WhyTraditional Budgeting should be Eliminated
WhyTraditional Budgeting should be Eliminated
Theimportance of budgeting cannot be understated as far as the growthand development of any country and business entity is concerned.Indeed, budgeting has been seen as one of the most successful andcrucial techniques or tools used in managerial. Today, almost everybusiness entity depends heavily on the budgetary systems and budgetsto attain strategic goals, particularly considering the likelyhandsome rewards that would be reaped in instances where the tool isproperly implemented and comprehended. Traditional budgets underlinea quantitative expression pertaining to a proposed plan of action bymanagement for a particular period, which assists in the coordinationof the activities that need to be done while also complementing theplan. It is mainly aimed at allowing for the achievement of directmanagerial efforts and objectives via measuring, rewarding,coordinating and planning. It also comes as a financial plan thatsupports a specific target. On the same note, the process ofbudgeting means setting strategic objectives and goals, as well asdeveloping forecasts for varied crucial factors including cash flows,production, costs and revenues. There are three fundamental purposesthat the corporate budgets were crafted to serve including themotivation of managers to operate in the best interests of thecompany, communicate or underline the financial expectations, andcoordinate the financial picture and activities of the organization.
Budgetingcomes with a number of advantages particularly with regard tofinancial control. It is known to set the business entity’sobjectives and goals pertaining to restrictions for expenses andrevenue turnover. The set objectives would then be monitored in thecourse of the year, with any variation to the actual figure beingdiscussed early enough. On the same note, budgets would direct thetendencies of managers through crystallizing the objectives of thecompany to simple financial figures, thereby lowering the possibilityfor misinterpretation (Jensen, 2001, pp 97). The fundamental ideabehind budgeting remains the support of the operations of thecompany, which essentially undertake or execute the long-termstrategy of the company. Indeed, budgeting would allow for thecommunication of the goals to the individuals that would be held toaccount for the results of the business.
Overall,budgets aim at promoting and reflecting the rationality in thedecision-making process as they provide the financial basis fordecisions made in the business. Budgets, from an economicperspective, facilitate decision-making through enhancing thecoordination across varying units in an organization as the differentsub-units would learn the interdependencies that have a bearing ontheir decisions. Scholars have noted that the advantages pertainingto traditional budgeting would be divided into two broad categoriesincluding performance management and control, both of which areconsiderably intertwined (Jensen, 2001, pp 97). In the case ofoperations management, budgets have the major task of allowing forappropriate resource distribution so as to enhance the effectivenessof operations, whereas the control management would allow for themaintenance of the stability of operations within rigid deadlines(Libby & Lindsay, 2006, pp. 34). These two perspectives, howeverdiver with regard to time since it is difficult or even impossiblefor future events to be controlled, in which case control is foundedon realization, while performance management may make use of budgetsin the coordination of actions that are taking place at the moment orthat will be occurring in the near future (Malkovic, 2011, pp. 41).It is noteworthy, however, that the effectiveness of budgeting wouldbe dependent on the manner in which the information provided by thetool is applied, as well as the goal orientation level pertaining tothe entire organization.
However,as much as traditional budgeting may have been one of the fundamentalfinancial processes that companies undertake, it has been subjectedto substantial criticism in accounting. Of course, it may beunderstood that business has fundamentally changed since thebeginning or the creation of budgeting in 1920s. These variationshave made markets increasingly competitive, volatile, as well ascustomer driven unlike the old stable markets that were considerablymore supplier driven (Libby & Lindsay, 2006, pp. 34). This mayhave resulted in a shift of emphasis from the internal effectivenesswhere traditional budgeting was a crucial tool to competitive edge oreffectiveness. Of particular note is the fact that the mostaggressive criticism has emanated from management consultants, whichresults in the question regarding the efficacy of their criticism.Nevertheless, it may be well said that the widespread dissatisfactiontowards the traditional budgeting processes is well placed.
Oneof the most fundamental issues or problems pertaining to traditionalbudgeting relates to time. It has been noted that on average, makinga budget would take around four to five months, which means it is aheavy and time consuming process. More often than not, budgeting andthe related tasks take around 30 percent of the managers’ time,which may be extremely expensive (Libby & Lindsay, 2003a, pp.32). Having in mind the time that is consumed, critics haveunderlined the notion that the process adds little value to abusiness entity. On the same note, a large number of budgets are madeon an annual basis, a year prior to the time they would beimplemented, in which case the timeframe may be too long in thevolatile contemporary business environment. Further, scholars havenoted that the percentage of time that managers are said to spend onbudget related tasks is extremely inflated (Libby & Lindsay,2003a, pp. 32). Nevertheless, it is noted that the time spent wouldincrease with an increase in the size of the company, as well as theamount of money and time managers would want to dedicate to thebudgeting process.
Onthe same note, traditional budgets have been seen as extremelyineffective in the competitive and uncertain business environment inthe contemporary world. In instances where the market conditions anddemands are not stable and can never be determined well in advance,it becomes neither necessary nor possible to make accurate or preciseplans as they would, in no way be useful as control tools.Traditional budgeting is seen as already out of date particularlyconsidering that it would not offer helpful information that managerscan use in making decisions. It is, with no doubt, imperative thatbusiness entities are prepared for any modifications rather thanlaying emphasis on following up the traditional budget. Scholars haveparticularly criticized the traditional budget for the support itrenders to centralised decision-making, as well as the fact that itnever allows for speedy adoptions or adaptation to the newcircumstances pertaining to the changing environment (Libby &Lindsay, 2003, pp. 31). The rigidity of the traditional budgetsystems would stop or hinder top executives from reacting to theemerging market conditions, which would means that new opportunitieswould be missed out. Indeed, it is well noted that thecompetitiveness and profitability of business entities in thecontemporary markets can only be achieved through speedy adaptationto the current business environment, which is often changing(Marcino, 2000, pp. 30). Given the rapidly fluctuating conditions inthe globalised market, decentralized organizations are seen as morefavorable since employees would be able to adapt at a faster pace tothe changes. In essence, it more difficult to incorporate or havestrict control and regulation in the rapidly changing environment(Libby & Lindsay, 2010, pp. 65). The uncertainty and increasedcompetitiveness of the business environment in the contemporary timescompared to the time when the traditional budget system was designedmeans that the budgets do not meet the business executives’ needsfor information that would be necessary for management under thesecircumstances. The obsolete guidelines would hinder managers fromtaking action as they hinder flexibility and continuous improvement(Labro & Tuomela, 2003, pp. 434). It is noted that the currentworld would require “change leaders” who are always open tomodifications and would react in a speedy manner to meet the changingconditions in the market. In instances where market conditions arestable, organizations would be capable of planning their output andcoordinating their resources well in advance. With the necessaryhindsight, it would be possible to compare the outcomes with theplans, as well as assess and control employees. As a result of theshorter life cycles and increasing competition, it would become moredifficult to make predictions and longer plans on the basis ofuncertain assumptions. Scholars have noted that in the making of abudget, past data would be collected and utilized in making forecaststo the future (Hope & Fraser, 2000, pp. 34). It is worth notingthat there exists a limit to the variables that may be considered inthe making of a budget and, consequently, the assumptions that wouldhave to be made. Indeed, it is noteworthy that assumptions may turnout right or wrong depending on the prevailing market conditions.Budgets often make managers have a feeling of security anddemonstrate the direction to which the business would be heading, inspite of the inaccuracy of the predictions (Orlando, 2009, pp. 49).This is worsened by the emergence of unexpected events, which would,essentially, not be included or considered when making the budget.Traditional budgeting is incapable of making predictions pertainingto disruptions in trend. This unpredictability of the future makesbudgets unhelpful to the business entity.
Inaddition, traditional budgeting is criticized with regard to theprocess by which they are made. More often than not, budgets are madeby the use of the incremental approach where the budgeted figurespertaining to a particular year would be composed of the previousyear’s actual amount plus or minus a particular amount (Hansen etal, 2003, pp. 107). Even in instances where the budget is designedusing realistic estimates, there exists the possibility of problemsarising in cases where the lower level budgets have to be alignedwith the company’s overall financial target and the budget is not arepresentation of the managers’ idea regarding the following fiscalyear. Scholars have noted that the incremental approach woulddisconnect the budget from the strategy of the company as thebudgeted figures would have emanated from the corresponding values ofthe previous year, in which case they are not founded on strategy(Bogsnes, 2009, pp. 45). This is in line with the unpredictablenature of the markets and the rigidity of the budgeting tool.Scholars have also noted that budgeting is a reflection of the statusquo where it underlines the things that would be appropriate andacceptable at a particular moment, in which case they steer the focusof the managers away from the alternative processes and target thatcould be beneficial to the company in the future. Of particular noteis the fact that budgets primarily incorporate financial figures, inwhich case the emphasis would easily focus on reduction of cost (VanDer Stede , 2000, pp 613). Critics note that the emphasis should beon increased value creation and the maximization of shareholdervalue.
Inaddition, there is the criticism leveled against traditionalbudgeting with regard to people related issues. This is seen as oneof the most problematic element of the budgeting process. It is notedthat the emphasis of traditional budgeting is on the attainment ofthe objectives and goals of the budget, which has the likelihood ofcreating dysfunctional behavior and gaming, while also complicatingthe possibility of cooperation in organizations considering that allteams would be focused towards achieving the goals and objectives setout by their own objectives (Marginson & Ogden, 2005, pp. 443).This problem comes up particularly in instances where budgets areutilized in the measurement of performance and setting of personaltargets (Hope & Fraser, 2003, pp. 56). Indeed, it is noted thatthe set objectives may hyper-emphasize the crucial nature of thebudgeted objectives and give managers the incentive to manipulate thefigures in favor of the budgeted figures and budget objectives. Thekey issue regarding this matter is the setting of goals that are toolow or too high. The problem with low objectives revolves around thefact that their achievement would eliminate the incentive for theindividuals to exceed the targets (Reeve & Warren, 2008, pp. 56).On the other hand, the setting of aggressive stretch goals would beequally hazardous as once managers realize that the budgeted goalsand objectives would not be attained may make managers desire to pushthe revenues to the following fiscal year while letting the currentyear fall short as they opine that it has already been lost as far asrewards and objectives are concerned. Budget slack creation heavilyrelates to the issues pertaining to target setting. Budget slackunderlines the notion that a manager would deliberately overestimatecosts and underestimate the revenue turnover thereby increasing thepossibility for the achievement of the overall budgeted objectives(Hansen, 2011, pp. 293). This, coupled with the managerialshort-termism is viewed as the most prevailing indicator ofdysfunctional behavior. It is noteworthy that managers who areincapable of attaining their objectives would lose their credibility,which would be harmful to their careers and rewards. On the samenote, consistently underperforming managers may be subjected totighter controls with an increase in the likelihood for interferencefrom top management (Frow et al, 2010, pp. 456). Naturally, managerstry to avoid such possibility. On the other hand, short-termism wouldprevail and tight budgetary control used in instances where there isan emphasis on the budgeted objectives. Of particular note is thefact that there is a negative relationship between the two types ofdysfunctional behavior as the presence of budget slack would decreasethe severity of the stress on attaining objectives thereby loweringmanagerial short-termism (Van Der Stede , 2000, pp 613). Traditionalbudgets are seen as relatively fixed performance contracts that formthe basis for the measurement of the performance of the subordinates.In instances where the managers realize that their bonuses arefounded on budgeted objectives and goals, varied problems wouldarise. It is noteworthy that one solution would revolve aroundsetting low budget objectives (Covaleski et al, 2003, pp. 33).However, a greater threat would revolve around the managerconcentrating on the achievement of the objectives irrespective ofthe possibility of suffering for the company. Further, theachievement of the objectives may make managers reallocate the costs,as well as delay the revenues so as to increase the possibility for apositive effect during the next bonus cycle (Hansen & Van DerStede, 2004, pp. 426). Of course, it may be argued that this form ofmanipulation would have small or minute monetary value to thecompany. However, it may alter the characteristics pertaining to theoperations and may result in higher costs in the future.
Inconclusion, traditional budgeting has been one of the mostfundamental aspects of the conventional business systems. Budgetinghas been found to be extremely useful in safeguarding the performanceof the business as it allows for control of resources. However, thetool has attracted immense criticism considering its rigid nature inthe face of the ever changing business environment. Needless to say,businesses need to change and adapt in a speedy manner to suit theconditions in the market and increase their profitability andsustainability. The rigidity of traditional budgeting makes itinappropriate for the current market, which means that it isimperative that new and more flexible tools for planning areimplemented and put in place.
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