ncreased interest in research on this topic, and to analyze whether the current approaches of budgeting hinder the effectiveness of modern organizations.
Dynamic Business Environment: The present business environment presents a very dynamic situation in front of the managers. In this scenario, budget is seen as a constraint rather than as a planning tool. As a result of this dynamic business environment, the relevancy of the budget is very short lived. Budges result in centralization of the decision making process. This delays the decision making and reduces and organization’s ability to respond to changing environment. The concept of how a successful company operates in the information age is shifting from “make-and-sell” to “sense-and respond” (Haeckel, 1999).
Budgeting done in isolation: Many managers who are against budgeting believe that budgeting encourages a myopic planning horizon indicating a delinking of the budget and strategy (Shastri, 2008). Budgets are done in isolation and are not aligned to company strategy and goals. Moreover, the budgeting horizon is not linked to the business cycle resulting in long budgeting periods in rapidly changing industries and short budgeting periods in extremely dynamic industries.
Hinders Innovation: The bureaucracy and controls created as a result of the budgeting process stop the culture of challenging the status quo. Most of the units focus on operating within the budget thereby reducing the chances of innovation. Most of the subunits focus on operating within their own budgets and hence do not take innovation as a philosophy (Hope and Fraser, 2001).
Expensive: It is often argued that the budgeting process followed at organizations is inefficient. This results in the wastage of time of the senior management. Budgeting is also an expensive exercise in terms of capital required for the budgeting purpose.
Sophisticated Budgeting Techniques: With the drawbacks of the budget and the budgeting techniques,