Critically analysed “Budgeting, as most corporations practice it, should be abolished”

Companies today are looking forward to decentralizing which is flexible to take budgetary decisions but still subject to the endless budget. Millions of dollars have been spending by companies to re-engineering their process, attempting to trace costs in terms of activity based costing and emphasizing the ideas of just-in-time. Hope and Frazer (2003a) claimed these things can lead to change in foundation but till budgets preventing companies from developing a new system. Abandon budget target does not say abandon high expectations of companies. But giving more attention on budgets can bring problems. There could some ethical breakdown when companies are trying performance to match with the budget. Abolishing budget will encourage employees of companies to nimble their creativity willingness and self-motivation to share information those are fundamental elements for any company’s swiftness.

Past several years, it had seen that many enterprises collapse and many others were attempting to overcome to meet their budget meet. One of the core reasons was using traditional budgeting methods that are unresponsive to external and internal changes and too time-consuming (Goode and Malik, 2011). In addition, at previous the size of firms was small and relationship between staffs was built on trust where trust worked to the interest of the firms. But, the flourish of multinational firms destructs the trust staffs. To contest this, budgets were practiced as system of control. But, this control is creating barriers to the progress of modern forward thinking firms. Sharing information is a big problem in the budget development because lack of trust between employees discouraged sharing information. Firms that depend upon mostly on budgets are failed to react quickly according to the change of market.   

However, budget is simply a tool working out to management plan and control resources so there has much scope that any tool can be misused (Carreras, Mujtaba and Cavico, 2011). Typically, corporations commence budgeting process by developing a team of top managers those are responsible for planning, monitor and control the budget process. They get a big authoritative power to the entire budgeting process. So, unethical behavior by staffs and team members can prevent the effectiveness of the budget system.

However, it is really tough to ignore these realities; firms are breaking free of the budgeting vise to get some benefits. Hope and Frazer (2007b) mentioned some ideas in practice when corporations might abolish the budget practice. When corporations abolish budget should develop some alternative measures. For instance; Svenska Handelsbanken, a Sweden based international bank had decided to close using budget in the early 1970s. Another Sweden based wholesale company named Ahlsell had also decided to abandon budgeting in 1995. These companies were adopted decentralized approach where unit managers have the power to adjust resource levels based on the market in opposed to budget cycle. The companies were used key performance indicators and became able to measure their performance in terms of customer satisfaction, cost reductions and increasing sales (Meister, 2003). After abandoning budget, Svenska Handelsbanken defeated all its Scandinavian rivals of banking in the 1970s on almost every measure e.g. customer satisfaction, total shareholder return and return on equity. 

In addition, many enterprises have canceled detailed budgets in favor of key performance indicators also use rolling forecasts. Companies have developed rolling forecast after every few months (Hope and Frazer, 2003b). These forecasts are conducted in every three months. Companies revised these forecasts regularly to adjust with continuous changing market condition which is the core advantage of the rolling forecasts technique. More importantly, rolling forecasts have not any fixed target or penalties for the employees that help to determine staffs to give more efforts. Overall, rolling forecasts assist managers and business units to foresee quick changes in the performance and improve their strategies.

Some finance experts treated budget is a bad yardstick to measure performance (Banham, 2012). Another practice in contrary to budget practice is raising the bar even higher. Abandoning budget does not mean rejecting high expectations. Companies set fixed target for business units and managers to accomplish. In raising the bar practice encourages business units and managers to do something much tougher. Under this circumstance, companies measure themselves against their competitors and try to do well much better than the rivals during the same period of time. But, before the end of the period, it is difficult to discern the success as a result companies are attempting to provide every ounce of endeavor and sincerity to do best in the competition. In this practice, companies are trying to enhance their long-term competitive position.   

Companies can practice these aforementioned techniques instead of extensive use of budget practice. It is to be noted that the necessity of budget cannot be ignored completely but depending fully on budget is not fruitful to improve the performance and success of companies. So, corporations should abolish budget in certain situations. 

References 

Banham, R. (2012) Freed from the budget: Many companies see budgeting as a time consuming exercise of limited value. CFO Magazine (September), pp. 41-46.

Carreras, A., Mujtaba, B. and Cavico, F. (2011) Don’t Blame the Budgeting Progress- An Exploration of Efficiency, Effectiveness and Ethics. Business and Management Review. Vol. 1, No. 3, pp.-05-13.

Goode, M. and Malik, A. (2011) Beyond Budgeting-The Way Forward. Pakistan Journal of Social Sciences. Vol. 31, No. 2, pp. 207-214.

Hope, J. and Frazer, R (2007b) Budgeting as most corporations practice it should be abolished. [Online]. Available at: https://www.bloomberg.com/news/articles/2007-11-13/who-needs-budgets-businessweek-business-news-stock-market-and-financial-advice (Accessed: 8 May 2017).

Hope, J. and Frazer, R. (2003) Who Needs Budgets? Harvard Business Review. Vol. 81 No. 2, pp. 108-115.

Meister, L. (2003) Who needs budget-Harvard Business Review. [Online]. Available at: http://maaw.info/ArticleSummaries/ArtSumHopeFrazer2003.htm (Accessed: 8 May 2017). 

Advantages and disadvantages of traditional budgeting

Planning and budgeting are pillars of management of an enterprise. In this quality lays its importance for organizations in general and enterprises in particular and therefore the society in which they act. The results of the management of the companies have a high impact on the lives of its customers, employees, communities, owners, government and the society as a whole. Budget is the key to making a plan and control for an organization and supports to implement organizational strategies (Rickards, 2006). The disadvantages of traditional budgeting are forced business practitioners and researchers developing new approaches that would be helpful to improve the managerial performance. As a result, the idea of beyond budgeting has emerged as an alternative to traditional budgeting that helps managerial contribution of management accounting. 

Traditional budgeting definition

Budgeting is a management control tool that is used widely that incorporated with the organization’s budgeting practices. Traditional budgeting refers to a futuristic financial plan that gives a basis for regularizing, controlling and evaluating the performance of business units along with the coordinating organization’s internal responsibilities (Moller and Chaudhry, 2012). In other words, traditional budgeting notifies the necessary amount of fund that is required for a specific period of time to perform specific organizational obligations. Traditional budgeting is annual and incremental that means it is marginally departing from the year before (Wildavsky, 2001). The major characteristics of traditional budgeting are as follows:

·         Organization first set their income and then makes plan for expenses.

·         Command and control management style are used.

·         Centralize authority and responsibility is exercised.

·          Performance measurement is conducted for fixed targets.

Advantages of traditional budgeting

A number of factors combine to make traditional budgeting decisions that perhaps the most advantageous for an enterprise:

• ·     Traditional budgeting gives a detailed framework of control as a result organization becomes capable of managing activities with stability (Yvanovich, 2012).
• ·        Traditional budgeting provides manager freedom to manage the operational activities as long as the organizational set parameters will achieve.
• ·    Traditional budgeting is involved in the organizational culture in most of the firms. So that abolishment of the traditional budgeting system is completely is risky.

Disadvantages of traditional budgeting

Traditional budgeting has some disadvantages those are discussed in below:

• ·     Traditional budgeting is time consuming, costly and numerous resources are required to conduct it. The use of spreadsheet in traditional budgeting is a big reason behind the time consumption.
• ·     It is low responsive and inflexible as result companies cannot able to success to implement the budget in real time that means it takes a longer time to review the budget than standard.
• ·   Traditional budgeting strategy focusing on cost reduction rather than value creation and often contradictory with the organizational goals (Gardner and Qamar, 2017).
• ·    Traditional budgeting is centralized as a result discourages creativity and high bureaucracy has been seen. 

      

      References

 Moller, C. and Chaudhry, S. (2012). Advances in Enterprise Information System II. Leiden: CRC Press.

Riskards, R. (2006). Beyond budgeting: boon or boondoggle. Investment Management and Financial Innovations. Vol. 3, No. 2, pp. 62-76

Wildavsky, A. (2001). Budgeting and Governing. Transaction Publishers.

Yvanovich, R. (2012). Traditional budgeting approach; advantages and disadvantages. [Online]. Available at: http://blog.trginternational.com/bid/162036/traditional-budgeting-approach-advantages-and-disadvantages (Accessed: 19 May 2017).

Gardner, E. and Qamar, A. (2017) Dissident Voices in Europe-Past, Present and Future. Cambridge Scholars Publishing.