Impacts of Traditional Budgeting on Management

Impacts of Traditional Budgeting on Management

1. Time-consuming

One of the limitations related to the application of traditional budgeting is the consumption of much management time. The process of budgeting of sales and business operations takes much time resulting in untimely predictions and budgeting. The process takes approximately 20% of management time, limiting other management operations. According to research, the traditional budgeting process ends up implementing plans on product outputs rather than implementing production processes. Traditional budgeting takes approximately five to six months of management time, with the rest of the time being spend in implementations (Popesko, Novak, Papadaki, and Hrabec, 2015). This process captures the management’s creativity and management roles, limiting productivity innovations within management. Traditional budgeting involves scaling the industry’s past events in developing finance structures. The process exerts more consideration in past events of the organization’s performance leading to management neglecting current market trends and future projections.

Traditional budgeting timing affects organizational operations that require fast decision making, such as planning on costs, therefore affecting the overall performance of the organization. The budgeting tool takes up 20 – 30% of the operation period (usually a year) and generally affects operations that happen within its creation period. According to Lindsay and Libby, (2010), traditional budgeting as a tool of management limits the company’s management in structuring innovations in terms of time and space. The fact that the tools take up much time, the management board may lack time to identify market trends and in planning on adjustments on current events. The tool’s untimeliness also proves traditional budgeting less useful to upfront financial events such as paying employee salary and tackling emergencies (Uyar, 2009). Fortunately, studies indicate that management boards in organizations have identified failures in the tool, and most of the organizations decided on leaving the management tool. In contrast, others intend to improve the process.

1. Traditional Budgeting is Unresponsive to Current Operations

The creation and implementation of traditional budgeting and other budgeting tools attract unmeasured calls of action that limit the operation of the company in the long-term. According to Eckholm and Wallin, (2000), budget systems take up considerable business flaws, such as mismanagement of funds, misuse of managerial roles, embezzlement of funds, and other faulty activities that affect consumer satisfaction, employee development and the long-term growth of the organization. The underlying cause is the downward mode of decision making.

The hierarchical decision-making module with upward delivery of information disregards insights and feedback on firm operations from consumers and low-level employees. Decision-making is carried out by top management in the firm. Some of the disadvantages with the model is allowing top managers in controlling the firm’s finance without the intervention of third parties or other employees. Employees in the top ranks, therefore, take this opportunity to make less strategic decisions that affect the company’s long-term operations (Popesko, Novak, Papadaki, and Hrabec, 2015). The management board has complete control over a firm’s finances, and are more likely to operate on self-directed interests. This makes the management tool, less responsive to the firm’s operations since the operations targeted are not satisfied.

Traditional budgeting exerts unnecessary focus on past events, therefore limiting focus on current requirements and company goals. Budgeting implements a fixed management policy on organizations that limit the organization’s motive of continuous improvement since the operations of the company are fixed to a specific list. Traditional budgeting relies on past organizational data while generating plans for the management of funds and cash flows. Therefore, managers spend most of the time focusing on past data rather than focusing on the present performances of the organization. The management, therefore, neglects customer preference, employee development, and short-term factors that affect the organization’s performance (Uyar, 2009). Collectively, the neglected events affect the company’s performance in the long-term, such as incompetence among employees, and loss of customers or clients due to dissatisfaction.

References

Ekholm, B. and Wallin, J., 2000. Is the annual budget really dead?. European Accounting Review, 9(4), pp.519-539.

Libby, T. and Lindsay, R., 2010. Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research, 21(1), pp.56-75.

Popesko, B., Novak, P., Papadaki, S. and Hrabec, D., 2015. Are the Traditional Budgets still Prevalent: the Survey of the Czech Firms Budgeting Practices. Transformations in Business and Economics, 14(3C), pp.42-57.

Uyar, A., 2009. An Evaluation of Budgeting Approaches: Traditional Budgeting, Better Budgeting, and Beyond Budgeting. Journal of Academic Studies, 11.