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Traditional Budget Is a Rigid Tool and Should Be Discarded In Practice - Essay Example

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This paper deems to critique the statement that the traditional budget is a rigid tool and should, therefore, be discarded in practice. The researcher will critically evaluate this claim in the light of recent external pressures from the capital markets…
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Traditional Budget Is a Rigid Tool and Should Be Discarded In Practice
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Download file to see previous pages The paper tells that the extensive use of budget in corporate organizations is rooted in the fact that it is a comprehensive tool for monitoring organizational activities and addressing critical factors in business. The concept of using models of a traditional budget is now under extensive debate owing to the restrictions that they impose on managers. The main proponents who describe the idea of a budget as a highly rigid one complain that discarding the budget for a corporate organization will ultimately change the organization from being a central hierarchy to a well-developed network that can more readily adjust itself to the market forces. In order to explore this argument, factors which cause researchers to challenge the concept of formal budgets in the organization are discussed. The impact of capital markets on organizations and the redundancy of the budgetary controls are to be focused. One of the biggest supports of strict budgetary controls can be found in the works of Otley who had established that maintaining strict budgetary control is not essentially expensive for an organization. This is because; focusing strongly on the budget ultimately results in obtaining stipulated results. Others who have supported the notion of strict budget control in an organization are of the view that formal budgets are likely to perform in an efficient manner only when the external environment is relatively stable and there are no fluctuations. The business environment is no longer stable and is actually shaped by the interaction of multiple forces which are dynamic and are constantly evolving. The interactions of business organizations have increased with the capital market. Money flows from the capital markets into the projects of any organization and the project, in turn, generates income for the firm. The money that is generated by the organization is used by the firms in order to repay the loans and provide returns to the shareholders. This makes the firm liable to the capital market. The concept of creating capital budgets is related to investing of the firm’s surplus in projects which have a net present value. ...Download file to see next pagesRead More
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