Effectiveness of Budgetary Control in Uncertain Environments - Report Example

Effectiveness of Budgetary Control in Uncertain Environments Traditional literature on budgetary control has focused on its importance as a tool for planning, controlling, motivating, communicating, as well as coordinating (Drury, 2000). Such analysis of the importance of budgeting to an organization were limited to the study of features that make different forms of budgeting appropriate as opposed to critically challenging the usefulness of the tool itself. In recent studies, researchers have shifted their focus and are now critically assessing the manner in which organizations are implementing budgetary systems to suit their operations (Hope and Fraser, 2003). Among issues of concern in the recent years has been how effective budgetary control is especially in unpredictable and dynamic environments that characterize the world in which current business organizations operate. The current business environment is characterized by uncertainties within and outside the organization due to changes brought about by actions of various stakeholders in a given organization such as customers, competitors, suppliers as well as regulatory groups. Even as majority of modern organizations continue to rely on the budget as the most favourable management control system (Hansen, Otley and Van der Stede, 2003), the system continues to face a lot of criticism especially based on its response to volatile and unpredictable market situations. These critics argue that the budgetary control system can be of little use to organizations that operates in a market with uncertainties given the slow nature of the tool to detect problems as well as its inability to fact in unforeseen market circumstances. What constrains the ability of budgetary control systems from acting under volatile and unpredictable market environments is that in their annual financial budgets estimates, organizations are preoccupied and therefore limited to the encouragement of short time approach as well as cutting down on costs in order to meet their objects within set intervals of time (Libby and Lindsay, 2003). By emphasizing on short time objects in their budgetary estimates, organizations do not explore long-term strategies that might add value to the overall organizational goals especially in the long term. A consequence of this limitation of budgetary control system can be unethical business practices such as manipulating and gaming with numbers by financial officers who fail to activate rapid updating mechanisms to remedy the situation in during volatile situation. Budgetary control system does not provide the best mechanism to enable companies adapt to changes occasioned by unpredictable business environments (Libby and Lindsay, 2010). Based on the results of a study involving French companies operating in unpredictable business environments, Bescos et al (2003) report these organizations indicated their dissatisfaction with the ability of their budgetary control systems to respond to various situations within their operations. This is because during the course of a financial year, the companies find themselves needing to adjust their forecasts as well as to make improvements on their budgeting processes to overcome challenges. However, because this process is time consuming, companies usually find it hard to adapt to the changes within the shortest time possible in order to smoothly continue running their operations. Organizations that have realized limitation of budgetary control system in adapting to volatile and unpredictability in the market environment have developed additional management tools that could improve their overall budgeting processes. Such organization do not rely on short term budgetary estimates but have in place extensive strategy goals that are perceived as necessary to maintain their competitiveness even during the unpredictable and volatile times. Traditional tools such as the balance scorecard support the strategy goals during the implementation of a new model for setting targets (Hope and Fraser, 2003). However, these new models are not exploited in isolation instead; organizations combine them with the already existing ones further complicating the situation for these organizations given that the models are based on different philosophies. Therefore, combining the budgetary control system with other models can result to an overdose of managing and increase costs as well as being time consuming. Further, the additional management tools are assessed on yearly basis just as the budgetary control system and are therefore prone to similar problems linked to budgeting (Hope and Fraser, 2003). Due to the inherent limitations of budgetary control system to deal with unpredictable and dynamic environments, scholars have come up with different views on how to deal with the shortcomings. While there are those who have argued that there is a need to have adjustments and improvements of the budgetary control system, there are those who argue for its abandonment all together (Ekholm and Wallin, 2000; Libby and Lindsay, 2010). The discussion over abandonment of budgeting has led to the development of a group that advocates moving “Beyond Budgeting” as the only option for organizations that do not want to risk their operations in times of unpredictable and dynamic market environments (Hope and Fraser, 2000). There are a number of organizations that have already dropped the budgeting process with the beyond budgeting practitioners having in place what is referred to as the Beyond Budgeting Roundtable (Bogsnes, 2008; Lalli, 2011). Beyond budgeting practitioners have developed and established consensus on a range of principles divided into leadership principle and process principle. The leadership principles segment encourages beyond budget companies to focus on a number of alternative measures such as customer outcomes, be organized in networks of small accountable teams, create workplace environment where everyone acts and thinks like a leader, enable teams to develop freedom as well as capability to act and support open systems of information to enable self-management. The process principles as laid down by beyond budget includes emphasis on organizations to have in place relative targets for constant upgrading, sharing of rewards, success derived from relative performance. In addition, continuous as well as inclusive process of planning, establish control mechanisms based on relative pointers and trends, making resources available on needs basis and dynamic coordination of interactions (Ostergren & Stensaker, 2011). Among those who criticized and abandoned the budgetary control system, include Wallander who is a past executive for the Swedish company Handlesbanken. Wallander perceived budgeting as unavoidable, one that organizations could do without if dropped. Among the reasons for his strong opposition to continued use of budgeting, Wallander notes it encourages same weather tomorrow as today approach to business operation, which leaves organizations in crisis in times of unpredictable and dynamic business environments (Collier and Agyei-Ampomah, 2005). However, this criticism about budgeting control system especially with regard to its adaptability to “volatile business environment” does not mean that business organizations cannot find effective ways to incorporate budgeting in such scenarios. Based on a study of North American companies, Libby and Lindsay (2010) report that the outcome presented by beyond budgeting scholars such as Hope and Fraser were over generalized on companies and that most of the organizations sampled still relied on the budgeting processes in their operations. This highlights an important role that budgeting can still play even during times of uncertainty in the business environment. Acceptance of the limitations of budgeting should not lead to the abandonment but creation of framework under which organizations can continue benefiting from controllability. Managers should not have a strict policy for implementation of the budgetary control system (Drury and El-Shishini, 2005), but allow a flexibility principle where external factors can be blamed for failure of some aspects of their systems. Having in place a budgetary control system that relies on the need to be perfect has the risk of working against organizational effectiveness while also denying the manager the necessary motivation to apply as much influence as possible on organizational operations. Making the failure budgetary control system a failure of the firm’s internal mechanisms can result in a feeling of helplessness and self-blame among managers, which could effectively be counter-productive in terms of self-efficacy. Further, the budgetary control system continues to be an essential tool for provision of direction as well as control even in situations of uncertainty in the business environment. A number of studies have shown appreciation of managers who view budgeting as an important component of stability and structural support (Marginson and Ogden, 2005a). Consequently, it is a loss for companies that drop budgeting instead of finding mechanisms to include it in a process that improves efficient reaction to uncertainties in the business environments. Well-adapted organizations will be those that find ways to merge successfully new models with the budgeting model to stir the organization out of difficult times that results from the unforeseen circumstances. References Bescos, P. L., Cauvin, P., Langevin and C. Mendoza (2003) Criticism of budgeting: A contingent approach. Proceedings of the 26th European Accounting Association Conference, Seville, Spain Bogsnes, B. (2008) Implementing beyond budgeting: unlocking the performance potential. New Jersey: John Wiley & Sons. Collier, P., & Agyei-Ampomah, S. (2005) Management Accounting-Risk and Control Strategy. Oxford: Elsevier. Drury, C. (2000) Management & Cost Accounting, 5th edition, Business Press, Thomson Learning Drury, C. and El-Shishini H. (2005) Divisional Performance Measurement: An Examination of the Potential Explanatory Factors. CIMA Research Report. Ekholm, B. G. and Wallin, J. (2000) Is the annual budget really dead? The European Accounting Review, 9(4), 519-539. Hansen, S., and Van der Stede, W. (2003) Practice development in budgeting: An overview and research perspective. Journal of Management Accounting Research, 15 (15-116). Hope, J. and Fraser, R. (2000) Beyond Budgeting. Strategic Finance, October, 30-35. Hope, J. and Fraser, R. (2003) Beyond Budgeting, Harvard Business School Press. Lalli, W. R. (Ed.). (2011) Handbook of budgeting. New Jersey: John Wiley & Sons. Libby, T. and Lindsay, R. M. (2003) budgeting unnecessary evil. CMA Management, 77(1), 30-34. Libby, T. and Lindsay, R. M. (2010) Beyond budgeting or budgeting reconsidered? A survey of North American budgeting practice. Management Accounting Research, 2(1), 56-75. Marginson, D. and Ogden, S. (2005a) Managers, budgets and organizational change: unbundling some of the paradoxes. Journal of Accounting and Organisational Change, 1, 45-62. Marginson, D. and Ogden, S. (2005b) Coping with ambiguity through the budget: the positive effects of budgetary targets on managers budgeting behaviors. Journal of Accounting and Organisational Change, 30, 435-456. Ostergren, K., & Stensaker, I. (2011) Management control without budgets: a field study of ‘beyond budgeting’ in practice. European Accounting Review, 20(1), 149-181. Read More