The Traditional Budget Is a Rigid Tool - Essay Example

The traditional budget is a rigid tool and should therefore be discarded in practice”. Contents Contents 2 Introduction 3 Discussion 3 Conclusion 10 References 12 Introduction The topic encompasses that budget is a traditional tool which should be discarded in practice. The traditional budget mainly deals with the inputs and the resources that are purchased. It is referred to as the common accounting tool that the organizations mainly use for implementation and formulation of strategy. The budget is referred to as an important tool and instrument for management control system that mainly aims for coordinating and communicating among the various subunits inside the organization (Shapiro, 2005). It prepares and develops a framework for evaluating the performance and productivity and ultimately motivating the employees and other managers. The application of budgetary control has been highly criticized because it takes lot of time in calculation and hence it is very time consuming, it levies an imposition of a vertical command structure, it controls the structure, creation of a centralized decision making process and it gives more importance in reduction of cost rather than value creation (Otley, 2001). Traditional budgeting is very much unsuitable for the rapid change in the environment in the new business world. The budget should be discarded due to the fact that becomes out dated rapidly during the period of budget year. The organization usually considers the budget as outdated in the starting before its construction it takes a lot of time to include all the items together. Budget generally does not focus on the financial targets annually during the process of revision (Jackson, 2007). Discussion The traditional budget is a rigid tool and should therefore be discarded in practice”. (Favour) Traditional Budget provides a means for developing the boundary systems that mainly focuses on the diagnostic control and also financial limits but it is very time consuming. The budgetary system in many organizations are prepared and constructed on the basis of the records and performance in the past rather than taking the future data into consideration. Hence the budget that is prepared is not fully reliable as it is prepared on the basis of past requirements without prioritizing the present requirements (Arsh, 2010).It usually gives importance to expenses giving very less importance to the expenses that is incurred. In the recent years the capital budgeting is criticized for being time consuming expensive and insufficient to meet the rising demand of the flexible environment. Modern companies that carry out its operation in the dynamic environment generally use and apply all modern techniques in order to sustain in the competitive environment (Williams, Haka, Bettner and Carcello, 2008). The companies by adopting the modern techniques are reaping the advantage of speedy, precise and the economical forecasting by applying forecasting technique. Example: Lyonnais and Electrolux has adopted rolling forecasting. Rolling forecasting technique is generally prepared on monthly and on quarterly basis. They are used as a substitute of the annual budgets (Gregory, 2005). The main problem that the companies are facing while adopting the budgetary technique are that budget may be correct or it may be inappropriate as the budgets are mainly based on the estimates and assumptions .The assumption for the future action is done on the basis of the past records and information (Kieso, Weygandt and Warfield, 2007). It creates a sense of insecurity as it sometimes does not provide profitable results Budgets cannot be prepared individually and automatically. Hence a feeling of insecurity generates. The coordination and cooperation of the staff is not available for exercising and implementing the budgetary control. The introduction, execution and formulation of budgetary technique are sometimes very expensive (Shah and Shen, 2007). Bank management adopts budgeting as a technique they generally applies there effort and initiative in performing the work effectively and efficiently but there effort and their performance are not appreciated or praised (Peterson and Fabozzi, 2012).The main problem with this is not of the finance management. The problem is the application of the traditional technique of budgeting. This problem is continuing from the decades due to the application of disruptive, outmoded, and the annual intrusion in the everyday management of the work. This article has focused and pointed out the weakness and disadvantages of applying traditional budgeting technique and suggests the alternative method or design to assist the management to a rolling view that is consistent for nearly a period of eighteen to twenty three or four months of the profitability, where there is no need for the annual budget process to be formulated. The most easy way to explain the traditional annual budgeting as a process or as a technique adopted by the commercial banks are very painful. The annual process prepared by budgeting is a tension and difficult for every manager and concerned that is generally involved in it (Agrawala, 2010). The main difficulty in adopting the traditional method of budgeting is that it does not estimate the revenue generated and the expenses that are incurred. The capital budgeting is not realistic in formulating the goals of the company, providing the rules, regulations, policies and guidelines to the supervisors. It takes lot of time in reviewing the budget on a continuous basis. The process and the technique is very complex to adopt and also the implementation of the traditional budgeting is very costly and expensive (Weston, 1990). It also creates the behavioural problem and also leads to wastage because by applying this technique the organization gets the lowest from the people as everyone is willing to negotiate for getting the lowest numbers (Atrill, 2006). The capital budgeting technique provides less value and motivate the wasteful and dysfunctional behaviours that results in de motivation of the employees. Now days the financial experts are trying to implement techniques that are beyond the application of traditional budgeting that is less complex, easy to understand, less sophisticated, and more adaptable and also can be implemented effectively and efficiently. The traditional budgeting has not yet developed for adjusting with the dynamic environment. The goals offset by the senior level managers are usually unrealistic (Brigham and Ehrhardt, 2011). Figure 1: Alternative for Traditional budgeting The figure shows the alternative of traditional budgeting. The external pressures from the capital market in capital budgeting can be defined by highlighting the facts that is the crash that have taken place in the stock market. The budgeting techniques that are adopted in the capital market generally estimates on the past data which affects the capital market adversely as assumptions on the basis of the past requirements and information fails to provide the relevant information (Ryan, 2007). Volatility related to the long term investment as it cannot provide accurate data for the future because the traditional method or technique is adopted by the capital market which restricts the stability. Due to the limitations of the adoption of traditional method of budgeting, the capital market generally fails to meet the target of the people who could have lead to the success of the business in future (Brown, 2003). Figure 2: Capital market Scenario Capital market is mainly criticized for being unrealistic because the assumption done is not reliable and the main reason for criticizing its assumptions are the investors acquire a diversified portfolio, the borrowing and lending of risk free rate of return, and the single period for the transaction horizon. The assumption which reflects that the investors acquire a diversified portfolio means that the assumption must be done in such a way that it reveals the operation of the stock market. Budgeting cannot provide assumptions. Another technique should be adopted (Myddleton, 2000). The limitation and drawback of traditional budgeting is due to economic uncertainty. The reason is that it has external focus which is insufficient. It is time consuming and it provides limitation in flexibility and responsiveness that is not suitable for the uncertain situation in the economy. The reason is that traditional budgeting usually discourages the change and it includes only little value (Watson and Head 2007).The budget is usually bureaucratic and it discourages the creative thinking and it involves much of the valuable time. Under the aspect of economic uncertainty the most important and the vital factor for the limitation of traditional budgeting is inflexibility and the organizations are forced to move towards the implementation of continuous budgeting. Continuous budgeting enables the companies to tackle and handle the market condition and situation in order to adjust with the uncertainty of the economy (Parker, 2007). The traditional budget is a rigid tool and should therefore be discarded in practice”. (Against) Traditional budget is a rigid tool but it is used as an important element for the organization. Therefore it should not be discarded. It can be best explained as: Budget is an integral part for every organization. Traditional budgeting generally uses the incremental approach it usually starts with the previous year budget and adjustment of the budget is done in order to reflect the changes in the assumptions for the next year. Budgeting is now regarded as an important technique that is used in the managerial accounting. In current years organizations are adopting budgetary techniques for the achievement of the strategic goals. The main advantage of the traditional budgeting is planning, controlling and performance management (Atrill and McLaney, 2011). The traditional budgeting mainly provides stability in regulating the spending and allowing the organization in creation of implementing effective fiscal plan. The budgeting report generally includes the information that generally determines and identifies whether the revenue of the current year is sufficient in paying off the services for the current year. Traditional budgeting mainly provides the organization with the valuable information to the managers in assisting and assessing the cost, efforts, services and the various accomplishments of the organizations (Higgins, 2008).Traditional budgeting generally provides a framework of control. The main role of the traditional budgeting is coordinating the financial activities of the company and it helps in creation of reference points. The framework helps in stabilizing in managing the activities. Traditional budgeting generally follows decentralize structure which many organization treat it as a standard operating procedure. Therefore the budgeting techniques can be treated as the budget cost centres which provides the managers with the freedom in running and operating the operations for the time needed for the organization to meet and achieve the parameters set or established by them. Budgeting generally used for maintenance of the performance management (Broadbent and Cullen, 2003).The traditional budgeting helps and assists the organization in properly preparation of the report of the organization. The detailed and wide explanation is been provided for receiving the information of the next fiscal year. Traditional budgeting includes planning the expenditures of the organization effectively and efficiently (Helferty, 2001). Traditional budgeting helps in monitoring the expenditure. For the creation and implementation of traditional budget in the organization it is essential to estimate the variable expenses. The use of traditional budget helps in attainment of the financial goals set by the organization. Traditional budget performs the function of a guard or it acts a hedge that helps the organization from facing the financial problems. Every managers and the business leaders wants to attain competitive success , to build a good management team, undertake innovation on a continuous basis, charging low cost, providing loyalty to the customers, and setting a very high standards for the control and governance. The benefits of the traditional budgeting help in the optimum utilization of capital, utilization of the operation more efficiently and effectively (Cox & Fardon, 2008). An example can be cited from an article which mainly mentions that the way in which Kenyan business sail have undergone through economic uncertainty. It has faced many challenges in order to determine the price of the product to secure the profit margin that was determined by them. They faced the challenge of using the limited resources by planning it effectively and utilizing it efficiently. Therefore the organization has implemented and formulated budget in order to achieve its objectives. Budget generally termed as the yardstick for measuring the performance and controlling the profits and operations of the organizations when it is compared with the actual performance. Another survey that was conducted by the American Productivity Quality centres and the Global business services of IBM has investigated that the companies are generally focusing on budgeting, planning and forecasting because the business plan and strategy are termed and regarded as the higher performers in the areas and sections focusing and providing importance on cost control, cost accounting, and also management of the cost. The article mainly specifies that the organization is performing high is expected to complete and finish the cycle of budgeting in 30 days as compared to those organizations that are performing bad or low. It is assumed and found out that the performers applied the continuous budgeting system when there is uncertainty in the economy. Conclusion The topic traditional budgeting is a rigid tool and should be discarded cannot be accepted fully because traditional budgeting may have many disadvantages but it has advantages too. Although Traditional budgeting is a rigid tool but should not be discarded because it helps in planning controlling and monitoring the budget (Van der Stede, 2000). Every organization has to prepare the budget in order to identify their expenses and evaluate the revenue that is generated by them. Now a day’s many organizations use Activity Based costing for its evaluation and preparation of budget. The main problem or the disadvantage of the traditional method of budgeting is that it is not adjustable and it is very time consuming. Traditional budgeting does support and agree with the fact and view provided by the beyond budgeting movement because they have helped traditional budgeting in finding out the drawbacks of the traditional budgeting. References Agrawala, K. 12 November 2010. [Online] Available at: http://www.enotes.com/homework-help/benefits-limitations-budgets-217995 [Accessed 29 November 2014]. Arsh, H. 2010. Management Control System. Interdisciplinary Journal of Cotemporary Research in Business. 12(6), pp.195-199. Atrill P. and McLaney E., 2011. Accounting and Finance for Non-Specialists. Harlow: FT Prentice Hall. Atrill, P., 2006. Financial Management for Decision Makers. Harlow: FT Prentice Hall. Brigham, E. and Ehrhardt, M. 2011. Financial Management: Theory and Practice. Boston: Cengage Learning. Broadbent, M. and Cullen, J., 2003. Managing Financial Resources. Oxford: Butterworth Heinemann. Brown, K. 2003. Investment Analysis and Portfolio Management. Boston: Thompson Learning. Cox, D. & Fardon, M. 2008. Management of finance. Worchester: Osborne Books. Gregory, J.N. 2005. The End of Traditional Budgeting. The Journal of Bank Cost & Management Accounting. 12(1), PP -27-39 Helferty, A. 2001. Financial Analysis: tools and techniques. New York: McGraw Hill. Higgins, R. 2008. Analysis for financial management. New Jersey: McGraw Hill. Jackson, J. 2007. Financial Management. New York: Cengage learning. Kieso, D. E., Weygandt, J. J. and Warfield, T. D., 2007. Intermediate Accounting. New York: John Wiley and Sons. Martin, G. S. & Baker, H. K. 2011. Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice. New York: John Wiley & sons. Myddleton, D., 2000. Managing Business Finance. Harlow: FT Prentice Hall. Otley, David (2001) Extending the boundaries of management accounting research. 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R., Haka, S. F., Bettner, M.S. and Carcello, J.V., 2008. Financial & Managerial Accounting. London: McGraw-Hill Irwin. Read More