The traditional method of budgeting

The traditional method of budgeting

The traditional method of budgeting has been used in organizations for so long. However, most commentators suggest that the method tends to fix a company’s and response to proceedings in the ever-changing business environment. To ensure progressiveness, a transformation of the accounting system must be well-thought-out. In order to understand how executives, directors, and managers foresaw the need for a new method of managing their companies, it’s crucial to comprehend the traditional process of budgeting itself, followed by scrutiny of the shortcomings and errors identified by such tactics. Budgeting is a vital instrument in modern organizations that ensures operations are within the company’s strategy. The traditional budgeting process involves projecting expenses and revenues of a business for the coming year based on the preliminary budget. The traditional budget gives a template that justifies future predictions and, thereafter controlling the company’s expenses or sales. Modern managers need methods, such as the beyond budgeting strategy that can easily integrate with the current trends without demotivating employees. Therefore, the writer disapproves of the traditional process of budgeting, arguing that they are hindrances to new changes. The traditional method of budgeting is becoming less relevant in the current era hence prompting the need for beyond budgeting, which promotes flexibility, devolution, and value maximization.

Frezatti (2005) argues that the traditional budgeting entails establishing and developing long -term goals for the organization. The essence of budgeting is to ensure that the company’s goals, objectives, and standards are met. The budget plays a critical role during the planning and execution. That can be achieved through the elaboration of the annual budget, which applies the decisions made by the company’s strategic plan. The method ensures that the anticipated analysis of the basic policies and organizational structures are enforced. Subsequently, it defines clearly the allocated responsibilities, which align their strategy bestowing the ones established by the business as a whole. Additionally, the budgeting process consents the management to enumerate what is essential for satisfactory performance, thus examining thoughtfully any possible prospects before coming up with any solid decision. Lastly, budgeting allows the company to determine its progress by referring to the established goals and previous achievements (Campos & Krom,2006). All the above-mentioned aspects may sound positive, but the in-depth analysis might reveal otherwise. The traditional method of budgeting centralizes the process where front line workers receive instructions on what to do by their superiors in the offices.

This method has both advantages, which can benefit the company. For example, it helps managers to make steady decisions. The company could cut back, reduce some expenses, or look for other cheaper suppliers if the previous budget was exceeded. However, most managers, practitioners, and administrators have expressed their discontent with the budgeting process. Beyond budgeting, movements argue that continued use of traditional budgeting methods limits creativity because the presented budget concentrates on past events rather than the current and the future activities of the company. The dissatisfaction from commentators is justifiable because traditional budgeting drawbacks such as low change responsiveness, inefficiency, failure to inspire desirable behaviors and discontinuation from strategic plan are increasingly seen as the barrier to progressive managers. The beyond budgeting solves the problem created using traditional procedures since they are usually too complex, long, and hard to adjust.

Modern organizations operate under varying perspectives and hence the need to rethink about the budgeting processes. Budgeting helps to give some executives control; others argue that budgeting is a pointless exercise if factors affecting businesses keep changing. Companies should focus more on the way resources are deployed and how to add value to the company. Traditional budgeting is less effective in modern businesses because things are more dynamic, turbulent, and uncertain. Innovations and technological advancements mostly determine the success of a company. Budgets may act as a barrier to progressive innovations and responsiveness to changes. Operating with a budget whose finances were allocated nearly a year earlier may hinder managers from responding to changes fast in today’s business environment.

The challenges faced by executives, managers, and other practitioners prompted for disregarding the traditional budgeting method. These methods present inaccurate goals of an organization. Some managers or business owners are tempted to make unrealistic projections so that the results look more appealing. Such incidents don’t solve long term problems despite boosting morale. Also, some experts argue that traditional budgets take little time to prepare compared to other methods such as the zero-based budget. However, it’s still time-consuming since you need to spend more time studying the past year’s budget and the actual results. The time taken to determine the necessary changes within the new budget takes away from the time for running the business. In this kind of budgeting, managers spend more time sorting things out in spreadsheets by comparing expenditures of the previous year and with the expected expenditure by balancing inflations and other influential factors.

Despite spending more time on the budget than running the business, the process of budgeting doesn’t encourage desirable behaviors. Most companies work with a projected target. Employees need to be constantly motivated to work, innovate, and create more valuable products. Therefore, efforts in terms of money, time, and energy should be directed towards those departments to encourage productivity and to reach the set goals. These behaviors cannot improve because the budget is created based on past achievements. On the contrary, beyond budgeting model forced managers to consider strengths, threats, weaknesses, and opportunities. That encourages workers to work smart because it creates and fosters a performance environment founded on competitive victory. The management sets targets based on the external benchmarks as opposed to targets set based on internal discussions. People start working to beat the competition rather than competing against one another. For example, yahoo workers can start working harder through innovations to create better products compared to those offered by Google or vice versa. That creates value within the company since the manager will provide more support towards such achievements. If the product looks more promising in terms of the value addition, it’s worth allocating more financing than relying on the old budget that limits progressive creativity.

Furthermore, budgeting does not encourage workers to work beyond their assigned duties. Having the beyond budget procedures motivates people to be responsible since they are rewarded as a team. Beyond budget makes managers results-oriented rather than meeting the budget since it gives people the freedom to act without unnecessary constraints. Having a budget strengthens bureaucracy and vertical-control; hence some workers feel undervalued. Some low-level managers may not have the authority to spend money for the benefit the company simply because there are restrictions that allow only top managers to assign budgets. Instead of promoting knowledge sharing, the budget supports departmental barriers, which might hinder interactions at all levels of the organization.

Beyond budgeting, the strategy is advantageous to businesses since it provides provisions for more adoptive procedures while allocating finances. The concepts decentralize the process, unlike in the traditional method, which allows only the executives and the directors to manage finances. The beyond budgeting strategy allows the entire management team to participate in the process of making the budget, which in turn boosts performance and organizational processes. According to Hope & Fraser (2003), decentralized management enables people to make quick decisions, hence creating enabling adequate reactions according to the demand. Therefore, beyond budget gives an opportunity for employees to focus on more effective and productive activities. In effect, leaders become more effective since they get more time to dedicate themselves to managing their juniors.

The purpose of the beyond budgeting methods is to solve shortcomings that the traditional method fails to address. Therefore, it should increase the adaptability of enterprises due to constant changes that affect business operations. Therefore, controllers must conceive and implement the best control methods. The management has to adopt the best performance management culture by backing required behaviors at all stages of the organization. The method ensures new possibilities for strategic management, which ensures resources are allocated in an adaptive and flexible manner. Beyond budgeting ensures that companies can operate effectively without a fixed annual budget. For instance, companies like German ALDI Group and Swedish retail banks have operated successfully for many years without budgets. The author implies that the model is relevant to knowledge-based companies that make relevance in a developed economy. The method can provide other companies due to the ever-changing circumstances in which they function. Any change is not easily adopted; hence it’s conflict and difficulties are expected. The method can successfully work if considerable organizational, cultural, and managerial changes are underpinned. This model enables the organization to discover the full potential of employees hence leading to high productivity. The beyond budgeting method came into existence because due to the vast dissatisfaction by the general management approach of budgeting. Even though advocates of the beyond budgeting put massive efforts to come up with the concept, other companies have chosen to improve budgets instead of abandoning them. The factors hindering the implementation of beyond budgeting include fear for change; it’s not easy to operate without budgets, lack of internal benchmarks, a limited number of users, and pressure to deliver paybacks.