Criticism of Traditional Budgeting Samples †MyAssignmenthelp.com

Question: Discuss about the Criticism of Traditional Budgeting. Answer: Introduction The preparation of budgeting is the primary method of traditional budgeting wherein one takes the budget of the previous year as the base year. While preparing the budget for the current year, it is imperative to adjust the operating costs that include demand, inflation rate, market situation and so forth. What it means is apart from the operating cost, the revenue associated with the budget of the previous year is also equally important. Zero based budgeting method is required to conduct traditional budgeting which is quite similar to incremental financial statement method (Welch, 2013). The primary subject matter of this paper is the criticism of budgeting. Besides, the paper also covers the evaluation of the two successful methods to improve budgeting. Criticism of Traditional Budgeting Budgeting is the cornerstone of management control process; it is one of the most comprehensive research topics of management accounting around the world. Theaccounting literature defines various uses of budgeting about evaluation and performance management, strategy information, policy implementation, and so on. However, despite the fact that budgeting is traditional and popular, annual budgeting has come under adverse criticism (Fraser, 2003). The paper aims to focus on the traditional budgeting criticism as per the instruction. An Overview of Budgeting The Chairman of the United States General Electric, Jack Welch does not bother about the budget. His bestselling book Winning portrays some essential information regarding traditional budgeting. He opines that budgeting is nothing but the most ineffective practice in management. Also, he believes that budgeting hampers big dreams, energy, time and so forth. He has a distaste for traditional budgeting thought to which most CEOs in Europe agree. For this very reason, European companies have been replacing the traditional budgeting for rolling forecast, and other plans (Melnychuk, 2014). As a result, the methods of budgeting plan, forecasting is slowly changing its way across the pond. Although it is a new trend, it is not above criticism. Due to this growing trend in the United States, most of the American-based companies have come to realize that they need some changes and adopt adaptive planning approach to set their future courses (Siglaugsson, 2017). According to The Beyond Budget ing Round Table (BBRT), it spends countless hours on the performance management of large-scale organizations. Bjarte Bogens of Norgewian oil company Statoil believes, "A traditional budget is not the way to manage a global oil exploration company. The world has changed. Our business environment is much more turbulent, dynamic and demanding than even five years ago. We have to change the model because the world has changed." (Wildavsky, 2001). In addition to this Robin Frasier of the BBRT argues "companies should not do budgeting," Furthermore, he also says, "In a competitive environment companies can perform much better if they give more autonomy to line managers. Beyond Budgeting Process In Beyond Budgeting, the first step should involve separating the three processes that are historically combined in the traditional budgeting routine; namely target, forecast, and resource allocationAbove all, the most important factor for beyond budgeting is business culture. While some organizations are not yet ready for this change, they may well become so over time, and the process will be evolutional. (Amalfi, 2016). The budgeting culture is the single most barrier to changes. Medium-scale corporations spend three to five hours on budgeting matters on a daily basis. In 2003, Hackett Group observed that the medium-scale organizations spent 25,000 person-days of the annual budget. The director of BBRT North America, Steve Player, said that budget becomes a threat to the lasting enterprises once it gains control as an instrument (Rothberg, 2011). He believes in todays dynamic economy, medium-scale enterprises build traditional budgeting platform and, as a result, they promote mistrust. According to most researchers, budgeting comes with many privileges despite the fact that it also involves several impediments or shortcomings. However, the adverse effects put the positive ones in the shade, which is not unusual. Excessive reliance on traditional budgeting may prove fatal at times. If there are inaccuracies or discrepancies in the budgeting of the previous year, chances are it may also reflect in the budget of the current year. Such a defect may lead to the incorrect budget, which can harm the development of the company in the long run. It is a well-known fact that lesser motivation can affect the bureaucracy of an organization which, if not addressed in time, can go on to make other employees feel unimportant or neglected. In instances like this, employees may either lose confidence or feel demotivated. Being an inflexible and fixed budget, the traditional one remains the same even in some cases - new competitors enter the market, market conditions change along with changes in policies and so forth. Survey of Budgeting Conducted studies on the context of Singapore provide new insight into traditional budgeting. In a survey related to the results of traditional budgeting, three model questionnaires were set out. Out of the 1380 surveys, 1,088 were distributed among economic entities, 100 among students with a master's degree, and the remaining 192 among professors to achieve the future of the budgeting process in Singapore territories (Elsevier, 2014). According to SAP AG, White Paper titled Beyond Budgeting (2001) considered the budgeting model which was introduced in the 1920s to assist financial managers to control the costs of large-scale organizations. As a periodic process, traditional budgeting and planning tend to define operational expenditures and forecast income. Notwithstanding the fact that it reflects on the historical data, it does not change during the budget cycle phase (Blondal, 2006). Traditional Budgeting refers to the amount allotted for specific financial obligations during a set period. Also referred to as annual budgeting by front line managers, it constitutes one of the simple ways of budgeting. Therefore, it comes across as an obvious choice to most companies. Critics, however, have opposed traditional budgeting. Critics complain that budgets are timed incorrectly (too long or too short); rely on inappropriate measures; and are either too simplistic (or too complex), too rigid (inflexible in a changing business environment), or too political (the incentives for managers send the wrong messages). For some companies, it even takes more than eight months to complete the budget (Andrews, 2007). It uses too many resources for an extended period. Most budgets are very detailed and require the input and back and forth negotiation of many people throughout the organization, which only adds to some corporate resources consumed by traditional budgeting (Wolf, 2017). Moreover, internal politics come into play and often become more important than the customerwith managers and employees self-occupied as a result. Fortune magazine reported, around 70% of companies surveyed were poor at executing strategya massive indictment of the performance management capabilities of budgets. It turned out that most businesses were characterized by incremental thinking, sclerotic budgeting processes, centralized decision making, petty operating rules, and controllers who demanded answers to the wrong questions. In Sulaiman et al. (2004) a survey was conducted for traditional and contemporary managementaccounting practices in some countries such as China, India, Malaysia, Singapore. The countries focussed on the traditional budgeting regarding variance analysis, performance measurement, standard costing, activity based costing, cost volume analysis, balanced scorecards and so forth. During the year 2000, Singapore based organizations implemented some changes to their strategy; the net income of the investments derived from the past surpluses was used for budgetary purposes (Blondal, 2006). According to the fiscal rule of Singapore, annual net investment income may use by budgetary sectors. All these happened because of following traditional budgeting. Heyns (2001) highlighted that any current practice review of budgeting has massive frustration with its traditional approach. Neely also said the same thing about traditional budgeting. In most organizations, budgeting and planning process is renowned for consuming at least 30% of management time. Price Waterhouse Coopers found a benchmark regarding the budget preparation (Turban, 2008). The PWC study not only failed to report budgeting costs but also lose its forecasts variation on large-scale enterprises. Practical Approaches to Improve Budgeting Now the two practice-led approaches come into effects that are to improve budgeting. The premise of beyond spreadsheets has a better way to deal with the situation of improving the budget. In the context of Singapore, the running businesses need to produce A line item budget presented and approved by executives and legislature. Being a modern budgeting system, this is easy to use and the financial planning is configurable to adopt a new version of financial and HR data (Lohan, 2013). Having different advantages such as security, version comparison, workflow, organizations may produce entire budget book into one system to bring together all necessary items. Top level managements can integrate payroll and HR application directly into the budgeting application to forecasting existing costs. If they interested in the project and capital budget, they can even consider the aspects like operating expenses, financing cost and capital cost to the primary spreadsheets, and so on. Cloud budgeting and planning application may be the second approach to do the same. Core ERP and HR systems with cloud facility may solve the problem to improve budgeting. Adopt cloud applications by using hybrid/on-premise strategy proving to be faster than traditional on-premise applications. With the help of cloud system including the database administration, hardware, and network, the upgraded budgeting system can upgrade subscription price. Conclusion European countries, as indicated earlier, are pioneering the nation by utilizing different budgeting systems from traditional budgeting approach. In less and open regulated market, the climate is always conducive to changes. In the United States, organizations tend to have upgraded their budgeting systems to cover up all the associated problems (Wood, 2008). The goal is to the stop-and-start budget unless or until they get a positive outcome. Rolling and managing budgetary forecast is nothing but a challenging matter. Therefore, planning tool is necessary to deal with all the associated situations. References Rothberg, A (2011) Traditional Budgeting vs. Beyond Budgeting: Three Core Differences. Journal of Traditional Budgeting page 1-3. Elsevier, B (2014) Difficulties of the Budgeting Process and Factors Leading to the Decisions to Implement this Management Tool. Journal of Emerging Market Queries in Finance and Business. Page 470. doi : 10.1016/S2212-5671(14)00484-5. Blondal, J (2006) Budgeting in Singapore. OECD JOURNAL ON BUDGETING . ISSN 1608-7143. Volume 6- No 1. Wolf, K (2017) Why its Time to Say Goodbye to Traditional Budgeting. [Online] Retrieved from https://www.amanet.org/training/articles/why-its-time-to-say-goodbye-to-traditional-budgeting.aspx. Accessed on [19.07.2017] Siglaugsson, T (2017) Should we abandon budgeting or can we improve it? [Online] Retrieved from https://www.linkedin.com/pulse/should-we-abandon-budgeting-can-improve-thorsteinn-siglaugsson. Accessed on [19.07.2017] Melnychuk, L (2014) Evolving FPA: Should the Budget be Abandoned? Global Treasury Intelligence. [Online] Retrieved from https://www.gtnews.com/articles/evolving-fpa-should-the-budget-be-abandoned/. Accessed on [19.07.2017] Amalfi, F (2016) A Modern Approach to Improving Budgeting Efficiencies for Government Organizations. [Online] Retrieved from https://www.govloop.com/community/blog/modern-approach-improving-budgeting-efficiencies-government-organizations/. Accessed on [19.07.2017] Lohan, G (2013) A Brief History of Budgeting: Reflections on Beyond Budgeting, Its Link to Performance Management and Its Appropriateness for Software Development. Lean Enterprise Software and Systems pp 81-105. [Online] Retrieved from https://link.springer.com/chapter/10.1007/978-3-642-44930-7_6. Accessed on [19.07.2017] Andrews, M (2007) The Impact of Traditional Budgeting Systems on the Effectiveness of Performance?Based Budgeting: A Different Viewpoint on Recent Findings. International Journal of Public Administration. 10.1081/PAD-120018299. [Online]. 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