Management, Budgetary Control, and the Beyond Budgeting Debate - Essay Example

Beyond Budgeting Introduction Budgeting is beyond just command and control management system it describes the culture of organization and management and along with that very much explains the policies, objectives and strategies of the management (Katarina & Inger, 2005). Budgets in the organizations are seen as very critical for the optimum performance of the organization as it provides the set pattern to the management that it has to follow and makes the job of making performance analysis easier for the management as it is taken as the criteria against which the output or outcomes are compared (Wallander, 1999). During the recent years new ideas have emerged in the business world that challenge the traditional approach to budgeting and claim it not be fit for the current business environment as it is unable to fulfill the demands and requirements. It is both private and public sector that have adopted traditional approach to budgeting since very beginning and they find comfort in tradition even if it doesn’t suit the current business environment. The new ideas are revolutionary they compensate both future financial planning keeping in view non-financial factors that influence the performance and working of the organization (Moolchand, Narendra, & Koshina, 2012). Therefore this changing business world gives rise to the idea of “Beyond Budgeting” that provides a model beyond command and control towards a more adaptive, flexible and empowering model. Beyond Budgeting is being used to transform the performance potential of the organization it removes the shackles of annual budget and at the same time allowing the employees to use their full power in the front line. Weaknesses and Limitations of Traditional Budgeting System Business environment especially in the past one decade has become much dynamic, complex, turbulent and uncertain. Adaptability is the greatest attribute that the organizations should possess in order to sustain in the market. Life cycles of the products have reduced with the continuous advancement in the technology innovation becomes a critical factor of success for the corporates. These details regarding the business and market environment signify that diversity along with flexibility is important for sustainable growth of the organization. It is not the organizations with huge capital and resources who can survive it is corporates that are adaptable would progress in future. Recent events in the business world raised the comments and the criticism over budgeting system that is in practice currently. It brings rigidity in the system, restricts movement and doesn’t limits flexibility that would lead to innovation (Juergen, Dr. Rainer, Jean-Daniel, & Steve, 2005). Organizations are required to be as adaptable to change as possible however they are required to comply with the fix plan that have been designed and being implemented one year before. Managers today have extended role than before they must possess decision making power as the changes are so often that there is no time to take the decision through regular process or all levels of hierarchy. However the rigid budgeting system doesn’t allow them to be responsive and restricts their ability to adapt to the changing environment and mold their daily in a way that would be optimal for the success of the organization. Traditional budgets are not responsive and require far too much time of management and requires their attention for its implementation as it doesn’t allow managers to make decisions. Budgeting is for financial purposes however they delivering goals and mission of organization create confusion regarding their purpose (Juergen, The Origins of Beyond Budgeting and of the Beyond Budgeting Round Table , 2003). It doesn’t even indicate the real performance as the costs of functions and departments are shown rather than activities performed by people therefore managers don’t have no account of actual cost drivers. Most importantly it is just the projection of the future periods without taking into account the non-financial factors like market prospects, trends, tastes, impact of globalization etc… Impact and Importance of Beyond Budgeting Beyond budget is the next step that has become necessary for organization in the ever increasing competitive business environment. It is both a business strategy and new structure for the organization and pattern for management and its working. Transformation into beyond budgeting would remove internal competition amongst the managers trying to beat one another for extra benefits and would focus on curtailing competition (Jürgen, 2002). Under traditional budgeting management fixes internally negotiated targets however beyond budgeting would allow to shift focus to the external environment and rather than targets strategies would be developed as per the competitive environment in the market. Rather than giving the targets to the managers and employees it would motivate them by giving them challenges, responsibilities and guideline rather than rules to be followed. Beyond budgeting system would allow team based reward distribution focusing on the fact that an individual cannot make much difference alone. It would devolve attention towards operational management as being in direct interaction with market thus their feedback would enable rapid adaption to the changing market conditions. It gives the decision power to the operational managers giving them guidelines and some important ratios rather than line by line instructions. This pattern would allow operational managers to be responsive towards environmental changes and better utilization of the opportunities. “Beyond Budgeting” would allow the organization to develop more customer oriented approach thus it would be the objective and strategy of the organizational teams thus making them accountable for profitable customer outcomes (Hope & R, 2000). This process of beyond budgeting would encourage and increase the free flow of communication amongst departments and managers. Operations of the organization would become more transparent with the open and fast distribution of information control would be facilitated at all levels. It is not only private sector but also public sector organization that benefit from beyond budgeting process; all the benefits discussed along with in-depth impact of beyond budgeting would influence both public and private sector. Public sector giving extra focus on budgets that are overly influenced by political and social motives however pressure of performance under resource constrained environment is common both the sectors for the managers (Becker & Green, 1985). Therefore it is the inability of the system to change and respond to the change that hampers the performance of public sector organizations thus beyond budgeting would bring in the required flexibility. Conclusion It has been seen that tradition provides comfort so is the case with the traditional budgeting that seems easy even if it is not appropriate for the current and ever changing business. Product lifecycles have become very much short with the regular advancement in technology. It is especially been in the past one decade that innovation has become critical success factor for the organizations. Thus it depends upon the environment of the organization whether it would enable and allow the flexibility that would encourage the response to the competitive business environment. The confidence that diverse business environment gives allows free flow of ideas and thus enables innovation. Traditional budgeting system has been rigid with the set of rules and line by line instructions to be followed by the managers with targets being more internally negotiated rather focusing on external environment. Reading List Becker, S., & Green, D. (1985). Budgeting and Employee Behaviour. Journal of Business, 370-406. Hope, J., & R, F. (2000). Beyond Budgeting. Strategic Finance, 30-35. Juergen, H. D. (2003). The Origins of Beyond Budgeting and of the Beyond Budgeting Round Table . ControllerNews – Zeitschrift für Controlling und Unternehmensführung, 168-171. Juergen, H. D., Dr. Rainer, G., Jean-Daniel, L., & Steve, M. (2005). Beyond Budgeting – Breaking free from the Annual Fixed Budget A Discussion between Experts from Borealis, Nestlé, Unilever und SAP. The Journal of Business Performance Management, 64-70. Jürgen, H. D. (2002). Beyond Budgeting: A Model of performance management and controlling in the 21st century? Controlling & Finance, 1-3. Katarina, Ø., & Inger, S. (2005). Management control without budgets: A field study of “beyond budgeting” in practice. Management Accounting Research, 1-30. Moolchand, R., Narendra, R., & Koshina, R.-M. (2012). Examining the Behavioural Aspects of Budgeting with particular emphasis on Public Sector/Service Budgets . International Journal of Business and Social Science, 110-117. Wallander, J. (1999). Budgeting - an unnecessary evil. Scandinavian Journal of Management, 405-421. Critical assessment Raghunandan et. al. (2012) discuss in their article that budget is the process through which management gains and keeps control of the organization and its affairs. Every enterprise regardless of its size, nature of business, industry and sector relies upon budget and budgetary system however its success primarily depends upon its acceptance and the attitude of the workers towards it. Budgetary system is not just financial targets or the goals that the organization sets it is the inclusion of the strategic goals and objectives that are defined in the budget it also gives the forecast of revenues, profits, production, cash flow and other important factors. The article is supposed to cover the behavioral aspects of the budget however it has overly discussed the factors of traditional budgeting. The ideas of author reflect that budget is about both the financing and investing strategies over the next fiscal year that are discussed in the budget thus making plans for the organization how to generate finances and make investments in the future periods. They also that there are both the technical and behavioral aspects to the budget however the traditional budgeting process emphasizes technical part to be most important as it discusses the mathematical computation of projected costs and expenses it is majorly been emphasized in the public sector. The behavioral aspects of the budget deals with the achievement of the financial targets and the ability of the personnel to achieve technical goals and how the abilities of the people would be utilized. However over the years it has been realized that the behavioral aspects of the budget are quite important it focuses on non-financial aspects that would achieve the targets set. In my view they are not a part of traditional budgeting as it is more focused on financial targets that are internally generated. It is important to get the commitment of the employees and convince them to the standards and the objectives set by the management. Budget is the most important strategic matter of the organization’s management that gives the internal control to them and allows the implementation of the strategies. They use the budget and budgetary system that allows them to make performance analysis, it provides a framework for implementing strategies and pattern for the optimum utilization of the limited resources that would be used efficiently and effectively for achievement of measureable targets. Author has failed to clarify that the budget is seen as shackle by employees, it removes their flexibility and limits their abilities. They are seen as extra pressure from the management and irrespective of their acceptance are implemented. Budget ensures coordination, communication and cooperation and allows the link of the various departments through achievement of targets that in particular is to satisfy the management. At the end of every specific period the outcome of each department are evaluated comparing the results to the outputs provided in the budget. It is just the material factors that motivates the employees to perform as achievement of targets attains rewards. Traditional budget is seen as supportive of the autocratic style of the leadership that is designed by the management in order to control the employees and decide the boundaries that have to be followed by the employees. Literature discusses that 21st century demands Beyond Budgeting however its research and article presented is just based on literature written before therefore it does not provide the actual evidence of the issues that author would have personally witnessed in a practical environment. Budgets are internally negotiated with less focus over the external environment. The current business environment requires participative budgetary system in which the feedback from the employees or more importantly operational managers has to be taken as they are directly in action better understanding the consumers thus making organizational teams more consumer focused. It is obvious that current business environment requires rapid and innovative decision therefore Beyond Budgeting is not something that has been structured it has evolved into a requirement. The current research limits in scope of its justification regarding adoption of Beyond Budgeting as it does not provide any practical of a business environment that has a free budget implemented. Therefore the working scenario under such situation cannot be understood unless such organization is practically observed and employees interviewed who have been given the freedom to be flexible in their approach. Read More