Traditional Budgeting And Strategy Management Accounting Accounting Essay

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Traditional budgeting had long been dislike by most companies as it is already out-of-date and had brought several impacts to the current modern business environment (Daum, 2002). A research done by Cranfield School of Management had mentioned that approximately 80% of companies today are unsatisfied with their current budgeting (Pierre, 2007).

In recent studies (Daum, 2002) discovered that traditional budgeting is taken as to been compared as an instrument of corporate management because it had been seen as an obstacle to progress by managers nowadays. A recent report (Pierre, 2007) reported that Jack Welch, whom is an ex CEO of General Electric, had said that "The budget is the bane of corporate America and it should had never existed. Making a budget is an exercise in mineralization. You're always getting the lowest out of people, because everyone is negotiating to get the lowest number."

According to researches, most companies had shows unsatisfied statements about the traditional budgeting as it gives impact to their companies such as taking too much time; too complicated; too inflexible; the budget is a tool of repression; budgets do not help reduce cost but protect it; updated too infrequently; not linked to strategies; product and strategy innovation are not allowed; and companies are unable to adapt quickly enough to the market (Daum, 2002, Pierre, 2007).

Companies today are facing higher challenging as the internal dynamic of the company will increased so as the pressure of complex in the company activities. The traditional budgeting could be quite "old fashioned' 40 or 50 years ago as to compare to current business environment. Taking as an example, if considering this traditional budgeting as a management instrument back in the 1920s, it could be useful for the particular company as problems could become clear to show that action is needed. But, due to the improvement in the day by day basis, companies nowadays would have more products to sell and produce compare to the past (Daum, 2002).

In order to success, these companies will have to bring out more new products to the market in shorter time intervals. In fact, they will also have to get lots things to be done at the same time such as develop the right products (in the long-term), form good relationships with customers, employees, and business partners (medium-term), and operate profitably (short-term). From here, it had proven that the traditional corporate management instruments budgeting are being too inflexible to the companies (Daum, 2002).

Thus, things around the environment are improving in a daily basis so as the budgeted numbers. Unfortunately, the percentage of the update of the traditional budget is quite low and too infrequently and this may bring impact to today's businesses environment as this may slow down their processes. The budget of the companies would be out of date before the financial year has even begun. Besides that, this budget do not allow for product and strategy innovation. If a company wants to be successful, they would have to be able to work faster in order to catch up with the growing in the markets. But, this budgets had tightens their cost-cutting and expenses which are used for innovation. Without innovation, the company will be unable to grow faster to reach the goal of the markets and satisfied their customers (Pierre, 2007).

Traditional budgets do not help the companies to reduce cost but instead they are protecting them. This situation is seems like the budgets are showing the companies or users that "use it or lose it". But in reality, people know that if the budgeted expenses are not being used, it will get pulled from the budget next year as management sees it as unnecessary. In fact, many firms had indicated that this budgets is wasting too much time as some entities especially the larger ones had actually believe that their budgeting process are approximately taking up to 20% of the senior management's time and take up to 5 months time to complete it. Slowing down the process of the companies may lead them failing to be up-to-date to satisfy the shareholder value so as the customers' relationships (Pierre, 2007).

2.1 Question 2:

According to Pflaeging (2006), budgeting is defined as the heart of the performance management process in most companies. The beyond budgeting particularly involves some circumstances in a manner of annual cycle which falls for agree targets, set rewards, actions planned, allocate the resources, coordinate plans across the organization and lastly control and measure the performance against the agreed plan (Pflaeging, 2006). In recent studies (Pflaeging, 2006) also mention that beyond budgeting is also know as a leadership philosophy which is based on applicable set of alternative processes.

In the mid 1990s, beyond budgeting had been known and that was the starting point of the beyond budgeting journey which is run by CAM-I (Daum, 2003). BBRT (Beyond Budgeting Round Table) of the CAM-I is then founded in 1998, London (Daum, 2001).

According to Daum (2001), below is the outcome of the 12 beyond budgeting principles which describe both performance management and controlling processes that support the concept of the budgeting.

Sources: Cam-I and Daum, Juergen H., (2001) 'Beyond Budgeting'.

Referring to Daum (2001), the CAM-I BBRT defined the above 12 principles diagram as "devolution". This process is not based on fixed targets and resource plans but instead they enable organizations for better sense of degree of flexibility

Beyond budgeting involves four key elements as shown below:

Rolling forecast is updated either monthly or quarterly. It is important for indicating in an organization. It helps to lift blinkers put in place by the budget and the annual finishing line of the organisations will be focused. This helps them to look at threats and opportunities further into the future (Plowman, 2009). According to Parmenter (2007), there will be barriers to implementing a quarterly rolling forecast as shown below:

Lack of management ownership.

Lack of linkage to strategic decisions.

Lack of budget holder skills.

The "stop and start" annual planning syndrome.

Lack of understanding of the application.

Parmenter, D., (2007) 'Barriers to implementing a quarterly rolling forecast' waymark solutions limited.

Most organizations might face difficulties in separating their forecast from and coordinating their forecast with the operational budget. From here, it brings them to the conclusion of preparing mid-year or quarterly "re-budget" instead of preparing a right way of forecast (Montgomery, 2002).

According to Kaplan and Norton, balance scorecard brings benefit to the organizations in the way of providing strategic planning and management system that is use extensively in the business and help to improve internal and external communications. Thus, it also gives opportunities in monitoring the organizations performance against the strategic goals. With the usage of the balance scorecard, the organizations able to rely on it as it gives clear prescription to help the company to 'balance' their financial perspective (no aurthur, 1999-2009).

The four perspective of the balance scorecard is shown as below:

Sources: 1998-2009, 'Balanced Scorecard Institute' A Strategy Management Group company.

According to Kaplan and Norton, 1999-2009, they had mentioned that:

"The balanced scorecard retains traditional financial measures. However, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

When companies tend to be more adaptable towards changing, barriers in beyond budgeting may occur. These happen as companies may seek the desire operating reality to gain faster response, innovation, process improvement, customer focus and also shareholder value. Towards all these requirements, the management will be easily facing inefficiency as they will kept remain stuck in an old-fashioned ways of command and control and these may brings barriers (CAM-I and Daum, 2001).

However, referring to the below diagram, it shows how beyond budgeting enables the lean, adaptive and ethical enterprise (Pflaeging, 2006):

Sources: Pflaeging, N., (2006) 'What is Beyond Budgeting? - An Introduction'. metamangement group.

Pflaeging (2009) argue that beyond budgeting model is a "coherent model" due to its components that is able to work in a harmony way and from here it can produce outstanding and sustained success. From this model, most organizations had achieved better opportunities (Pflaeging, 2006). Beyond budgeting gives the benefit to the organizations in four situation - faster response; innovative strategies; lower costs; and more loyal customers (Pflaeging, 2009).

Companies will be able to operate faster and simplicity as this may give the managers the ability to act immediately within clear principles, values and strategic boundaries. Besides that, managers are able to coped things immediately to emerging the threats and opportunities as they arise rather than being constrained by a fixed and outdated plan. As for the innovative strategies, it allows the organizations to move away from reward and help them moving towards the opportunities of mutual trust which is built up to share knowledge and best practices with suppliers and contractors (Pflaeging, 2009).

3.1 Question 3:

Borealis is the biggest European polyokefins producer with production plants in different European countries. Borealis is also the divisions of Statoil Norway and Neste Oy Finland in 1994. Previously, both Statoil and Neste had traditional purposes of budgets which are make planning and controlling easier for the management. Borealis then abandoned traditional budgeting in 1995 and replace it by new management tools (Brueninghaus. 2003).

Borealis abandoned the traditional budgeting because they have the aim in the below improvement (Boesen, 2001):

Decentralise authority and decisions.

Reduce the resources used in the process.

Simplify the budgeting process.

Improved financial management and performance measurement.

According to Steve Morlidge, traditional budgeting in companies is just a set of tools and procedures that lead to a fixed annual performance contract which just interlocking the companies fixed annual plans and had few relationship with customers and the market demand. When most staffs are focusing too much on budget numbers, they will started to neglected the importance of the customer needs and keeping up in the market to compete with other competitors as markets changes rapidly. From here, they will fail in gaining the growth and building competitive advantage as it is impossible to forecast what will happen in a complex commercial market (Daum, 2003-2005).

In fact, if companies rely much on budgets, they would not be able to see what happens in the reality and not able to be much more flexible as budget will be an unproductive negotiation process. This due to the companies whom might just negotiated the budget figure that they know that they will be over perform and this may guide them to unsatisfied outcome (Daum, 2003).

Borealis had bring up four management tools to be replace the past budgeting as they had realised that they had to separate financial forecasting from target setting and performance management. The four tools that have been implemented will be as below (Daum, 2003-2005):

Borealis believe that with this tools split up, it allows them become more flexible and also reducing the completion with financial numbers. With the help of beyond budgeting, it gives better implement tools that is much more appropriate to manage the businesses comparing to the fixed traditional budgeting (Daum, 2003-2005).

From the interview (Daum, 2003-2005), Rainer Gunz mentioned that the current business conditions are changing rapidly so a much more appropriate and flexible investment management is needed to allow the company dynamically adapt overall investment volumes during the fiscal year to changing economic conditions. This is when rolling investment management is implemented in Borealis as it allows and helps them continuously work on their investment projects with their business strategy depending the current economic performance and also possible opportunities that show up (Daum, 2003-2005).

Thus, when Borealis doing the rolling financial forecast, they will be focusing in price information from corporate planning; expected sales volume form the sales force; fixed costs and depreciation from the manufacturing sites; and exchange rates, inflation and loan information from corporate finance (Ferry, 2009). Besides, with these tools, Borealis will gain benefits as they are able to look one year ahead continuously; having no conflict between forecasting and target-setting; and able to incorporates both latest external and internal assumptions (Boesen, 2001).

Rolling financial forecast is updated quarterly which covers next 5 quarters and has higher accuracy than budgets as it is a straightforward process and it is simpler and faster compare to budgets. With the help of this tool, Borealis is able to gain early warning information which may trigger strategy adaptation (Daum, 2003-2005). Below will be the diagram of rolling financial forecast process in Borealis:

Boesen, T., (2001) Beyond Budgeting - Strategic and operative planning at Borealis, ppt - 14.

The balance scorecard gives Borealis the opportunities to be much for focusing on non-financial performance and also the intangible assets instead of just focusing on financial results. Borealis used the balance scorecard for target-setting and reporting progress. Other than that, this tool is also used to communicate strategy. Balance scorecard focus more systematically on strategy for selecting key performance indicators (Boesen, 2001). Rather than communicate corporate performance through budgets and variances, the company now tracks performance against key performance indicators related to business (Ferry, 2009).

The starting point for balance scorecard in Borealis is their strategic option which is derived from improving overall competitive position; develop Borstar into a commercial and successful technology and lastly grow into a successful position. From these strategic options, it is where the key indicator performance might exist which is shown as below (Boesen, 2001):

Boesen, T., (2001) Beyond Budgeting - Strategic and operative planning at Borealis, ppt - 22.

According to Rainer Gunz, he said that benchmarking play an important role in Borealis as it enables them to realize relative targets that move with the environmental developments. In Borealis, benchmarking tool help them to alert challenging targets and deal targets and measures for the balance scorecard. Nevertheless, balance scorecard also helps Borealis in dealing the investment projects from a market or competitor perspective (Daum, 2003-2005).

Figure 2: Boesen, T., (2001) Beyond Budgeting - Strategic and operative planning at Borealis, ppt - 9

From figure 2, it shows Borealis still can success even without budgets. The financial managers of Borealis is satisfied with the four new management tools compare to the traditional budget as with the new management tool it brings more benefits to the company such as flexible, faster, cheaper and also better. Managers now had more freedom to achieved challenging targets that were benchmarked against leading global competitors (Ferry, 2009).

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