it would change along the line), continually roll plans, change business operation i.e clearing top-down targets and using decentralized system. (Daum, 2002)

(Ali et al 2011) saw beyond budgeting as the way forward. It was a way of boosting the most important characteristics of a budgeting system i.e flexibility, responsiveness and co-ordination. It was concluded that beyond budgeting is still in its infancy stage and still requires further development and practical implementation so a better budgeting technique that would update the failing traditional system was suggested.

(Fraser et al 2003) stated that budgeting should be abolished as it is a way of forcing performance and can lead to break down of corporate ethics. As long as budget is still part of the business plan, a self-motivated workforce is unrealistic. Using beyond budgeting approach pushes employees to outdo themselves and it boosts their confidence because they know their reward is based on relative performance. Employees are motivated to do more which could even surpass what they would have gotten as targets when they feel they are trusted and not struggling to meet a target. (Hope et al 1997) argue that management accounting models that were previously used by companies in the Second wave (Industrial age) have to be changed if companies want to be successful in the third age (the Information age) because times have changed.

(Hill, 2012) also criticized traditional budgeting stating that it has unrealistic objectives (goals set are sometimes arbitrary because they do not solicit input from departmental managers that are in charge of achieving the result), the budget always goes up (they do not look deep to see if there were some misappropriated funds in some places they just keep adding to the previous year's budget and assuming it always goes up), padding and then cutting (managers who write budgets always add more because they know executives will cut it and this affects the sincere managers too because their budget also gets cut). (Yvanovich, 2012) also went on to criticize traditional budgeting stating that it is inefficient (it takes time and consumes resources), low change responsiveness (because of the use of annual budgeting cycle, the budget becomes obsolete not too long after its created), failure to motivate desirable behaviour (it allows unprofessional attitudes in managers doing anything to meet their target, it strengthens bureaucracy and reinforces departmental barrier because everyone is striving to meet their targets instead of working as a team) and it causes disconnection from strategic plan (as managers are trying to get their figures right and struggling to achieve target they forget that they are supposed to be creating value)

Traditional budgeting appears to be detested by most of the researchers and many were in favour of beyond budgeting. Beyond budgeting is not perfect on its own as an organization without control could end up losing focus and chasing after unimportant things. As seen from (Daum 2002, Ali et at 2011), organizations are not yet at the point where they can go for a 'no budgeting' policy so the suggestions the made for adopting a better budgeting/advanced budgeting seems very attainable. They are not on the traditional budgeting approach and neither are they on the beyond budgeting approach. It is more like using a technique that tackles some problems that come with traditional budgeting approach (because a little of the traditional budgeting approach still has to persist) and making budgeting better.

In conclusion, Arthur's write up on using beyond budgeting for continuous improvement in performance and shareholder value and (Hills 2012, Yvanovich 2012) criticism of traditional budgeting are well stated. Traditional budgeting on its own cannot be totally abolished as Fraser et al said because a little bit of control is still needed in an organization. Beyond budgeting approach is a very good approach but it cannot be fully adopted. Some of the privniples from the beyond budgeting approach should be brought into the traditional approach (changing a lot in its way of operating) thereby updating the areas where traditional budgeting approach has failed but it should not be removed or abolished.