Question

1. CIMA define Beyond Budgeting as:

“…the idea that companies need to move beyond budgeting because of the inherent flaws in budgeting especially when used to set incentive contracts. It is argued that a range of techniques, such as rolling forecasts and market-related targets, can take the place of traditional budgets”.

Required:

Discuss the extent to which you agree that the “inherent flaws in budgeting” are universal, and also the extent to which you agree that beyond budgeting ideas can take the place of traditional budgets.   Max words 700

Answer 1

Answer:

Inherent flaws in Budgeting that are universally accepted:

• Budgets prepared under traditional processes add little value and require far too much valuable management time which would be better spent elsewhere.
• Too heavy a reliance on the 'agreed' budget has an adverse impact on management behaviour, which can become dysfunctional with regard to the objectives of the organisation as a whole.
• The use of budgeting as a base for communicating corporate goals - setting objectives, continuous improvement etc - is seen as contrary to the original purpose of budgeting as a financial control mechanism.
• Most budgets are not based on a rational, causal model of resource consumption, but are often the result of protracted internal bargaining processes .
• Conformance to budget is not seen as compatible with a drive towards continuous improvement.Traditional budgeting processes have insufficient external focus

Beyond Budgeting a step ahead of traditional Budgeting:

• It creates and fosters a performance climate based on competitive success. Goals are agreed via reference to external benchmarks as opposed to internally-negotiated fixed targets. Managerial focus shifts from beating other managers for a slice of resources to beating the competition.
• It motivates people by giving them challenges, responsibilities and clear values as guidelines. Rewards are team-based, in recognition of the fact that no single person can act alone to achieve goals.
• It establishes customer-orientated teams that are accountable for profitable customer outcomes. These teams agree resource and service-level requirements with service departments via the establishment of service level agreements.
• Also it has the following uses:
• establishes the level of income and expenditure
• authorises that expenditure,once agreed, out of the planned income
• acts as a control on expenditure and income
• communicates policies and plans
• focuses attention on the future
• motivates managers and staff.