Management and Budgetary Control and the Beyond Budgeting Debate - Case Study Example

Management & budgetary control and the Beyond Budgeting debate Student Number Module Name Module Number Word Count Table of Contents Table of Contents 2 Introduction 3 The concept of Budgetary Control and the current traditional system 3 Addressing the weaknesses in traditional budgeting systems 4 Why organisations hold on to budgets 5 Case study on successful implementation of Beyond Budgeting 6 Conclusion 6 Reference List 7 Introduction Since the introduction of budgets in 1920s, the budgeting process has been accepted by organizations as a proficient method of planning and control in the short-term. Budgeting is employed not just in large business organizations but also in the small businesses for formal purposes (Goode & Malik 2011). Every organization has objectives and plans formulated from their long-term strategy. Budgeting is meant to give those plans and targets financial values. This makes the progress of the business measurable and also helps to transform strategic ideas into operative actions understandable to all (Hansen 2011). This report explains how Sheffield Surgical Ltd can use Beyond Budgeting principles to enhance a cultural framework that matches the modern dynamic business environment. The concept of Budgetary Control and the current traditional system Budgetary control is a process through which organizations establish budgets that relate to different activities and compare the figures in the budget with the actual performance of the business to establish variations, if any (Wagh & Gadade, 2013). Budgetary control uses budgets to guide planning and controlling activities in the organization. Therefore, it is meant to help the management to formulate policies and to plan, control and co-ordinate the overall budgetary control objectives (Badu, 2011). Report on budgetary control is very essential in the process of feedback and to ensure absolute effectiveness in business operations. The design, timing and the overall impact the budgetary control report as Wagh & Gadade (2013) argue, must be understood to lead to effective actions and business success. Traditional budgeting system has evolved over the years and it is currently being used by organizations to plan their business operations (Pietrzak 2013). Traditional budget is expressed in quantitative manner and it is meant to help the business achieve its objectives and help management to plan, coordinate, measure and reward (Réka, Ştefan & Daniel, 2014). The main benefits of traditional budgeting systems according to Réka et al (2014) are planning, control and performance management. The budget is an essential tool for management control since it is not possible to conduct management control without budgetary control. Additionally, it is through control that managers can maintain focus of the important issues of the organization’s objectives and actions (Lorain, Domonte & Pelaez 2015). Traditional systems support performance management in a sense that if properly prepared, the budget gives management a clear picture of the next fiscal year (Réka et al 2014). Based on such information, management can easily set objectives and make appropriate decisions. Nevertheless, traditional budgeting systems have been criticized for inability to function well in highly doubtful situations and for leading to information obsolescence very fast (Lorain et al 2015). The basic criticism of traditional budgeting is that it is something of the past. It is inflexible and does not keep up with the requirements of the modern business world (Pietrzak 2013). Additionally, traditional budgeting systems are time consuming, costly to assembly and have little value because they focus on cost reduction (Réka et al 2014). Despite these drawbacks, however, most companies continue to use the traditional system. Addressing the weaknesses in traditional budgeting systems As mentioned earlier, traditional budgeting systems have become irrelevant in the modern business environment since they do not satisfy the needs of managers (Goode & Malik 2011). In this respect, Beyond Budgeting has been developed as one of the alternative budgeting methods that can address the needs of the contemporary business environment. Beyond Budgeting is meant to strengthen the contribution of managerial accounting in business performance and operation (Hansen 2011). If the organization follows Beyond Budgeting principles it would be able to manage its performance and decentralize the process of making decisions without necessarily developing traditional budgets (Hope & Fraser 2003). Through Beyond Budgeting, the organization should be able to achieve the success factors of the business. Therefore, Beyond Budgeting can deal with the weaknesses of traditional budgeting systems in two ways (Goode & Malik 2011). First, Beyond Budgeting is an adaptive approach to management. Through this approach to budgeting, managers can review, on a regular basis, organizational targets and thereafter develop goals of performance that can be weighed against competitors, world-class benchmarks and earlier periods (Réka et al 2014). This is contrary to the traditional systems where managers are tied to predetermined actions by fixed annual budgets and plans (Goode & Malik 2011). Second, Beyond Budgeting facilitates a more decentralized approach of management which helps to resolve the problem of centralized leadership inherent in the traditional budgeting systems (Hope & Fraser 2003). Through Beyond Budgeting, the organization can devolve performance accountability and decision-making to line managers and also create a culture of personal responsibility and a self-managed environment for working (Réka et al 2014). This helps to increase motivation, employee productivity and improved customer service in the organization. Why organisations hold on to budgets Despite the introduction of modern approaches to budgeting, organizations might not want to leave budgets because of the benefits they get from the budgets. First, organizations use budgets for planning purposes and therefore have a direction to follow. Organizations want to anticipate future business situations and even avoid unforeseen problems and therefore they believe this is possible through budgets (Réka et al 2014). Second, organizations stick on budgets to be able exercise control within. Through budgets, organizations can measure performance against the desired results set in the budget (Lorain et al 2015). Ideally, it is not possible to control performance without predetermined standards and hence, making budgets important for organizations (Libby & Lindsay 2010). Third, budgets help organizations to coordinate their activities which explain why they might not want to leave budgets. Budgets are used to communicate financial plans across all departments within the organization which increases cooperation towards a common goal (Libby & Lindsay 2010). Therefore, with these benefits, organizations might not abandon their traditional budgeting systems but in stead find ways to improve them. Case study on successful implementation of Beyond Budgeting One of the companies that have successfully implemented the concept of Beyond Budgeting is the FoodCorp, a food production company that operates in the Agri-food industry in Scandinavia (Sandalgaard & Nikolaj Bukh 2014). The company started changing its process of budgeting in 2003 by closely examining its various business processes, including planning and budgeting procedures. FoodCorp then saw the idea of Beyond Budgeting relevant and adopted it after extensive consultations with specialists in Beyond Budgeting model (Sandalgaard & Nikolaj Bukh 2014). However, it was a struggle through the change for FoodCorp because of lack of internal benchmarks. Additionally, the need to deliver the expected results with the new system was a hindrance to the implementation of the Beyond Budgeting system (Sandalgaard & Nikolaj Bukh 2014). Conclusion Conclusively, traditional budgeting systems have been there since 1920s and continue to be used by companies, despite being criticized for being the thing of the past. Organizations which use traditional budgeting do this because it helps them in planning, controlling and coordinating their business operations. However, the fact that traditional budgeting does not adaptive to uncertain situations has created the need for Beyond Budgeting model. Organizations need to adopt Beyond Budgeting to be able to adapt to dynamic Business environment and decentralize performance accountability and decision-making process. They need to create a cultural framework suitable for the contemporary dynamic business environment which is possible through the adoption of Beyond Budgeting principles. Reference List Badu, D., 2011. Budgeting and Budgetary Control at Ernest Chemist. Goode, M. and Malik, A., 2011. Beyond budgeting: the way forward. Pakistan Journal of Social Sciences, 31(2), pp.207-214. Hansen, S., 2011. A Theoretical Analysis of the Impact of Adopting Rolling Budgets, Activity-Based Budgeting, and Beyond Budgeting’, European Accounting Review, 20(2), pp. 289-319. Hope, J. and Fraser, R., 2003. Beyond budgeting. Harvard Business School Press, Boston. Libby, T. and Lindsay, M., 2010. Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research, 21(1), pp. 56-75. Lorain, M.A., Domonte, A.G. and Peláez, F.S., 2015. Traditional budgeting during financial crisis/El presupuesto tradicional en la crisis económica. Cuadernos de Gestión, 15(2), p.65. Pietrzak, Z., 2013. Traditional versus activity-based budgeting in non-manufacturing companies, Social Sciences, 82(4), pp. 26-37. Réka, C.I., Ştefan, P. and Daniel, C.V., 2014. Traditional Budgeting versus Beyond Budgeting: A literature Review. Annals of the University of Oradea, Economic Science Series, 23(1). Sandalgaard, N. and Nikolaj Bukh, P., 2014. Beyond Budgeting and change: a case study. Journal of Accounting & Organizational Change, 10(3), pp.409-423. Wagh, A. and Gadade, S.T., 2013. Evaluating budgeting and budgetary control process in colleges. International Monthly Refereed Journal of Research in Management & Technology, 2, pp. 107-115. Part 2: Critical comparison of two academic articles on Beyond Budgeting This section is a critical comparison of two articles on Beyond Budgeting. One of the articles was written by Sandalgaard & Nikolaj Bukh (2014) titled ‘Beyond Budgeting and change: a case study’. The second article was written by Goode & Malik (2011) and it is titled ‘Beyond Budgeting: the way forward’. The comparison focuses on the background of the articles, research methods employed, limitations and findings. The article by Sandalgaard & Nikolaj Bukh (2014) investigates the reasons why organizations adopt Beyond Budgeting model and the practical problems they encounter in the process of changing they way they manage their accounting system to the Beyond Budgeting system. To achieve this goal, the authors used a food manufacturing company in Scandinavia as a case study. Generally, based on the findings from the case study, the authors analyzed the practical issues organization face when adopting Beyond Budgeting system. On the other hand, the article by Goode & Malik (2011) seeks to find out whether Beyond Budgeting is the way to go for companies in the modern dynamic business environment. The authors began by analysing the evolution of different concepts of budgeting, then went ahead to provide criticisms of traditional budgeting before discussing the applicability of Beyond Budgeting in modern business environment. The methods of research used in the two articles are different from each other. The method of research was selected based on the nature of information the authors wanted to collect. Sandalgaard & Nikolaj Bukh (2014) chose to use a case study approach to carry out their research. Primary data was collected by use of interviews. Additionally, the authors collected data from internal reports, annual reports, budget reports and the company’s Web site. The approach used by Sandalgaard & Nikolaj Bukh (2014) is different from the one used by Goode & Malik (2011) whereby they solely relied on secondary sources of data, including professional papers and journal articles. Therefore, unlike Goode & Malik (2011), Sandalgaard & Nikolaj Bukh (2014) adopted a better approach to research which they clearly explained in their work and hence, making it more reliable. Goode & Malik (2011) did not explain any difficulties they experience when developing the article. This makes it difficult to anticipate the problems they faced, if any, even if it may be obvious. Alternatively, Sandalgaard & Nikolaj Bukh (2014) admit that their study was subject to normal limitations associated with case-based research. In addition to this realization, the authors admit that the prepositions made in the article be subject to further investigation in other companies trying to adopt Beyond Budgeting. Again, Sandalgaard & Nikolaj Bukh (2014) showed some level of professionalism in their work by explaining to the reader the limitations the faced in the course of their research, an aspect that Goode & Malik (2011) failed to demonstrate and hence compromising the quality of their work. The article by Goode & Malik (2011) shows that Beyond Budgeting is more flexible and responsive. To implement this model, the authors argue that the organizations culture should undergo a complete overhaul and management style shifted, an observation made by Sandalgaard & Nikolaj Bukh (2014) as well. Upon analysing the opinions and thoughts of various academics, Goode & Malik (2011) conclude that Beyond Budgeting has a major role to play in the future of management accounting. Although the article support the notion that traditional budgets belong to the past and therefore not suitable for the modern business environment, Goode & Malik (2011) indicate that it would be difficult to fully abandon traditional budgeting in organizations because of organizational culture, need for a framework of control and to decentralize, the views also held by CIMA (2007 and Réka et al (2014). Nevertheless, Sandalgaard & Nikolaj Bukh (2014) findings show that organizations that change their system of management accounting based on Beyond Budgeting inspiration maintain fixed targets in their budgets. Additionally, Sandalgaard & Nikolaj Bukh (2014) found out that the analytic use of budgeting at lower organizational levels in the company is likely to concentrate on a larger proportion of line items, even if the budgets at the corporate level centers on few line items. Reference List CIMA, 2007. Beyond Budgeting. Topic Gateway series No. 35, London: United Kingdom. Goode, M. and Malik, A., 2011. Beyond budgeting: the way forward. Pakistan Journal of Social Sciences, 31(2), pp.207-214. Réka, C.I., Ştefan, P. and Daniel, C.V., 2014. Traditional Budgeting versus Beyond Budgeting: A literature Review. Annals of the University of Oradea, Economic Science Series, 23(1). Sandalgaard, N. and Nikolaj Bukh, P., 2014. Beyond Budgeting and change: a case study. Journal of Accounting & Organizational Change, 10(3), pp.409-423. Read More