Peculiarities of Traditional Budgeting - Essay Example

?Budgeting Table of Contents Table of Contents 2 Introduction 3 A Brief Overview of Budgeting 3 Possible Strategies to Overcome the Problems and Contribution to Improved Organizational Performance 8 Conclusion 11 References 13 Introduction Budgeting acts as a key facet in determining the financial success factor of any organization. It generally provides considerable assistance in identifying the dimensions of business functions that need more attention to be upgraded and delivers a rational idea regarding the unnecessary expenses incurred within a particular organization with the motive of preserving financial effectiveness. Initially, traditional budgeting acted as the only alternative for budgeting. But, in the recent phenomenon, budgeting has come up with several alternatives. It can be affirmed in this regard that traditional budgeting is often criticized as sufficient enough to support global companies in attaining their desired targets. In this regard, several budgeting processes, with new innovative ideas and broader perspectives, have been developed in order to deal with the changing business scenario (Finkler & et. al., 2008). With this concern, this paper intends to explain the problems along with the weaknesses of traditional budgeting and identifying possible strategies to overcome those problems or weaknesses. Moreover, the discussion in this paper would also emphasize the benefits that an organization can anticipate while making changes in the traditional budgeting procedure, applying the concept of ‘Beyond Budgeting’. A Brief Overview of Budgeting Budgeting is regarded as a process of making a financial plan, wherein efforts are made by the accountants or the business owners to meet the strategic goals of the organization facing minimum or no hindrances in terms of financial resource scarcity or misuse of financial resources. It is often viewed to be a universal tool, which is capable enough of making deliberate efforts towards improving various significant aspects such as marketing efficiency, business productivity and operational accountability among others (Finkler, 2008). In precise, budgeting acts as a guideline in aiding a manager to properly allocate the accessible resources or funds to each of the departments in the organization. It has often been praised as a strategic tool that can broadly enhance the interrelation between the units and the departments to work together efficiently, which in turn reduces the chances of failure in sharing critical information. Budgeting process acts as a motivational aspect that again helps the managers as well as the employees to work more productively making better use of the resources available. It can be apparently viewed that most of the companies follow previous year budget plan in order to acquire a brief idea about how well they had performed and forecast a plan to overcome deficiencies in the upcoming future. This further advocates that the budgeting process needs to be formalized and quantified (Fontinelle, 2013). Failure in making proper budgeting will eventually lead towards the wastage of organizations’ scarce resources, time and manpower among others. The goals that are set by the budgeting process should therefore be realistic and idealistic in nature, to assure greater benefits of the budget planning (Donovan, 2005). In this regard, several large scale companies may hire accountants or other professionals in order to outline the business budget, while in relation to the case of small companies, it is the owners or the officials belonging to the top management team, who are responsible for preparing budget plans (Donovan, 2005; Wallander, 1999). Problems and Weaknesses of Traditional Budgeting Cautiously planned approaches and continuous reviews of finances are few of the key concerns required to be followed in order to run a business. Budgeting, along with forecasting of financial statements, as included in the paradigm of accounting, play an imperative role in managing financial information in accordance with the organizational objectives. Budgeting continues to play a central role in the field of accounting and remains relatively unchanged through the traditional era till date. However, criticisms concerning the conventional notion of traditional budgeting have been intensely increasing; even to the extent that this sort of budgeting should be abolished completely as it fails to suffice all the needs of strategic planning in the 21st century decades. In simple words, in common instances, reasons for criticisms to traditional budgeting concentrate on its failure to cope with the changes along with the requirements of the modern day business (Ekholm & et. al., 2000). Arguments in this regard debates that a traditional form of budget cannot be regarded as the way to manage a globally operated company in the recent 21st century. Today, the business environment is comparatively more turbulent, dynamic and demanding as was witnessed in the traditional era. Thus, traditional forms of budgeting require to be changed to deal with the increased level of globalization along with internationalization challenges in an effective manner (Marginson & et. al., 2005). Nowadays, it can be apparently observed that successful business corporations are well equipped with advanced technologies and are quite capable of reacting towards any sudden situation or change in the market conditions. The main problem of traditional budgeting can be apparently observed under such circumstances, as the traditional budgeting procedure requires considerable amount of time and utilization of maximum management resources, which proves inefficient in assisting the management to take fast decisions. According to various observations, on an average, within every three or four months, a company is required to prepare a budget in order to identify its changing needs and plan accordingly. Moreover, the other problem of traditional budgeting lay in the fact that the process is restrained owing to the skills and experiences of the professionals. Despite the introduction of modern technologies and high quality computer networks, the traditional form of budgeting further remains to be much expensive. One of the vital reasons behind the criticisms of traditional budgeting relating to time consuming is the use of spreadsheets. Although, spreadsheets are viewed as common modern tools amid every company, it can result in generating certain inadequacies such as manual data entry errors and trouble in devising accurate formulation (Hanninen, 2003). It thus becomes evident that the business and the marketing environment are changing continuously in this present day context. On the contrary, traditional forms of budgeting are examined to work more effectively in a stable environment, proving no longer effective in a changing environment of the 21st century phenomenon. Arguably, in traditional budgeting, most of the company’s focus is identified to be on cost reduction rather than on value creation, which is a key constituent to ensure long-run success of a business in the changing economic situation. In relation to determine the behavioral aspects within the context of traditional budgeting, it can be stated that while focusing on the subject matter of cost reduction, at certain times, a budget with unrealistic or too high goals is determined by the strategic decision makers that in turn make the employees de-motivated. The budget is then reduced and no longer reflects the real needs of the organization, affecting the overall efficiency of the workforce. The major weakness of traditional budgeting is that it does not act in multiple dimensions. Thus, the individuals engaged in traditional budgeting process waste their valuable time and fail to acquire greater opportunities along with deliver optimum value to the companies functioning in the current day scenario. Consequently, job performance and level of customer satisfaction decreases gradually (Hanninen, 2003). The traditional form of budgeting can be viewed to remain completely different from Activity Based Budgeting (ABB) or Activity Based Costing (ABC). Unlike ABC, traditional budgeting focuses more on dealing with internal issues rather than rendering equal significance in identifying as well as evaluating the external factors. It is worth mentioning that traditional budgeting is not oriented to long-term vision, which can be regarded as one of the major weaknesses of this traditional budgeting. Accordingly, in a complex organization, it can be viewed that the process of planning and re-planning involves numerous people, making it quiet time consuming (Hanninen, 2003). To be summarized, from the above discussion, it can be affirmed that traditional budgeting tends to create confusions amid the organizational members in terms of promoting unprofessional attitudes. As argued in Hanninen (2003), traditional budgeting makes people feel undervalued, strengthens bureaucracy and promotes vertical control as well. The traditional budgeting also attempts to fortify departmental barriers instead of enabling better knowledge sharing. In traditional budgeting, most of the individual judgments further tend to prevent the selection of best alternatives owing to the availability of wider options, which in turn indicates to the inefficiency of traditional budgeting in identifying the relevant options and excluding the most risky strategic options. This eventually results in restricting the organizations using traditional budgeting in the modern era, towards availing greater opportunities. Possible Strategies to Overcome the Problems and Contribution to Improved Organizational Performance Acquiring a brief idea about the different problems and the weaknesses of traditional form of budgeting, Enterprise Resource Planning (ERP) tools can be suggested as relevant for making effective and realistic budgeting in the 21st century context. These tools are much capable of performing multiple activities like inventory tracking, managing accounting process, facilitating purchasing, creating valid financial statements and paying bills among others from a single application. Apart from ERP, BI (Business Intelligence) and BPM (Business Performance Management) solutions could be the other possible strategies to overcome the problems that have been identified in the above discussion, in relation to traditional budgeting (Henson & et. al., 2003). Arguably, in today’s continuously changing business market conditions, budgets should be prepared on a monthly basis rather than being conducted yearly as was considered when applying traditional budgeting methods. This can be justified with reference to the fact that budgets prepared on a monthly basis would be much appropriate for the modern organizations to track different finance related aspects, in supporting them to mitigate the problem of time consumption and thereby, mitigating the weaknesses of traditional budgeting. It can further be stated that annual budget should not be followed until and unless, a significant change is identifiable in the business context. It is worth mentioning in this context that every budget whether it is a long or short-term, if appropriately prepared and implemented, must deliver effective assistance for controlling, monitoring and generating greater value for money, resulting in enhanced organizational performance, following the ERP method (Henson, 2003). With regard to identify the possible strategies for overcoming the problems that are associated with traditional budgeting, it can be affirmed that budgeting needs to be conducted quiet cautiously and wisely. Moreover, budgeted targets should be made sensibly and coherently. Correspondingly, if budget targets, perceived by the employees, become much difficult or complex, it will result in creating high level of stress and also in de-motivating the performance of the employees. The budgeting method applied therefore must have the capability to design across multiple dimensions that include product, geography and customers among others as per the ERP method. Planning across multiple dimensions can ensure specific and strategic analysis along with planning. In this similar context, budgeting must be based on activity calculation and activity costing. Thus, traditional budgeting can be replaced with ABC process that is quite capable of eradicating the identified weaknesses of traditional budgeting. Comparatively, unlike traditional budgeting, in ABC, the focus is laid more on dealing with external issues, simultaneously emphasizing on the internal determinants. This particular method is therefore, capable of identifying the changing needs of business success and likewise, can improve organizational performances providing more flexibility to a company when dealing with unforeseen situations and highlighting the importance of operational planning (Henson, 2003). Rolling budgeting could be another alternative of traditional budgeting through which the above identified problems can be addressed appropriately. In rolling budgeting, the major focus is laid upon improving financial forecasts and performing forecasting tasks effectively. The aspect of rolling budgeting can contribute towards enhancing organizational performances through the proper utilization of the accessible resources and making effective decisions relating to finances (Hanninen, 2013). One of the key facets which would make the budget process successful can be noted as preparing budget prior to three to five months from the initiation of a new fiscal year. The solutions might differ from the modification of traditional budgeting to beyond budgeting, rolling budgeting and ABC, suiting the requirements of contemporary business world at large. Notably, the use of complementary systems such as rolling back and monitoring, as similar to balanced scorecard approach should be encouraged in order to overcome the recognized problems associated with traditional budgeting. Moreover, the usage of these systems can enable the decision makers to stabilize costs, minimize risks and provide numerous benefits in strategic planning accuracy, ensuring that total limited resources are used in the best possible way (Hanninen, 2013). Benefits of Beyond Budgeting Approach The approach of ‘Beyond Budgeting’ is fundamentally regarded as an effective leadership philosophy, which can be attributed as much innovative and used in place of traditional budget as an alternative option. It basically works on the principles of speed and simplicity (Kaplan Financial Limited, 2013). One of the major benefits that an organization shall attain, while making changes from traditional budgeting to a ‘Beyond Budgeting’ approach, is lessening the complexities and bringing simplicity in the management process along with a greater degree of accuracy (Hope & Fraser, 2003). In this form of budgeting, the focus is majorly laid upon determining accurate results of performance evaluation and rewards (Vicky & et. al., 2003). This model also provides the front-line people with clear principles, values and strategic boundaries, allowing them to act responsively, which is one of the utmost requirements of the modern era. The notion of ‘Beyond Budgeting’ can shift the budgeting process to a more efficient integrated benchmarking system as compared to traditional budgeting, wherein the managers are entitled and assisted to set effective performance standards. The other benefit that an organization can obtain by changing to ‘Beyond Budgeting’ is drawing out emerging threats along with the opportunities linked with the development of a fixed and outdated plan. This particular form of budgeting creates an environment to work in an open and in a self-regulated manner. Through this benefit, the organizations can be supported in building mutual trust amid its members and conducting best practices within the organization. To be mentioned, fast response towards consumer’s grievances is considered to be a vital process in ‘Beyond Budgeting’ that offers greater benefits to the organizations in making quick decisions, managing their own businesses and most vitally, becoming more competitive in this present day context (Bogsnes, 2009). The aforesaid form of budgeting is often regarded as an adaptive process. Unlike traditional budgeting, wherein managers plan and control businesses centrally, the method of ‘Beyond Budgeting’ decentralizes the operations, ensuring better operational performance of the overall organization (Beyond Budgeting Association Ltd, 2013). Conclusion From the overall analysis, it can be apparently observed that the form of traditional budgeting has been criticized by most by the critics as they find it to be a major barrier in the path of success. Over the recent years, the businesses have been changing more rapidly and adversaries of budgeting have grown quite considerably. Several problems along with weaknesses can be apparently observed in relation to the form of traditional budgeting. These include excessive costs, time consuming barriers and ineffective identification of strategic challenges or opportunities. However, there exist certain possible strategies in order to overcome the problems that have been identified as associated with the traditional form of budgeting. These strategies might include implementation of ERP tools, execution of ABC process and utilization of rolling budgeting approach among others. It is worth mentioning in this regard that the modern organizations can anticipate several benefits making a change from traditional form of budgeting to ‘Beyond Budgeting’. This can be justified with reference to the fact that this form of budgeting (i.e. ‘Beyond Budgeting’) is more capable of supporting the organizations in making effective decisions, managing various sorts of operational functions effectively and most vitally, utilizing available resources effectively. References Beyond Budgeting Association Ltd, 2013. Benefits of Beyond Budgeting To Your Organization. Faster Response. [Online] Available at: http://www.bbrt.org/beyond-budgeting/bb-ben.html[Accessed November 05, 2013]. Bogsnes, B., 2009. Implementing Beyond Budgeting: Unlocking the Performance Potential. Wiley Publication. Donovan. S., 2005. Budgeting. Lerner Publication. Ekholm, B. G. & et. al., 2000. Is the Annual Budget Really Dead? European Accounting Review, Vol. 9, pp. 519-539. Finkler. A. S. & et. al., 2008. 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