The official terminology of the Chartered Institute of Management Accountants (2005) defines a budget as Quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues; resource quantities, costs and expenses; assets, liabilities and cash flows. In many organisations budget is seen as a key element in the management of control systems, although universally controversial the usefulness of budgets has generated much recent discussion and debate.
Though budgets are useful for coordination, communication, and performance evaluation, many individuals consider them the cause of gaming and earnings manipulation by managers, time-consuming and costly to develop, and a barrier to change. According to Bunce, Frasier and Woodcock (1995) budgeting was seen as concerned with top-down planning for financial performance, built on organisational hierarchies, and intended as control over operational expenditures.
In many organisations, managers were dissatisfied with traditional budgeting however, no clear recommendation for an alternative system this was to change over the period from 1997 to 2003 which led Jeremy Hope, Robin Frasier and Peter Bunce to suggest a new management philosophy which is known as 'Beyond Budgeting'. This essay is intended to give an overview of the beyond budgeting debate and to provide evidences to suggest if the traditional budgeting should be abolished.
2.0 THE BEYOND BUDGETING DEBATE: CRITICISMS OF BUDGET
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In recent times, budgeting has been seen to put pressure on supervisors, with supervisors blaming others and indulging in budget games. In fact in recent times, this 'command and control' mentality has been one of the main criticisms of those advocating Beyond Budgeting. In fact Algyris (1952) commented that making the tool is a far easier task than learning how to use it, in which he was referring to the Beyond Budgeting Model. Beyond Budgeting entails releasing capable people from the chains of the top-down performance contract and enabling them to use the knowledge resources of the organization to satisfy customers profitably and consistently beat the competition, with intellectual assets accounting for 80 -90% of shareholder value today, people really are the organization's most valuable asset. But the way the annual budget contract works means that their energy and ingenuity is used more for negotiating the budget than for creating value for customers and shareholders. The budget should be replaced by an appropriate performance management model (Hope and Frasier, Oct 2001).
Furthermore, Charles Horngren, whose popular textbooks have promoted traditional budgeting for more than 40 years, admits that numerous managers are extremely unhappy about budgeting. Critics contend that budgeting is incremental, consumes many months and thousands of hours of staff time and ignores performance, and leads employees to focus on the wrong targets at the expense of customer service and overall corporate goals. Also budgeting is argued to be autocratic because central oversight agencies are domineering and restrict the managerial flexibility of line departments, limiting their capacity to innovate. The competition for resources forces bureaucrats toward the single-minded pursuit of budget maximization (Christensen, Peter et al Oct 2003).
Hope and Frasier (2003) identified three primary factors that account for such high levels of dissatisfaction with budgeting. Budgeting is cumbersome and too expensive, managers and staff of business organisations admit that budgeting is usually cumbersome and leads to pressure on staff and also is expensive to maintain. Secondly, budgeting is out of kilter with the competitive environment and no longer meets the needs of either executives or operating managers, budgets needs to be able to meet up with the rapidly changing business environment. Thirdly, the extent of 'gaming numbers' has risen to unacceptable levels. In addition, in support of their claim that budgeting often takes four months, it also involves many managers and multiple iterations and can put considerable pressure on the finance team of any given organisation.
Many companies have expressed interest in Beyond Budgeting as gathered by Hope and Fraser (2003) such as Volvo, Bulmers, SKF, Leyland Trucks, Ahlsell which have experimented with Beyond Budgeting ideas. An important example is ALDI, which has a strong company culture which makes ALDI strategic and competitive and cannot be easily initiated, they manage by the means of their culture and values, and most importantly there are no budgets- there never has been. Increasingly, even finance people question the value of budgeting. One published report says nine out of ten think it is cumbersome and unreliable.
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Among their complaints; it takes time away from activities that add greater value, such as supplying managers with the information they need to make decisions.
Furthermore, Dr Jan Wallander transformed Handelsbanken into one of Europe's most successful banks of the recent decades; few companies took the trouble to find out what he had done, and more importantly, how to turn his philosophy into a set of guiding principles. It was only in the 1980s that a French businessman, Jean -Marie Descarpenties was to follow a similar approach, first at packaging company, Carnaud MetalBox, and then at computer company, Groupe Bull. At the same time Dennis Bakke and Roger Sant were establishing an electric utility company in America, known as the AES Corporation, and based on a core set of principles that both Wallander and Descarpentries would have approved. These are all entirely possible, for instance the Johnson & Johnson and Emerson Electric indicate, that both the beyond budgeting and budgeting models can be highly effective if designed appropriately, regardless of the specific conditions faced. Alternatively, one approach may have a greater propensity of success than the other under certain conditions. Moreover, while many of us might be sceptical of abandoning budgeting, the beyond budgeting movement has sparked deeper thinking in us all (Hope and Frasier, 2001).
3.0 RELEVANCE OF TRADITIONAL BUDGETING
Budgets started life in the 1920s as tools for managing costs and cash flows in such large industrial organisations as Du Pont, General Motors, ICI, Siemens (Jeremy Hope and Robin Frasier, 2003). The relevance of traditional budgeting cannot be over emphasised, and surprisingly many managers still believe that the benefits outweigh the costs, and also see budgets as being indispensable. Organizations continue to use budgets for control purposes, and they derive considerable value from their use. It would seem more fruitful to determine when traditional budgeting loses its effectiveness and whether the way a budget is used impacts the value that organizations experience. For example, the results indicating that budgetary information is used in a variety of different ways for performance evaluation across firms suggests the fixed performance contract argument of the beyond budgeting movement is far from universal in its application (Theresa Libby and Murray Lindsay, August 2007).
However, there are advantages of using the traditional budgeting which will be discussed below:
Budgets help managers to plan for the future and to put things in order in an organisation, Wells (2004) argues that, having planned ahead, a budget aids to adjust personnel, allocate physical and human resources, organise the acquisition of equipment, grants purchasing on time. In addition, budgeting compels managers to think about the future (Carter et al, 1997), which leads to problems being anticipated before it arises.
Framework of control
Budgets are usually used as a source of control by managers; almost every industry has been using budgeting as a controlling instrument. According to Howard (2005), the controlling and anticipating part of budgeting helps to identify and eliminate avoidable costs. As seen by the Kraft Food (2005) which shows, budgetary control contributes to focusing on value adding activities which creates shareholders value. Budgeting has always being used as a means of controlling the activities that take place in the organisation, and managers/supervisors are usually pleased with the aspect of this advantage of budgeting.
Coordination and Communication
Budgeting is usually an approach to solve one of the major challenges of an organisation; coordination and communication. Budgeting helps to facilitate control and aid in co-ordination as argued by (Colman 2001), also budgeting compels managers to communicate and find the best solution as suggested by (Drury 2001). Without budgeting, managers at different departments within the organisation would only seek to satisfy themselves, so therefore, budgeting ensures that managers do get to communicate and rather find a solution.
Performance Evaluation and Learning
Budgeting ensures performance is evaluated; in fact performance of the organisation can be looked at, which is by comparing the budget and the actual sales costs. The variance analysis helps managers focus on what they should pay attention to and which leads to growth and improvement in the organisation.
Moreover, while budgeting practices may require improvement, for many firms' budgets are deeply ingrained in the way they carry out their activities particularly in North America and may be the only means of communication, coordination, and control across the organization. That's why it may be difficult for managers to give up budgets there are also several well-known examples of extremely successful U.S. companies whose budgets lie at the heart of their management control system. For example, Johnson & Johnson relies extensively on budgeting systems and is perennially ranked as one of the best-managed firms in Fortune's annual survey. Emerson Electric is another such company whose former CEO, Charles Knight, extols the value of the company's budgeting system in a recent book called Performance without Compromise (Theresa Libby and Lindsay Murray, August 2007).
4.0 TRADITIONAL BUDGETING VERSUS BEYOND BUDGETING
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In weighing both sides of the debates requires critical thinking. For both Traditional Budgeting and Beyond Budgeting the significances, criticisms were discussed above and with valid examples.
The evidences suggest how important Traditional budgeting is and its relevance to organisations, cannot be undermined, though there seems to be a high level of dissatisfaction with the traditional budgeting due to its centralization approach, inflexible planning and command and control style, most individuals or managers won't still give up and still see as indispensable, however, it still required an improvement which led to the Beyond Budgeting.
The Beyond Budgeting is simplistic in nature which according to Hope and Frasier (2003) is a flat simple hierarchy with few controllers; well- trained staff, no budgets to act as barrier to cost reduction; and a few simple- to- understand measures. Due to the rapidly changing business environment, for companies to sustain competitive advantage, most opt for Beyond Budgeting reason being modern companies reject centralization, inflexible planning, and command and control which led Peter Bunce and Robin Frasier and also joined by Jeremy Hope to form the Beyond Budgeting Round Table (BBRT) due to the dissatisfaction of the Traditional Budgeting.
To sum up this essay, the budget debate is very controversial and needs to be carefully weighed, yes there seems to be universal dissatisfaction with the traditional budgeting, however, evidences suggests that individuals and managers in organisations still find it difficult to let go. Although, there are companies that have abandoned the traditional budgeting and are very successful in the current business environment, however, this doesn't support that traditional budgeting should be abolished and which led to the Beyond Budgeting which conforms to the current business environment and is success can be proved by companies who are using it as discussed above, so companies, organisations should determine the best budgeting that suits their organisation, however, the traditional budgeting should not be abolished.