Question

Write an essay of 700 words 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.

Answer 1

      Budgeting is “Systematic control of an organization's operations through establishment of standards and targets regarding income and expenditure, and a continuous monitoring and adjustment of performance against them.” Even though Budget is an essential tool it has inherent flaws also.

The following limitations of budgeting are universal in nature and difficult to manage.

1. It requires skilled and trained managerial staff

2. It is time consuming as well as costly

3. It faces various operational problems during the implementation of such technique

4. Requires full support of top management

5. Budgets have no motivational effect unless they are accepted by the managers involved as their own personal targets.

6. Up to the point where the budget is no longer accepted, the more demanding the target the better the results achieved.

7. Demanding budgets are seen as more relevant than less difficult targets, but negative attitudes result if they are seen as too difficult.

8. Acceptance of budgets is facilitated when good upward communication exists. The use of departmental meeting was found helpful in encouraging managers to accept budget targets.

9. Managers’ reactions to budget targets were found affected both by their own personality and by more general cultural and organizational norms.

10. There are chances to introduce slack targets

Beyond Budgeting

Beyond Budgeting is ‘an idea that companies need to move beyond budgeting because of the Inherent flaws in budgeting especially when used to set contracts. It is argued that a range of techniques, such as rolling forecasts and market related targets, can take the place of traditional budgeting.’

Limitations of Traditional Budgets

1. Time consuming

2. Costly

3. Barrier to change.

4. Concentrate on cost reduction and not on value creation.

5. Based on unsupported assumptions and guess work.

6. Reinforce departmental barriers rather than encourage knowledge sharing.

7. Making people feel undervalued.

To overcome these limitations a tool came into force known as beyond budgeting. Beyond budgeting is a leadership philosophy that relates to an alternative approach to budgeting which should be used instead of traditional annual budgeting.

Beyond Budgeting has the following advantage over Traditional Budgeting

1. It is a more adaptive process than traditional budgeting.

2. It is a decentralized process, unlike traditional budgeting where leaders plan and control organizations centrally.

3. Beyond budgeting helps managers to work in coordination to beat the competition.

4. Internal rivalry between managers is reduced as target shifts to competitors.

5. Helps in motivating individuals by defining clear responsibilities and challenges.

6. It eliminates some behavioral issues by making rewards team – based.

7. Proper delegation of authority to operational managers who are close to the concerned action and can react quickly. Operational managers do not restrict themselves to budget limits and focus on achieving key ratios.

8. It establishes customer – oriented teams.

9. It creates information systems which provide fast and open information throughout the organization.

Suitability of Beyond Budgeting

1. Industries where there is rapid change in the business environment.

2. Industries using management methods such as TQM.

3. Industries undergoing radical change, e.g., using BPR.

4. Traditional vs Beyond Budgeting Model

Difference between Traditional and Beyond Budgeting

	Traditional Budgeting	Beyond Budgeting
Targets & Rewards	-Incremental targets -Fixed incentives	-Stretch goals -Relative targets and rewards
Planning & Controls	-Fixed annual plans -variance controls	-Continuous planning -KPI’s & rolling forecasts
Resource & Coordination	-Pre-allocated resources -central coordination	-Resources on demand -dynamic coordination
Organizational Culture	-Central control -focus on managing numbers	-Local control of goals /plans. -Focus on value creation

So from the above facts it is clear that beyond budgeting ideas can take the place of traditional budgets.