analysis of the effects of Traditional Budgeting on managerial practices

analysis of the effects of Traditional Budgeting on managerial practices

Using Traditional Budget, managers focus on the past rather than on present and future issues of an organization.

Introduction

Though the traditional budget has been the main form of budgeting used for years in organizations, it has gained very intense criticisms in recent years. There is an argument that traditional budgeting makes an organization and its managers focus on past events, rather than thinking about current and future issues of the organizations (ACCA, 2020). This argument states that instead of managers concentrating on their current realities, they are instead fixated on the previous years’ fact of events. This, in turn, creates inflexibility with regards to responding to the ongoing management needs. This view has led to people devising new ways of budgeting, which, according to them, solves the issue of past orientation. Focusing on how traditional budgeting works and its effects with regards to appropriate management, this paper will analyze the above criticism to bring about an informed conclusion on the matter.

Analysis

Considering how the traditional budget works, there is a fear that this statement is true. The traditional budget functions based on the previous year’s performance. According to (Nguyen, Weigel & Hiebl, 2018), to create a budget using the traditional budget method, a manager takes the previous year’s performance and uses it as the base for the next year’s financial plan. The current year’s budget is therefore prepared by making changes to the previous year’s budget by adjusting the expenses based on the inflation rate, consumer demand, market situation, and other aspects in a budget. The new adjustments become a guide on how the New Year will roll out in terms of expectations and performance. As a base, the previous year’s data becomes the benchmark for the coming year’s achievements so that all activities in the following year are gauged as according to what happened in the previous year. In this case, the organization is only past-oriented and can only function as well as the glass ceiling of last year’s results was.

The best that a company can go when it is using a traditional budget is with regards to what the past’s best performance stated. This view does not challenge an organization to pursue the penetration of new horizons, as the standards they are working with is already familiar, having been achieved before. Though it is easy to implement because all the components are familiar having been worked on previously, the issue comes in when one considers how the company views the future. The future is approached on what the past looked like. Such that there is no novelty, but only perfections of repeated ways of doing things. The overall attitude of the organization and the managers towards management is limited to the already known experiences. Therefore nothing about future matters. Neither are they equipped or ready to embrace changes.

Though the use of traditional budget creates stability in the functionality of the organization, it does not guarantee progress. Confidence is key to a company’s healthy performance, as there needs to be an atmosphere of immovability, and everything being under control in an organization. It is a good thing to have this ambiance. However, more critical to a company is progress. In the previous paragraph, it was clear that the management of a company using the traditional budget is past-oriented. Analyzing this aspect shows that it is an obsession with stability in a company’s operation that brings about the focus in the past. In their minds could be the thought, “if this strategy worked in the past, then it can work now.” This hinders progress as this focus is not on the goals and objectives of the organization but rather, on the cost reduction and sustainability, practices that cannot go hand in hand with the aspect of progress. A company’s growth can be achieved when working on goals and objectives, which, from time to time, facilitates monumental steps toward achieving an organization’s vision. Progress works with flexibility and attending to the current issues using the current appropriate measures. On the contrary, the traditional budget is about what worked in past management practices. The adjustments made can only go as far as affecting minimal changes. It is essential to note that the past is vital, but only as history and reference point. But not as a control. Adjustments need to be made wholly to budgets, as (Nguyen, Weigel & Hiebl, 2018) state, to enable effective management and progress. The current business world is so dynamic that a budget that worked last year could fail to effect success in the next year. In a company, current year progress depends so much on a fresh budget plan.

Companies thrive when there is flexibility, an aspect that traditional budgeting fails to bring about. According to (Marina, Rodriguez & Margarida, 2016), a traditional budget is fixed and rigid to changes. As a base, the previous year’s performance becomes control of how everything is done, its details entering into the budget plan. Even more important to note is that once prepared and at work, a traditional budget cannot be altered regardless of the need. An organization has to work with this plan to the end of the year. After which another budget is prepared, which could now capture the needs throughout the year, very late. With its rigidness, this budget type is unable to respond to the market needs that might require an organization to make amendments in its operations. For instance, there might be a new competitor in the market or even change in market conditions where an organization cannot make it through unless changes are made. In this case, a company will have to work through the year with poor performance because the traditional budget cannot allow for the adaption of new strategies before the financial year ends. The current business world requires high levels of flexibility. The market is so dynamic, with sustainability and progress depends on the company’s ability to make appropriate changes now and then. A company needs to make strategies from time to time to face the challenges in the market efficiently. So, though the traditional budget has its share of advantages, the fact that it lacks flexibility makes it a disadvantaged approach to planning. The managers have to stick to their initial plan regardless of the conditions. This way, the best they can do is focus on this initial plan and utilize it so that it becomes efficient in the company’s operations.

Resource allocation in traditional budgeting is based on assignments from previous budgets (Marina, Rodriguez & Margarida, 2016). Here, the decisions made and the priorities established in the past are likely to remain unchanged in future resource allocations. In this case, resource allocation depends on past levels without taking into consideration projects, which should be ranked higher according to their importance to the survival of the organization. There is no deliberation on how the future could turn out differently, and the need to vary the allocations to fit the possible changes, if a certain amount of resources working in the previous years, it should work in the years to come too.  This aspect makes the process of resource allocation passive with regards to the prospective needs, as everything is predetermined. With this rationale in the resource allocation procedure, the managers are fixated in the past. The managers will manage these resources with the approach they have used in the past regardless of the current company’s needs. Profits need to be made, and a predetermined peak as set by the past performances is aimed at. So, instead of meeting the company’s current need using the resources at hand, a manager becomes busy ensuring that the allocated resources enable the company to hit the previous peaks with regards to revenues and continuity. In turn, this makes the company miss out on better utilization of resources, as the usage is already fixed. With a traditional budget, a manager cannot make funds available for other than the already laid down tasks. However, appropriate utilization involves making resources available to operations when required (Nguyen, Weigel & Hiebl, 2018). Traditional budget limits the proper usage of resources, as new aspects that could serve the company better cannot be invested in as the already laid down plans are to be followed to the latter.

Conclusion

Traditional budgeting has so many advantages that make people use it. However, an objective analysis into how it works sheds light on how it hinders managers from focusing on current and future issues of their organization. This approach to budgeting is based on past performances, with an assumption that the future will be no different. Without considering how the future could be different, the managers stick to the previous patterns. They use it as a guide to management and end up missing on attending to the present and the future issues of the organization. Their flexibility is impossible, as the budget does not provide a platform for elasticity in the face of unanticipated problems.

 

Reference List

ACCA. (2020). Beyond budgeting. Retrieved 11 March 2020, from https://www.accaglobal.com/gb/en/student/exam-support-resources/professional-exams-study-resources/p5/technical-articles/beyond-budgeting.html

Marina, C., Rodriguez, L., & Margarida, S. (2016). The Role of Management Accounting Systems in Public Hospitals and the Construction of Budgets. In Management Association, Information Resources, Public Health, and Welfare: Concepts, Methodologies, Tools, and Applications: Concepts, Methodologies, Tools, and Applications (pp. 289 – 306). Hershey: IGI Global.

Nguyen, D., Weigel, C., & Hiebl, M. (2018). Beyond budgeting: review and research agenda. Journal of Accounting & Organizational Change, 14(3), 314-337. doi: 10.1108/jaoc-03-2017-0028

World Bank. (1998). Enhancing the role of government in the Pacific Island economies (pp. 33 – 43). Washington: The World Bank.