The Traditional Budgeting Process Research (Essay Sample)

THE TRADITIONAL BUDGETING PROCESS
by Student’s Name
Course code+name
Professor’s name
University name
City, State
Date of submission
Introduction:
Financial budgeting planning is a process that has been in use to estimate the revenues and anticipate expenditures over a long period. Very many multinational companies have adopted the budgeting process and made them an integral part of their planning processes and operations since its inception in the 1920’s. The ability of budgets to allocate and coordinate efficient use of resources through in-house communication and simultaneously controlling expenditure evaluation and authorization has made budgets a most popular tool for administrators and the management of companies to rely on. The popularity of the budgeting process has seen the technique remain unchanged in its use since its initial introduction into the business world. However, in its continued use over time, some managers have noticed some severe dysfunctional tendencies exhibited by the budgeting process.
Hope and Fraser (2003) argue that the traditional way of budgeting has gone “Out of Favor” with Organizations’ competitive business environment. Various other critics have echoed the disparagement towards traditional methods of the budgeting process terming it as “an unnecessary evil (Wallander 1999, Cited in Rohm 2007 p, 7). Others have developed popular phrases to disapprove of the traditional budgeting process, such as “The yearly Budget is Dead” (Gurton 1999, Cited in Rohm 2007 p, 7). The undesired negative tendencies demonstrated by the budgeting process have prompted various scholars to try to come up with ways and solutions to counter the adverse effects identified by financial managers such as budget gaming, budgeting bias and budget slacking among other issues. Several different contingency policies and theories have been established, and indirect and direct connections between employee motivations, business environment and budgets have been examined.
According to Hope and Fraser (1999a), huge American and European multinational companies have resolved to alternative methods and dismantled the budget. Increasing theoretical discussions have had effects on companies approach towards the traditional budgeting process. For example, research has shown that some Scandinavian organizations have recently started to adapt to new forms of strategic, operational and budgeting control process (Glader 1996, Cited in Rohm 2007 p, 10).Rolling predictions and forecasts are vital in future planning because they are quick to respond to shocks caused by unforeseen external factors. Hope and Fraser (2003b) state that only about 20% of companies alter their budgets within the economic year. The inflexibility attributed to strict adherence to budgetary planning is non-competitive in the current economic business market. Business analysts recommend rolling forecasts as an effective tool for controlling and observing changes in the short term.
The Traditional Budgeting Process:
In his award-winning book called ‘Winning’, the chairperson for General Electric Company Limited Jack Welch (2014) states that the budgeting process is one of the most ineffective practices in organizational management. He continues to say that budgeting slurps the time, energy, big dreams and fun out of a company. Most budgets are detrimental to a company’s road map to success. Most European company executives have shared in Jack Welch’s dislike for the traditional budgeting process. In light of this, they have slowly but surely adapted to rolling forecasts and other modernized methods of unceasing financial planning. In the recent past, more and more American business organizations are slowly shifting sides to the new ways of financial adaptive planning.
There are countless research reports that have been submitted on the issues of traditional budgeting by BBRT (Beyond Budgeting Round Table), an organization that is based in the Northern part of America. The organization has concluded that budgeting poses great blockade to transformation because of the extensive work. In one of its report, BBRT reports that on average, a regular organization devotes about three and a half months and about 30% of financial managers and senior executives’ time to the budgeting process. Some organizations are reportedly said to spend up to nine months in the budgeting process. Hacket Group (2003) discovered that a typical multinational company in the million-dollar category earners wasted as many as over 20,000 person-days per billion dollars of earnings summing up the yearly budget.
The Northern America regional director for Beyond Budgeting Round Table Company explains that the once significantly important instruments of control, budgets have become hazardous tools in today’s markets for global buyers and knowledge/information economy. Additionally, Budgets prevent flexible and fast market adaptation so that companies and organizations realize only a fraction of their potential. Budgets also often encourage deception, mistrust and endangerment to organizations transparency (Butz 2011).
Budgetary Problems:
Many organizations tie employee and executive rewards directly to performance against budgetary estimations and projections. This has been a common practice among organizations especially those that were formed before the first global depression. When this happens, employees aspire to bring down the performance expectations to suit achievable target levels. Therefore, employees are engaged with the management in discussions of possibly bringing down the budgetary estimated targets to achievable budgetary levels. For instance, for persons mandated with operating a revenue-generating department, it is more likely for them to try to reduce the estimated target, to look good after having exceeded the expectation.
Conversely, a manager responsible for managing a cost center will try to maximize on spending, regardless of whether the expenditure is necessary or not. From an incentive point of view, persons advocating for a larger expenditure pocket will look good, and the same cycle continues. The resultant effects of budgetary discussions with staff are that the budget becomes a continuous mediation with the organizations management, and rather than representing the real picture at the ground, ends up being an arbitrary and fictitious document.
Budgeting process costs too much, uses a lot of business capital and takes an elongated time to be fully completed. Depending on how big a company is, the budgeting process can take up to ten months of planning (Libby and Lindsay, n.d.). Most companies on a calendar financial period begin planning for the budget in the summer, ending the process in late October and sometimes December, or even in some instances, finishing the budgetary process after the commencement of the budget period. The budget process is tedious and time consuming with back and forth discussions involving many different stakeholders, which only compounds to the total sum of organizations resources used up in the budget process. In other cases, the employees and the management become entangled in internal politics usually associated with budget allocations. These sideshows usually overshadow the customers’ demands and expectations leading to poor quality service.
Budgets are inflexible, fixed, and often irrelevant. The traditional budget is a detailed process that involves proposals of detailed information from the lowest staff members to the management and right to the board regardless of any alterations that may need immediate action taken to correct a dire situation. Once the budget has been approved, there are no more changes that can be effected. The market conditions may change, or even the economic elements may need some changes done to suit the current market. New regulations may be introduced; unforeseen competition may enter into the market, new partnerships may emerge, new concepts or technology may necessitate a quick reaction from the company. Budgets are also perceived to strengthen the obstructions and barriers between sections and departments rather than boost sharing of knowledge. Budget estimations are also said to be short-term financial estimations in nature, and they tend to ignore important shareholder interests.
A survey done by the BBRT and APQC on forecasting, planning and budgeting discovered that about 55% of respondents claimed that the statistics applied in their research were altered and never represented the actual situation on ground, making them irrelevant within the first five months of the financial year. A leading researcher in that exercise noted that there is a tendency for budgets to differ as the situation at the ground tends to become unstable due to the accelerating nature of business markets. BBRT is cautious to clarify that Beyond Budgeting does not involve new techniques or tools. They explain that it is an administrative philosophy founded on a set of defining principles made from actual cases resulting to adaptive management performance (Hope & Fraser 2003).
Rolling Budgets and Forecasts:
Continued existence in an environment that is highly competitive means that corporate organizations must be innovative and flexible through the innovation and development of different services and products. Nevertheless, integrating the effects of product improvement and innovation into the traditional budgetary process can be a daunting task, especially if organizations have fixed budgets that are time specific. Budget reviews may be done from time to time depending on a company’s policy; however, the basic budget remains unchanged during the course of the financial year. In light of the above, many organizations have resulted to adapt to rolli...