Beyond Budgeting System And Problem Business Essay

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

In 1997, according to Ozigi, budget is defined as the estimated total profit and expenditure in yearly basis of an organization based on the expected income accruing to the unit of organization. It is a proper written statement of management's strategy for the coming future, which is expressed in terms of finance. A budget prepares the course of actions to be taken in future for management of knowledge in an organization. In 1980, Kooniz et al. find a different meaning of budgeting that it is nothing but the preparation of plans in financial and non-financial terms for a given period of time in future, where financial includes expenditure and revenue where as non-financial includes materials, labor-hours. The concept of budget came into existence in the early 1920s when these were used as tools for cost management and cash flows by large industrial organizations. Budget has different meaning in different field like researchers in literature management see budget in terms of a board organizational plan which refers it as management of coordination, planning and control.

As a rational model budget includes the following: 1) clear definition of objectives and goals, 2) inputs are to be chosen and combined in a way so as to make the goal attainment maximum, 3) before making a decision that is to be implemented in a given procedure various alternatives are acknowledged and compared, 4) for the enhancement of making decision information systems are used, and 5) a rational pattern with an importance on a long-term plan.

Characteristics of a good budget plan for Management of knowledge in an Organizations are: 1) for the management of knowledge in organization a financial plan is needed containing various projects and programs, 2) a permanent period of one year usually, 3) both expected expenditure and incomes of materials, KM personal and equipment, 4) after approval an authority to gather and incur expenditure, and 5) every financial activities to be included around the management of knowledge in the organization given.

The objective of this paper is to evaluate that whether budget is important in the current organization, if important what are the changes that is required to make it more dynamic and as per the need of the current organization.

Beyond Budgeting system and problem

Traditional budgeting is called as beyond budgeting where the model of management is considered first. For changing the situation that was rarely met by various organization this was developed, when the process of management was associated with budgeting, just like the way of establishing goals and strategies, allocation of resources, etc. were not neutral in terms of management behavior and thoughts. Therefore, ten reasons were defined why budgeting caused significant problems and should be replaced:

Being very bureaucratic is expensive resulting in taking up about 20 percent of manager's time.

It hides innovation and initiative, because it supports management of authority.

Unethical behavior is encouraged and reputational risk is increased, as it presumes violent targets and inducements that need to be met at any cost.

People are demotivated, because instead of performance maximization budgeting mostly entails going with the flow. And as the consequence of these people do minimum work.

It is outdated in very short time periods, because its key notions normally become out-of-date rather frequently, and additional time is required for their mastering.

It does not deal with plan, because budgeting is originated on departments and functions.

It is out-of-killer with the environment so competitive outside, as quick response and nonstop innovations are the main concern of today's managers apart from the actual budget management and people.

It protects costs that is not important and will not add value, because they are mostly compiled on the basis of outcomes of the previous year.

It prevents quick response which is not considered as the objective of budgeting, but for successful work it is necessary.

It strengthens control and command.

Therefore, it is obvious that the budgeting in this manner was obviously not designed for working on various tasks with main stress on rapidity and self-rule but rather for big companies with high hierarchies.

Hence, to summarize of traditional management model can be done in this way:

It becomes very expensive in putting budgets and targets, implementing instruments, budget management and people from distant locations.

There is a very few involvement of people in making decisions and plans, which is considered as top-down process.

There are a lot of adjustments made among the need for temporary outcomes and creation of long-term value, which cause the development of micro-management.

Transparency is not maintained in this model while making decisions.

The gifted people usually want to leave it because of the structure which is too rigid.

The main aim of Accountability is convincing only the management, and not the customer (BBRT, 2011).

How to make Change to Current Budgeting system?

In order to achieve the kind of style of management mentioned above, it is very important to reconsider the traditional vertical organization and to translate it into such a way so as to tackle the customer. The origin of the Beyond Budgeting model is based on reconsidering team-based accountability (Bogsnes, 2009). There are three types of teams in beyond budgeting and they are: executive team, which helps for fixing goals and purpose and maximizing the performance of other unit; support services teams, which is responsible for supporting and serving the value centers; value center teams, which is responsible for building strategy, providing values and investing capital (Hope, Fraser, 2003). Moreover, there are only project teams are formed, but they are specific on project and are established in a short-term basis.

Twelve principles of Beyond Budget approach which altogether are the most best practices of leading organization of the world, were build up on the basis of various proofs gathered in 12 years, so by combining these principles the best budgeting model can be defined. The list of 12 principles is as follows:

Governance and Transparency

Values -a general cause is there instead of a central plan.

Governance - sensible judgment and common values are there instead of fully described rules, laws and regulation.

Transparency -understandable and unrestricted data are there instead of limitation and restriction of information.

Accountable teams

Teams -network of group of firms for accounting is there instead of assigning particular functions to each department.

Trust - there is a full trust that each firm regulates and controls their performances by their own instead of assigning a manager for each firm.

Accountability - accountability is done on the basis of reviews of all the peers and general norms instead of doing it on the basis of hierarchical connection.

Goals and rewards.

Goals - determined goals set by each team are facilitated instead of facilitating goals mentioned in the fixed contracts.

Rewards -rewards are given on the basis of relative performance instead of giving rewards on achieving a fixed target.

Planning and controls.

Planning - planning is a continuous and comprehensive process instead of doing it as a top to down event.

Coordination - interactions are managed dynamically instead of coordinating it through annually defined budgets.

Resources - resources are available in time whenever they are required not just-in-case.

Controls -controls are based on regular and immediate feedback instead of doing it on the basis of budget variances.

Seven steps are there which are necessary to implement Beyond Budgeting model into reality (Hope, Fraser, 2001):

Guiding union should be established- union should be a team comprises of 10- 12 people, and those people can create an idea for making changes and can guide in the method of model implementation.

Innovative thinking- thinking of leaders should be innovative while managing the process.

Many design teams should be established- principles for the Beyond Budget will be implemented by these teams so that an effective model can be designed and can be implemented in reality.

Building an urgent case for change and convincing the board - necessity of Beyond Budgeting principles for a specific organization should be understood by the executives.

Looking for quick wins - leaders should recognize quick wins to continue momentum and form reliability.

Education and training -a proper training and education should be given to all the teams which are established recently so that they will be aware of each and every aspect about the new model.

Consolidating the gains and maintaining the momentum - creation of value centers, reduction of operating process and helping services teams is necessary

In accordance to the approach of Better Budgeting, five techniques are there which are believed to produce improvements. They are:

Value-based management - it includes managing the value of shareholder which is created time to time. Each and every expenditure plan must be calculated in terms of the shareholder value they are going to produce and calculated as project appraisals. It also helps relate shareholder value and plan to planning and budgeting.

Activity-based budgeting - it includes managing and planning controlling and planning with value-adding activities and processes. Activities of organization along with business processes are organized to meet the needs of customer and external.

Profit planning - this approach is for planning financial flow of cash of profit centers to evaluate whether an organization or unit makes economic value, produces enough cash, and magnetizes adequate resources for investments. While making its financial plans, it confirms consolidation of short and long term prospects of an organization.

Zero-base budgeting - it assumes that expenses are re-justified in the course of each and every budgeting cycles, which helps to prevent from creating imprecision, and previous information or inefficiencies. The importance of this technique depends on running stability of environment.

Rolling forecasts and budgets - it resolves problems related to irregular budgeting and thus gives more precise forecasts. It also overcomes problems related to budgeting at a particular point of time and the frequent doubtful practices by which such cut-offs can be encouraged. It overcomes problems with budgeting at a fixed point in time and the often dubious practices that encourage such cut-offs. It responses more to the changing environment, but along with that it needs permanent resources to govern.

It is economical to use the budgeting techniques like zero- based and activity -based techniques to enhance the preciseness and concentration of outputs of the budget. It is not suggested to use these techniques frequently or regularly because there is a problem in using these techniques that is a lot of work is involved here than the traditional budgets. The potential of progressing estimates and budgets is most as a better frequent budgeting approach. To get over from the time-lag problems of traditional budgeting, various organizations have successfully introduced it to enhance the preciseness of their estimates and calculations. Management based on value and profit planning is very theoretical. Their efficiency evaluation is very difficult as there exist a very less examples of their techniques of implementation and practical applications. So we can see that there are no universal techniques to better budgeting which can able to resolve all the problems at a time.

Motivational Theories to determine the need of Current Budgeting System

There are various motivational theories which are practically analyzed to find out which of them are best for the purpose of managing the account. The first thing which needs to be understand is motivation is a very complex issue, and they are built according to the requirements of individuals.

There is various theory of motivation. We start analyzing the content theory of motivation; this theory is paying attention mainly on some particular factors which are needed for motivating individual. The factors which are mentioned in this theory are found inside an individual, but they can easily influenced by things around them.

We know that every people have certain needs which they want to be fulfill. The primary needs like food, water and sleep can be easily selected out. Physical properties of human behavior are deal by them and in spite of all these they are considered as unlearned. These kinds of needs are biological in nature and are quite stable. Behaviors of the people which are influenced by them are identified easily.

A different kind of group of need is termed as secondary needs. They are very different from the first group as in this group the needs are of psychological nature and are gained with experience and maturity. Hence theses needs are directly concerned with the empirical evidence. They are not constant as theory but vary according to the individual, culture and society. These needs include the inner states of mind and the thought procedure, individual's desire for achievement, authority and emotional needs. Recognition and then understanding these needs is more difficult because they vary vastly from person to person and they can be exhibited in different ways. But recognizing and understanding these needs is also very important as the managers are concerned with the exact behavior and also, they determine the rewards a person desires in an organization. Several theories developed by Frederick Herzberg, Abraham Maslow, Clayton Alderfer, and David McClelland in which needs are explained as motivation are discussed below.

The theory by Abraham Maslow defined need as a psychological or physiological insufficiency that an individual feels a strong urge to fulfill. These needs if not fulfilled affects the person's behavior at work by creating various levels of apprehensions among him. The theory thus formed on this definition of need also states that motivation is an outcome of need and that the needs exist in a hierarchical order. His hypothesis is that a fulfilled need cannot be a motivator. Only an incomplete need is a motivator and affects a person's behavior in his work environment. (Simons, Irwin, Drunken, 1987).

The two basic principles that define Maslow's theory are as follows:

Progression principle: according to this principle there are five needs arranged in hierarchical order and that a need of higher level influences a person only when the lower-level needs are fulfilled.

Deficit principle: a need once fulfilled is no longer a motivator for an individual as people strive hard to satisfy only their deprived needs. The levels of needs defined by Maslow are presented below:

Maslow's level of needs arranged in a hierarchical way is as follows:

Higher level needs:

Self-actualization needs - this means that an individual needs his work to be testing and ingenious and also, he wants to be included in all major decisions taken in his work environment. Apart from this he needs self-sufficiency and flexibility in his work life.

Esteem needs - this includes the attributes like appreciation and admiration from the management. A person also needs to be given responsibility of important work and existence of possibility of promotion.

II Lower level needs:

Social needs - the environment of an individual's workplace should be socially fit which includes pleasant relations with customers, supervisors and coworkers.

Safety needs - the person should feel secured about his benefits and compensation in his job and needs to be satisfied that he is safe in his work premises.

Physiological needs - a person needs to feel physically comfortable in his job. Thus there should not be unreasonable working hours and continuous overtimes. Strain can avoided by giving refreshment breaks in between.

Another famous work in this regard is of Frederick Herzberg. His theory includes two factors that explain the motivational role of work environments.

Motivators involve things like success, assignment of important work, promotion prospects, involvement in top level decision making and recognition. They are means to satisfaction and motivate the people to achieve greater success.

Hygiene factors include basics like proper salary, social and physical work conditions, job security, technicality of supervision and policies of the organization. Although they do not motivate employees, but it can cause dissatisfaction among the employees if not present. Dissatisfaction will ultimately reflect in the performance of an individual.

Thus to avoid dissatisfaction among the employees, managers should first make certain that all the hygiene factors are adequately present and then proceed to the next level which provides motivators to the individual.

Theory developed by Clayton Alderferis ERG (Existence, Relatedness, Growth) theory. This theory is based on Maslow's hierarchy of needs. He reduced Maslow's five levels of needs into three levels which are described below.

Existence needs -needs which are basis for existence, that is, proper material and physiological fitness.

Relatedness needs - these needs include fulfilling of satisfactory interpersonal relationships in the society.

Growth needs - deal with needs for progress and psychological development.

This theory explains that when the needs are unsatisfied, they influence behavior and motivate an individual but when lower level needs are fulfilled, they become less significant. Conversely, the needs at higher level become more significant and gain more effectiveness when fulfilled. If the higher order needs are not achieved, a person moves down the hierarchy to activate the lower level needs again which gives rise to frustration and regression and ultimately effects one's behavior. This concept is stated by the frustration-regression principle.

David McClelland had a different outlook in the need-motivation concept. His theory was that every individual had different levels of priority given to different needs. He further added empirical evidence to support his viewpoints. The three different needs according to him are:

Need for achievement - the influencing motivation for success.

Need for power - this is the need to make other people work in the way you want them to work.

Need for affiliation - this deal with a will to have friendly, pleasant and close relationships in the society and avoid negligence or any ill-behavior.

Each need is linked to one's preferences and priorities and the managers have to set up the work environment accordingly. For people who prioritize high achievement have a tendency to do work better. Various feedbacks, assigning projects and responsibility, acknowledgement are few job situations which can motivate people in this category. Those with high need of power are expected to put all their efforts to get timely and continued promotions. They like to get the superior positions and enjoy a competitive and position-oriented workplace. For people who give utmost importance to affiliation seek social relationships, satisfactory relationships with superiors, clients and co-workers and companionship. They prefer work that brings interpersonal relationships and goodwill in the society along with it.

Recommendations and Conclusions

With reference to all the above mentioned different approaches to accountant management, we can arrive at the following suggestions and conclusions.

The traditional model which includes budgeting introduces various allegations on the path of successful company management and accomplishing of company targets. Thus it is not wise and advisable to use this model.

It is essential to replace the traditional strategy with the Beyond Budgeting approach as it affects the working of the company positively along with bringing numerous other advantages. Examples of companies which have implemented this new technology include Google, Toyota, and American Express. The success of these companies is a proof of the current model's benefits over the traditional one.

To successfully base the manager's work, it is needed to consider the empirical evidence presented by the workers of different theories and the theories itself which describe the needs. Thus the above mentioned motivational theories should be made use of and according to the need of the employers; proper work environment should be created. A comparative study should be made of the theories studied above and the one which is best fitted should be implemented. Maslow's theory in particular can prove very beneficial for the company as it describes the basic as well as higher level needs in an organized hierarchical manner.