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

The traditional budget is a rigid tool and should therefore be discarded in practice Contents Introduction 3 Discussion 3 Conclusion 9 References 10 Introduction Budgeting is an important financial practice that is highly required for the purpose of financial anticipation. Since 1920 most of the organizations across the world have included budget as an integral part of their organizational control. Budget is an expression where there is significant scope of quantitative calculations. But over the years traditional budget has faced significant criticisms for the purpose of its rigidity. The contexts of modern day organizations have changed significantly. Business situations and budgetary controls have become more volatile in nature. It requires high degree of flexibility in the budgetary control. That level of flexibility is missing in traditional budgeting. Budget has high significance for getting an idea about the organizational financial goals. Modern business world has become fast, in this fast paced context traditional budgeting faces lots of criticism from various parts of the business society. The essay will focus towards the relevancy of traditional budgeting in the context of modern business world. Traditional budget is being made once in every year. Organizational activities are being evolved around this budgeting. The essay will critically evaluate the given topic. During the course of this essay all the aspects related with the traditional budget will be discussed in detailed fashion. At the end of the essay a suitable conclusion will be drawn about this burning topic. The essay will try to incorporate practical examples suitable for this topic. Discussion A traditional budget is a formal quantitative process which indicates the quantity of money that an organization allocates for a particular time period. Traditional budget supports the organizations to spend their money according to their predetermined plan. Traditional budget indicates income and all the categories of spending. Here comes the scope of criticism of traditional budget. Recently organizations across the world and financial experts of global fraternity have blamed the system of traditional budget for its time consuming nature. They have categorically stated that with the current context of volatile business situations the pace of traditional budget is too slow to respond properly. Traditional budget is significantly costly and lack of flexibility makes the system incapable for coping with the dynamic business environment. Many organizations and financial analysts across the world have raised their voices against the traditional budget and they have suggests to go beyond the traditional budget. According to Dury, traditional budget is being made on the basis previous organizational data and future financial anticipations (Bourmistrov and Kaarbøe, 2013). He told that these kinds of practices have made the traditional budget a rigid tool. Rigid nature and association of risks with this uncertain matter has made this tool somewhat obsolete in the current business context. For real example there are several companies in Sweden who have stopped budget system into their organizations. According to a survey conducted by Heyns, Bourne and Neely, almost 80 percent organizations are not at all satisfied with the budget and planning system. According to them, the time has come when traditional budget can find its place in the financial museum. In simple terms traditional budget should not be only tool to be used by the organizations. Cranfield School of management has also criticised this traditional tool for its high level of rigidity and limited capacity to cope with the ever-changing dynamics of modern day business. Fanning has stated that, traditional budgeting has disadvantage of high cost association. He also added that with the advent of modern technical up gradation, budgeting can be done by spending fewer amounts of money and time. Currently various web based tools have come into the picture which allow the organizations to allocate their budget in a fast pace without consuming too much money. Technological up gradation provides significant amount of flexibility into the organizational budgeting. According to the survey of Dugdale and Lyne, still traditional budget has significant popularity. It is significantly important for the purpose of planning, co-ordination, controlling and communication. Due to lack of effectiveness, various organizations across the world are trying to get rid of traditional budget and looking forward towards various different techniques. Companies like Credit Lyonnais and Electrolux have successfully shifted their focuses from traditional budget and currently they are following rolling forecasts. It means these two organizations are not at all satisfied with the effectiveness of traditional budget and that is why they have gone for alternative. With the rolling forecasts the organizations can monitor and control their business operations after regular interval of time. It may be monthly basis or quarterly basis. It indicates that this technique certainly provides more flexibility into the budgeting which was missing in their traditional budget (Marcino, 2000). Companies like British Petroleum and VOLVO, always focuses towards the future perspectives not towards the past trends. Modern organizational context is more dynamic in nature. Organizations across the world are seeking for more modernized technologies to gain high competitive advantages. That high level of competitive advantages cannot be gained with the support of traditional budget only. Companies across the world are looking for high level of precision, speed and high degree of economical certainty. All those things cannot be achieved by the rigid traditional budget. Modern organizations are spending more money for the incorporation purpose of IT software. All these software are significantly helpful for the purpose of cost reduction. Traditional budget generally fails to identify various variances caused due to the financial uncertainties (Malmi & Brown, 2008). All those variances are easily identifiable with the help of modern budget process. Incapability to identify several variances is a significant limitation for traditional budget and this limitation has made this conventional process highly ineffective in nature. Traditional budget is more of a reactive process which responders after any certain incident. This reactive process often causes high level of losses for the organizations across the world. Due to high level of business uncertainty modern world requires proactive process for budgetary control. That proactive factor is missing in traditional budget. That is why organizations across the world are raising their voices against the traditional budget. Over the years companies across the world have identified one reality that, superior financial performances can be achieved with the help of day-to-day planning. It requires continuous monitoring from the side of the managements. That continuous monitoring is missing in the case of traditional budget. According to the criticism of Beyond Budgeting Round Table (BBRT), budgeting is not at all suitable for the modern-day organizations. In the modern day business context innovation and competitiveness is the most essential matter for the companies. All those things cannot be possible through traditional budget (Libby & Lindsay, 2010). It is being noticed that in spite of high degree of criticism many organizations across the world have not been able to totally do away with the traditional budget. That means with the present situation, traditional budget cannot be totally discarded. In the modern business world it has been observed that, techniques like rolling forecast and balanced score card are finding more prominences in the organizational budgeting. Hope and Fraser have stated that, traditional budget provides rigid planning and incremental thinking. They have categorically stated that, modern day organizations require knowledge management, strategic performance and value addition in their processes. All these things cannot be achieved with the help of highly rigid traditional budget system only. Traditional annual budget has an inflexible image (Libby & Lindsay, 2007). According to a survey done by Ekholm and Wallin, 20.5% organizations out of 659 companies have responded that, they want to carry out with their traditional budget. On the other hand, 60.7% companies have stated that they do want to carry on with the traditional budget only but they want more adjustments and flexibilities into it. This finding is clearly articulating that most of the surveyed organizations are against the rigidity of this tool. It also indicates that organizations want to carry on with the budget but rigidity should be eliminated. Capital market required on time and accurate information. That on time accurate information is not possible with the traditional budget system. Capital market requires high level flexibility and real time communication. That level of flexibility and real time communication is not possible with traditional budget. Scopes of adjustments and uncertainty accommodation is low in this process that is why slowly but surely the tool is losing its popularity across the organizations. Traditional budget is a supporting tool for the organizations to meet their lowest level of financial target. With the support of this tool organizations cannot beat their target and over achieve them (Ryan, 2007). It is being observed that capital market is generally highly influenced by the external information. Share prices of the organizations rise and fall due to the positive and negative information respectively. It means capital market is highly volatile in nature where situations changes within very quick period of time. To handle the uncertain external pressures of capital market accurate information plays significant roles. Those uncertain external pressures cannot be managed with the help of traditional budget. Some extra supporting systems are required to manage the situation. Capital market requires suitable variance reports. Those variances can be calculated with the support of some questions like “how and “what”. Those important questions are being considered in the case of traditional budget. Traditional budget focuses towards the short term financial performances. It ignores various driving forces related with the values of shareholders. It means the tool is highly rigid in terms shareholder’s value creation. As far as the capital market is concerned, share holders and investors are the backbones or nerve centres of the organizations but with the traditional budget those backbones and nerve centres are not taken care of properly. It is a significant limitation of traditional budget. Traditional budget always follow top down approaches from the management. In the current business context frontline empowerment is highly important but that frontline empowerment is not possible with traditional budget. That is why traditional budget is not suitable for empowering people. In traditional budget several departments have their own budgets. It creates high level of barriers between several departments. That means traditional budget does not encourage knowledge sharing among the various departments. Interdepartmental knowledge sharing is highly important. That thing is not possible with the traditional budget. This is an utter limitation of the traditional budget. It is often being noticed that, traditional budget accounts for some amount of costs. In most of the cases costs associated with budget preparation is higher than the perceived benefit out of the budget. It indicates that traditional budget has high level of rigidity in terms benefit generation is concerned (Otley, 2001). Traditional budget is an annual ritual that has in depth presence into the organizational context but there is high level of uncertainty is associated with this system, as the system absorb too much time. Traditional budget has enough scope of unreliability and cumbersomeness. All these negative factors have highlighted the level of rigidity associated with the traditional budget. In spite of all these negative factors most of the organizations are carrying on the legacy of traditional budget into their organizations. According to the study of global best practice, managers across the organizations only spend one fifth of their total time for the purpose of data analyzing and managers spend rest of the time for the purpose of data collection for the preparation of budget. It reinforces the fact that the system is highly time consuming in nature. With the changing business environment firm should adjust its operational activities but traditional budgets are being made for at least one year time period. It means the process cannot offer any interim adjustments highly required for the companies. Traditional budget does not consider involvement of uncertainty related with a business. That means it is unable to provide the required amount of flexibility to the organizations. According to Abernethy and Brownell, traditional budget alone cannot provide organizational flexibility. It requires supports of the other process. He also added that importance of the traditional budget cannot be ignored totally, but it requires something extra. All the above arguments and discussions are indicating that traditional budget is a rigid tool but it should not be discarded totally. Conclusion The above essay has significantly analyzed the topic. During the course of this essay various real examples and figures have indicated that, traditional budget is a rigid tool. The tool has left behind its glorious days. Currently the tool has lost its significance greatly. Organizations across the world are searching for the alternative tools which can provide high degree of flexibilities and on time accurate information. During the course of this study one thing has been noticed that still most of the organizations across the world are continuing with this strategy because they want to build upon the tool. In spite of so many criticisms across the global fraternity, large numbers of organizations across the world has not been able to discard this tool totally. It is being observed that several organizations are using combination of traditional budget and other tools simultaneously to get optimum benefit of various tools. It shows that in practice they have not able to discard this rigid tool totally. One thing can be easily concluded from this essay i.e. without any shadow of doubt traditional budget is a rigid tool but still it should not be discarded totally in practice. It should be restructured or redesigned suitably. References Bourmistrov, A. & Kaarbøe, K., 2013. “From comfort to stretch zones: A field study of two multinational companies applying “beyond budgeting” ideas”, Management Accounting Research. Vol. 24 (3), pp. 196-211. Libby, T. and Lindsay, R. M., 2007. “Beyond Budgeting or Better Budgeting? – IMA members express their views”, Strategic Finance. Vol. 89 (2), pp. 46-51. Libby, T. and Lindsay, R. M., 2010. “Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice”.Management Accounting Research. Vol. 21 (1), pp. 56-75. Malmi, T. & Brown, D. 2008.“Management control systems as a package – Opportunities, challenges and research directions”, Management Accounting Research. Vol. 19 (4), pp. 287-300. Marcino, G. R., 2000. “Obliterate tradition budgeting”. Financial Executive. Vol. 16 (6), pp. 29-31. Otley, D.,2001. “Extending the boundaries of management accounting research”. British Accounting Review. Vol. 33, (3). pp.243-261. Ryan, B., 2007. “Budgeting, the individual and the capital market: a case of fiscal stress”. Accounting Forum, 31, (4), pp. 384-397. Shields, J. F. and Shields, M. D., 1998. “Antecedents of participative budgeting”. Accounting, Organizations and Society. Vol. 23 (1), pp. 49-76. Van der Stede, W., 2000. “The relationship between two consequences of budgetary control”. 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