The Truth about the Budgeting Process - Literature review Example

Introduction The manner in which business environment is undergoing changes the need has come to move beyond budgeting and look at developing management accounting system which contributes towards the long term business operations and performance. Hope & Fraser (2003) stated that business should look towards eradicating the use of budgeting so that better process can be implemented. The debate to move away from budgeting has come due to the growth and advancement of information age (Drury, 2008). The business environment has become so competitive and complex that the present form of budgeting is not useful for business. Organizations are continuously facing dissatisfaction associated with traditional budgeting and require moving away from the process of traditional budgeting and reinvigorating new management accounting methods so that better management decisions can be taken. The paper thereby looks at analyzing the manner in which the concept of budgeting has developed and evolved over time and analyzes the different limitations associated with traditional budget. This will help to analyze the manner in which business has looked to eradicate the concept of traditional budgeting and moved away from the concept of budgeting. Since, the paper looks towards evaluating the different factors which are pertinent for moving away from budgeting so it will look at analyzing the present business environment and highlight the manner in which different management accounting concepts can be used for decision making. Evaluation of the Various Concept of Budgeting Bhimani et al (2008) is a quantitative business plan which has been developed by managers so that the business goals can be achieved. Becker et al (2009) has stated that the budgeting is a key concept of management accounting concepts and helps business to accomplish the goals. Budgets during the 1920’s were developed to help managers to control cost and cash flows so that business could have managed the different activities in a better and coordinated manner (CIMA, 2007). The process looks at developing fixed performance contracts which helps to identify the future income and expenditure expectations so that future strategies can be developed based on it. Rickards (2006) has identified budgeting as a concept which helps the business to implement its strategy of working and is more than controlling cost and planning. This has led towards the development of different budgeting methods and has moved from the traditional cash budgets towards zero based budgeting and activity based budgeting. Budgeting helps to carry out different functions and brings effectiveness as it helps to exercise better control over the different operations. It was also identified that a study carried out by 40 managers revealed that budgeting is still widely used in all organization as it provided different benefits and along with it businesses used different methods and management accounting tools so that better effectiveness can be ensured and the decisions based on it are better (Dugdale & Lyne, 2006). Budgeting is ingrained in the culture of the organization and it is hard to think about an organization where there are no budgeting techniques used (Libby & Lindsay, 2007). Duam (2002) has stated that organizations need to move away from the traditional method of budgeting and should look at growing, expanding and exceeding targets and limits so that better prospect can be determined. This will help to deal with the complex environment and help to increase innovation and ensure better retention of employees. The business environment from the 1920’s is undergoing tremendous changes which has thereby stressed the need of adapting to the different changes so that better results can be achieved. Criticism of Budgeting The traditional budgeting methods which were used are time consuming and unresponsive to the external changes which has thereby impacted the manner in which business working is determined. A research carried out by Neely et al (2003) highlighted that budget preparation consumes around 20% of the time which thereby makes it difficult for the management to carry out different activities. This was carried out by Bartram (2006) which brings forward the fact that even the leanest of companies consume around 79 days to prepare budgets while the worst practicing companies consume around 210 days. This is a considerable amount on time which is spend on activities which doesn’t provide value to the business thereby creating doubts on the manner different business activities are carried out. The budget culture which is prevalent in organizations has also prevented organizations from reshaping their working style with the need of the modern world as the budget reign and contained management behaviour makes it difficult for the business to carry out the required activities. This has resulted in the activities to be carried out based on old paradigms and has restricted the ability of the business to be innovative and finding new solutions (Hope & Fraser, 2007). The traditional management system is thereby an obstacle for management when it comes to innovation and management of the business enterprise (Daum, 2002). This has thereby limited the business prospect and made it difficult for the business to be carried out with regards to the modern era needs and developments. Daum & Hope (2003) highlighted that the growth which the organizations are witnessing is one of the prime reason which has led towards making the traditional budgeting techniques to be irrelevant. Previously organizations and companies were small and worked on a smaller and limited area. The business was developed mostly on trust and looked towards ensuring that relationship between the organizations fostered towards development of the culture. The growth of business and globalization has led towards businesses moving away from one area to another and has thereby limited the amount of trust that people have among each other. This in addition to the fact has resulted in the budgetary system to be implemented and controlled. Using a system to combat growth and restrict organizations from using the modern ways is being seen in case of traditional methods (Ryan, 2007). This has thereby limited and restricted the manner in which different business decisions are taken and has made it difficult for the business to cope with the changing business environment. Neely et al (2003) has also brought forward different limitations which traditional budgetary methods bring to the organization. It is seen that budget lacks strategic focus and restricts the process of value creation for the organization as the aim is always to reduce cost and doesn’t focuses on areas through which better opportunities of growth can be ensured. The bureaucratic style which budgeting process uses also impacts the creative instinct of businesses and makes them to work on a similar set of code and conduct by following the prescribed mechanism for future growth. This restricts the employees to grow and become de-motivated as the lack of opportunity to take decisions and having controls which restricts the employees is seen as a hindrance in the path. Jensen (2003) states that the integrity of the whole enterprise is at stake which is compromised at times when managers partake different type of behaviour. The traditional method is also based on a flaw principle where people are rewarded when they achieve the required targets but are punished when they are not able to meet the required limits. This results in dysfunctional behaviour among the different behaviour among the different individuals and creates gap among different people and individuals within the organization. Jensen thereby proposes to abolish the process of using budgets as a process to reward individuals and should look towards at a bigger picture and include different things so that better decisions and long term decisions can be taken based on it. The dysfunctional behaviour which is created within the organization results in widening the gap among individuals and makes it difficult to create trust so that better and bigger goals can be achieved in the best possible manner. Otley, D. (2001) has brought forward the fact that businesses need to look to evolve their system of budgeting and has to extend the boundaries so that better management accounting research can be developed. This will require developing different performance management system which helps to ensure better interpretation of information and provides an opportunity through which business is able to develop new ways and fundamentals to improve their overall business effectiveness. Ryan, (2007) has brought forward the need of having budgetary measures which looks at identifying the manner in which capital market influences businesses and needs to include those while planning. Since, capital markets have a huge role in determining the long term success of the business so it becomes imperative to develop measures which are aimed towards developing budgetary measures based on capital market needs. Van der Stede, (2000) has highlighted the need of having budgets which helps to exercises better budgetary control and provides the required relations which will help in effective planning. Having better budgetary relations and fostering on an aspect through which better control will be exercised will help to increase the overall relevance of budgets and ensure that the use of budgets increases to a large limit. In addition to it budgets look at using past information which has a negative impact on the overall performance and decision making. An example is incremental budgeting where previous year data is used and slightly modified to suit the needs and requirements of the next year. No major changes or ramifications are done and not proper evaluation of the budgets doesn’t have to determine whether the budget is over or under performing. In addition to it the process doesn’t look to include the changing business environment while planning which makes the entire process to be incorrect and will not lead towards providing correct decisions based on it. Leading on to the same the process looks towards making certain cuts and adjusting when the targets are not met (Hope & Fraser, 2003). This is unacceptable as the results could not have been achieved due to some other reasons which are beyond the control of individuals and would have led towards having different underlying reasons for the targets not being achieved. Lindsay & Libby (2007) slightly differentiate from the above and say that traditional budgeting tool if implemented properly helps the organization to be able to determine the framework within which the different operations of the business will be carried out. The value and importance of the same can be increased if the process further looks to include different management accounting tools and strategies which helps to include the current working environment and makes changes in the manner different business dimensions and areas are being looked at. Despite the different criticism which budgeting has it is still witnessed that organizations continue to strive for the usage of different budgetary techniques as it supports the business in some or the other way. Most organizations continue to look towards using different budgetary techniques as it helps to develop the required framework based on which the different operations of the business is carried out. Beyond Budgeting Organizations need to look beyond budgeting and needs to develop a budgeting system which provides flexibility, coordination and responsiveness so that the overall process looks towards bringing effectiveness (Pilkington & Crowther, 2007). The process doesn’t look towards just using another tool but would otherwise require a complete overhaul so that the organizational culture and management style can bring about the required change. The process of change will require abandoning the budgetary mechanism and will thereby help to look at different financial and non financial measures so that the manner in which different business decisions are taken can be improved. The process will thereby look towards having external benchmarks and competitors so that the process looks towards making changes so that better approach and process can be developed. This helps to remove the restrictive nature of budgets which can use to improve and change the potential of empowering employees so that better business decisions can be taken. Players (2003) has looked at determining the manner in which traditional system can be developed so that the process looks at improving performance measures through which competitors and benchmarking process can be improved (Hope & Fraser, 2003). This will help to ensure that budgeting process gains effectiveness and will bring a complete change in different decisions are taken so that business imperatives and decision making can be carried out. Daum & Hope (2003) also has built on the same and brings forward the fact that using a more adaptive approach will help to improve performance reviews and will ensure that the process which is used to take business decisions will be better. The process will also tend towards a process where it looks towards using a decentralized approach moving away from centralized and hierarchical approach which the process provides. The process of empowerment will help to improve authority and decision making so that the lower level management and others associated with the business are able to take better decisions Since, managers have already embedded the culture of having budgets within organizations so it becomes difficult for managers to carry out different operations and activities without the use of budgets. This thereby requires making changes and ramification in the entire process and looking at developing a mechanism which is aimed at using different and improved tools to support budgets. This will help the business to take full advantage of the different opportunities and will instigate a process through which strategic level decisions will be taken and will yield towards multiplying the overall value in carrying out the different activities. The strategy of moving away from traditional budgeting mechanism to one which is more innovative and matches the changing business requirements will help to ensure that the process leads towards improving better results. This will help to exercise better control and will chalk a path through which different activities will be carried out in the best manner. Conclusion The overall changing business environment and developments has made it mandatory that businesses look to move away from the traditional method of budgeting to one which is more advanced and uses different dimensions. This will help to deal with the changing business environment in a better way and will act as a major force of development for the future. It is unlikely that budgeting will be stopped completely but organizations instead will look at ensuring that the process is better streamlined and changes are being made so that the business is able to deal with the changing business environment in a better way. This will help to bring about the required change and will develop the required path through which overall effectiveness in decision making will be seen. The process will tend to help the business to deal with changing business changes and bring about effectiveness so that the different decisions and manner of working improves. This will help to bring about the required change and will foster a better environment of growth and prosperity within the organization. References Bartram, P. (2006). Forecasting the end for budgets. Director. 30. Becker, S., Messner, M. and Schaffer, U. (2009). The Evolution of a Management Accounting Idea: The Case of Beyond Budgeting. Working paper. Bhimani, A., Horngren, C., Datar, S. & Foster, G. 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(2003). New ways of setting rewards: the Beyond Budgeting model. Californian Management Review, 45(4), 104-119. Hope, J. and Fraser, R. (2003). Who needs budgets? Harvard Business Review. 81(5), 125-126. Jensen, M. (2003). Paying People to Lie: the Truth about the Budgeting Process. European Financial Management, 9(3), 379-406. Libby, T and Lindsay, R. (2009). Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research. Neely, A., Bourne, M. and Adams, C. (2003). Better budgeting or beyond budgeting? Measuring Business Excellence, 7(3), 22-28 Otley, David (2001) Extending the boundaries of management accounting research, British Accounting Review, 33, (2001), pp. 243-261. Van der Stede, Wim (2000) The relationship between two consequences of budgetary control, Accounting, Organizations and Society, 25, (2000), pp. 609-622. Ryan, Bill (2007) Budgeting, the individual and the capital market: a case of fiscal stress. Accounting Forum, 31, (2007), pp. 384-397. Read More