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The traditional budgeting process

The Traditional Budgeting Process 1
THE TRADITIONAL BUDGETING PROCESS
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The Traditional Budgeting Process 2
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.
The Traditional Budgeting Process 3
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
The Traditional Budgeting Process 4
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.
The Traditional Budgeting Process 5
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;
The Traditional Budgeting Process 6
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
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to rolling budgets and forecasts as a means to counter the rigidity of traditional budgets (Hayes
2002).
A continuous budget also commonly referred to as a rolling budget is a financial planning
tool that is updated continuously so that the allocated period of planning remains unchanged,
while the actual period that is covered within the budget varies (Hope & Fraser 2005). For
instance, as each quarter passes, the one-year continuous budget is prolonged by one quarter, so
that there is always an annual budget in place. This results to an up-to-date, accurate and cost
effective budget, integrating all the current data. In a continuous budget, information is routinely
updated to include current information reflecting varying market trends, business or industry
conditions. Rolling budgets are regarded to offer best present-day estimations as to the
company’s operational and financial performance over a certain period.
Rolling budgets are updated continuously rather than semi-annually or quarterly. This
implies that they are therefore more precise and need little amounts of time to be updated as
compared to traditional budgetary planning model. In a traditional budgetary model, planning for
a new budget starts afresh and involves the process of marshaling up resources from the
grassroots. Rolling budgets on the other hand involves minimal modification s as the budgets are
regularly updated. It is through this process that lot of time and physical, human and financial
resources are saved.
Whereas the traditional budgetary system ties down the management and staff performance to
the budget, the rolling budgets provide an environment for competition to thrive.
Companies in a rolling budget have some degree of freedom to adjust to suit market
inconsistencies and changes. The management can focus on achieving high returns and results by
putting their attention on outdoing competition. For instance, an organization can employ main
The Traditional Budgeting Process 8
industry metrics to estimate its performance against market leaders in the industry, and using
those results to benchmark and re-adjust current performance to suit market trends.
Figure 1: Major differences between New Beyond Budgeting Model and Traditional Budgeting
Source: Who Needs Budgets (2003).
Traditional Budgeting
Management Model
Rolling Budgets and Forecasts
Management Model
Targets and Rewards
Incremental Targets, Fixed
Incentives
Stretch Goals, Relative
Targets and rewards.
Planning and Controls
Fixed Annual Plans, Variance
Controls
Continuous Planning KPI’s
and rolling forecasts
Resource and Coordination
Pre-allocated resources,
Central Coordination
Resources on demand,
Dynamic coordination
Organizational Culture
Central Control, Focus on
Managing numbers
Local Control of goals and
plans, Focus on value creation.
Application of the Continuous budgets in the Private Sector:
In the Private Sector, this method can be most favorable because the focus shifts from
internal competition to beating other managers and competitors in the market. With such a
setting, companies automatically adjust to the winning formulae by focusing all their energies to
beating the competition. Rolling budgets also acts as a motivator, challenging staff members
while providing clear guidelines and responsibilities. The reward system within the
organizational structure of rolling budgets focuses on teams and not individuals. This again,
motivates staff members to come up with winning ideas, placing the market standards as the
The Traditional Budgeting Process 9
benchmark. In conclusion, rolling budgets allows managers and the executive to make rational
decisions, removing unnecessary spending that put pressure on resources.
The rolling Budgeting method is suggested for organizations and companies that are
undergoing radical transformation, companies who are very young in the industry, organizations
that are experiencing quick growth trends, where realized results are significantly different from
the planned amounts (Libby and Lindsay, n.d.). Emphasis of rolling budgets should be placed on
vital variables such as costs, sales, orders, cash flows and profits because these variables are
significantly important for companies and should be uninterruptedly observed.
Response to Change:
Many European corporations have initiated the idea of shifting away from the traditional
way of budgeting. European markets tend to be less regulated, thus promoting a favorable market
for growth and development. Likewise, in the United States, markets have a short-term mentality
because of the effects of quarterly reporting on earnings, a common feature influenced by the
Wall Street. Companies are therefore, involuntarily pressed to stick to the traditional way of
budgeting, which is watched closely by Wall Street, creating little room for any flexibility. As a
result of this, many corporations have been defiant on any changes towards a more flexible way
of budgeting.
However, in the current past, there has been willingness by some customers to try out
rolling forecasts, with a few of them adapting to the new budgeting style, while still maintaining
the traditional budgeting system. The ultimate objective is that in due course, the concept of the
stop-and start and the calendar year will become insignificant.
The goal is that in due course the concept of the calendar year and the stop-and-start budget will
become less and insignificant.
The Traditional Budgeting Process 10
Workscited:
BOGSNES, B. (2009). Implementing beyond budgeting: unlocking the performance potential.
Hoboken, N.J., John Wiley & Sons.
BUTZ, C. (2011). Role and Effects of Budgeting in Managerial Practice. Mu
̈
nchen, GRIN
Verlag GmbH. http://nbn-resolving.de/urn:nbn:de:101:1-20110815378.
HACKETT GROUP (FIRME). (2003). The book of numbers. Hudson, Ohio, The Hackett Group.
HAYES, J. (2002). The theory and practice of change management. Houndmills, Basingstoke,
Hampshire, Palgrave.
HOPE, J., & FRASER, R. (1999). Beyond budgeting ...: breaking through the barrier to 'the
third wave'.
HOPE, J., & FRASER, R. (2003). Who needs budgets? Boston, Mass, Harvard Business School
Pub.
HOPE, J., & FRASER, R. (2005). Beyond budgeting: how managers can break free from the
annual performance trap. Boston, Mass, Harvard Business School Press.
Libby, T. and Lindsay, M. (n.d.). Beyond Budgeting or Budgeting Reconsidered? A
Comprehensive Survey of North American Managers' Views. SSRN Journal.
The Traditional Budgeting Process 11
ROHM, S. (2007). Are traditional budgeting practices out of kilter with companies' competitive
environment. Mu
̈
nchen, GRIN Verlag GmbH. http://nbn-resolving.de/urn:nbn:de:101:1-
2010081310999.
WELCH, J., & WELCH, S. (2014). Winning the ultimate business how-to book. [S.l.],
HarperCollins e-Books. http://rbdigital.oneclickdigital.com.

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