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The case against traditional budgeting has been debated by Hope and Fraser as part of the Beyond Budgeting Roundtable. They argue that budgeting systems often result in dysfunctional behaviour and consume large amounts of management time. Additionally, they often slow down organizations from being flexible and responsive to deal with unpredictable environments change facing modern organizations, and they are disconnected from strategy. Therefore these significant shortcomings lead to uncoordinated with competitive requirements. hyper-competition, and increasingly fickle customers.
The criticisms from BBRT have attracted the attention of scholars, practitioners and academics into the discussion.
According to Dugdale & Lyne (2006), there are series of articles in management accounting, calling for organizations to replace budgets with a range of indicators and techniques. They see the use of budgets as part of a performance contract, as a pernicious practice, claiming that it leads to numerous problems which include the following; meeting only the lowest targets, using more resources than necessary, making the bonus-whatever it takes, competing against other divisions, business units and departments, spending what is in the budget, providing inaccurate forecasts, meeting the target, but not beating it and avoiding risks. Management accountants recognize these problems, but Hope and Fraser (2001), claimed that budgeting are preventing organizations from competing effectively in globalized, deregulated markets. They maintained that this requires more effective strategic management and the replacement of the command and control structure of most organizations with the distribution of more authority to the front line. They should instead adopt a policy of radical decentralization and implement appropriate key performance indicators, scorecards and rolling forecasts (Dugdale & Lyne, 2006).
On the other hand, agreeing with the argument of the advocates of the "beyond budgeting" approach, Dugdale & Lyne (2006) emphasize most the financial managers in their study strongly agree that budgets were problematic in the way that budgets are too time consuming and managers might be constrained by budgets and delay necessary actions. However, they state that the critiques identifies above are not sufficient reasons to abandon budgeting but improvements should be required (see, Horngren et al., 2008; Wickramasinghe & Alawattage, 2007; Dugdale & Lyne, 2006).
According to a research by Neely et al. (2003), 80% of the organizations agree that the planning and budgeting process does not perform appropriately and it does not add value to the organization. They found that budgeting creation uses 20% of management time, even the most efficient companies take 79 days to arrange their budgets, whereas 210 days were spent in the worst practice companies. This is a considerable of time for an organization to spend on budgeting that arguably adds no value to the business.
Horngren et al., (2008) assert that the result of a survey has shown over 92% of the 150 companies in North America highlighted that most managers still agree budgeting to be one of the most widely used and highest rated cost management tools for cost reduction and control. Highlighting one of the usefulness of budgeting to the users, they maintain that, advocates of budgeting claim that the process of budgeting forces manager to become a better administrator and puts planning in the fore-front of managers' mind. In the same view, in a round table discussions organized by CIMA and ICAEW in 2004 on "The traditional role of budgeting in organization", it is stated that budgeting and the accompanying process are indispensable and that, traditional budgeting remains widespread. Some maintain that as many as 99% of European companies have a budget in place and no intention to abandon it (kennedy & Dugdale 1999, cited in CIMA-ICAEW, 2004).
On the other hand, Libby & Lindsay (2007) express that the problems are arising from how budgets are implemented and used within organization, if used appropriately they can be a very effective tool. Moreover, a survey of US organisations by Libby & Lindsay (2007) revealed that more than 50% of senior managers believed organizations could not manage without budgets despite the associated time and costs, budgets were adding value to an organization. Ekholm & Wallin (2010) agree with Libby and Lindsay, and add traditional budgeting is a strong framework to plan and measure a company's operations if they are properly used. They claim that traditional budgeting is not dead yet, therefore it can be suggested that those inadequacies could be down to the implementation and not the tool itself.
Organizations and culture
The above critique against budgeting is most commonly applicable for large organizations in a rapidly changing environment and employing over 1,000 people.
The smaller firms (10 - 50 employees) tend to impose strict budgets for employees to follow. This is likely to be due to the size, management style and ability to train staff in unfamiliar concepts. Moreover, the budget culture has restricted the ability for a firm to reshape into a modern business because the budgets reign and contain management behaviours into old patterns (Hope and Fraser, 1997). In today's environment the traditional systems of frequently found to be an obstacle to innovation and enterprise by management (Daum, 2002).
Daum& Hope (2003) emphasize the growth of organisations as a factor in causing
the insignificance of traditional budgeting methods. Formerly, organizations were smaller and staff relationships were built on trust. The development of international organizations has caused a failure in trust between workforces. Consequently, budgets were used as systems of control, however this control aspect has become a limitation to a modern and forward thinking company.
Hope & Fraser (1997) found that the Scandinavian bank Svenska Handelsbanken that provided the example case for the idea that organizations could abandon all forms of traditional budgeting and operate successfully. Their CEO reported that a cultural change from budgets and targets to improvement has enabled costs to be driven down. They state that Svenska Handelsbanken utilised a radically decentralised organization structure to enable each branch to run as an independent profit centre. This is a case involving a synthesis between new management processes and radical decentralization.
Handelsbanken has developed a performance and rewards culture based on competitive success at every level such as branch to branch, region to region, and bank to bank. These competitions build strong pressure to employees to perform at high levels of expectation and leaders provide a governance framework based on clear principles and boundaries. These enable the devolution of strategy, action plans, and resource decisions to regions and branches. Branches are allowed to adopt any action they consider are required to improve performance, for instance, they can access and adjust operational resources including staff levels. Additionally, managers are permitted to deal with customer needs since there are no product targets to achieve. A key principle in this organization is that everyone views the same information simultaneously, thus strengthening controls throughout the bank. Like Handelsbanken, other organizations are adopting for radical decentralization as a means of providing a distinctive competitive advantage.
Dissatisfaction with its traditional budgeting process also was the starting point for cultural change at Rhodia, a large specialty chemicals company. It abandoned budgeting in 1999. It is a large and complex global organization that has developed a clearly defined methodology for replacing the traditional planning and budgeting process.
The problem in this organization was the old planning and budgeting process started in June and took around six months to complete. It was based on an extrapolation from the past, and targets were subjects to 'adjustment' by operating managers. The result was little ownership or ambition and lack of any clear link with strategy. Moreover, business management teams barely spent time on strategy, and few understood how to manage the process. No one needed convincing that the budget provided poor value and should be replaced. The only concern was at the factory level, where a number of managers were used to working with predetermined plans and schedules that defined their work programs for the year ahead.
Borealis, a leading European petrochemical manufacturer, long had been general dissatisfaction with the company's budgeting practices. It abandoned budgeting in 1995. It is a company subject to rapid and unpredictable change. This dissatisfaction stopped from the dual roles budgets had played. They set an upper limit on costs and constituted an effective floor or base amount for expenditures. Managers most likely to spend whatever amounts the budget authorized because unexpended sums at year-end could prompt funding cuts for the following year, therefore regularly leads to wasted resources. Moreover, top management did not comprehend budgeting as an ongoing process that continuously takes an enterprise's changing environment into consideration. Instead, it viewed budgeting as an annual one-shot exercise, which committed sizable resources for a considerable period of time.
Practitioners in Europe and the U.S have suggested two alternative approaches to overcome the limitations of traditional budgeting practices. Better Budgeting approach advocates improving the budgeting process and primarily focuses on the planning problems with budgeting. Alternatively, Beyond Budgeting approach advocates abandoning the budget and primarily focuses on the performance evaluation problems with budgeting.
Both suggestions originated from within the same organization, the Consortium for Advanced Manufacturing-International (CAM-I). The US based CAM-I Activity-Based Budgeting (ABB) group suggests to improve budgeting through budgetary planning, the budget language and budgetary control more to the operations in the organization. This group pratices the analytical approach advocated in Activity-Based Costing methods to elaborate an operational plan before drawing up a financial budget. The operational plan is based on decisions about number of end-products, required activities, resource consumption rates and total production capacity. A feasible plan in operational terms is then translated into financial terms, to see how it fits into the firm's financial planning and required financial outcomes.
An alternative option for firms that still want a formal budgeting system is Better Budgeting. Better Budgeting entails five techniques that can be used to overcome some of the limitations of traditional methods (Neely et al, 2003). Activity Based Budgeting involves planning using value adding activities, following a similar concept to ABC and ABM. Zero Base budgeting forces managers to justify their budgets every year to try and prevent dysfunctional behaviour and budget games. Thirdly, a Value Based technique encourages a focus on creating shareholder wealth and linkages with strategy. Profit methods consider both short and long term projections whilst ensuring sufficient cash is generated. Finally, Rolling Budgets create frequent budgets to provide more accurate forecasts. A major problem with Better Budgeting techniques is that they can actually take even more management time to be used effectively, which is likely to cause greater dissatisfaction with the processes.
The European-based CAM-I Beyond Budgeting Round Table (BBRT) group proposed a completely different approach and recommends to abandon budgeting and to introduce instead a system of decentralized decision making, in the hands of empowered local managers, while replacing budget-based performance evaluation by relative performance contracts with hindsight. This approach attempts to provide an alternative for budgeting, which enables management to make planning and control more strategy-related.
Beyond Budgeting seems to have many advantages over traditional systems but it is not without criticism of its own. CIMA (2007) believe that having no budget creates numerous problems. A business will have no framework for planning, coordinating and controlling its activities. The business can lose direction without detailed plans of its current position and future goals. Finally, a drastic culture change can leave employees feeling dissatisfy and the decentralized structure may be impractical for some organisations.
This article supports the argument that traditional budgeting is redundant and no longer applicable for the current environment or it can be even essentially abolish shareholder value within an organization.
To conclude, BBRT's view is that Beyond Budgeting is a far more effective system
which overcome the limitations of traditional budgeting methods. Hope & Fraser expect that the Beyond Budgeting will become a 'major management theme for the future' (Daum & Hope, 2003).
After evaluating the discussions and opinions of several academics, this article believes that Beyond Budgeting play a significant role in the future of management accounting. However, it is unlikely that it will be fully adopted Beyond Budgeting as numbers of techniques are particularly practical within the modern environment. It might be difficult for management completely abandon budgeting, as it is embedded it business culture. Perhaps Better Budgeting techniques could be practiced in order to update the failing traditional system.
It is the view of this article that the traditional budget requires refreshing and revitalizing but
is not yet ready for removal.
Where the ABB group tries to make budgeting more meaningful to operations managers, the BBRT take a different route by suggesting alternative methods to improve the relation between management decisions and strategy.
The Beyond Budgeting show cases are helpful in discovering alternative ways of managing modern companies, but they do not convincingly provide an alternative management concept, capable of replacing the budgeting function.