Managerial Accounting – AVIMA 11
Henrique Antunes de Souza
The Traditional Budgeting
Beyond Budgeting: The Concept
Beyond Budgeting: The Benefits and a Comparative Analysis
A concept may go through changes over time, being reconsidered, reviewed, improved or even forgotten. In an environment where changes happen often, it’s usual to observe concepts and models being worn out and new or adapted approaches being introduced. In the field of business administration, the budgeting process has proved to be fundamental and highly recommended as a successful way of planning and controlling. Nonetheless, the current dynamic corporate environment has shown signs that the traditional budgeting no longer fits a company’s aim or it could even be an obstacle to growth. Considered to be an inflexible, a complex and a costly approach, the introduction of a new management instrument was charted (Frezatti, 2005). In order to better understand how executives foresaw the need of a new tool to better manage their companies, this paper will begin by discussing the traditional method of budgeting itself, followed by an analysis of the downsides and flaws identified by such approach. Thereby, after highlighting the ineffectiveness of the traditional method, an introduction of the Beyond Budgeting will be presented, showing the definition and principles of such scheme. Furthermore, in order to establish an in-depth investigation of the Beyond Budgeting, a comparative analysis with the previous approach will be provided along with the outcome, considering the benefits of such process as well as the possible pitfalls, leading to the conclusion of the paper. The Traditional Budgeting
This section aims to describe the main aspects and downsides surrounding the traditional approach of a budget, thereby allowing the reader to understand the motives behind the trend of changes plotted in the previous decades. Frezatti (2005) mentions that the traditional method of budgeting consists in establishing and developing long-term goals for the company. One of the main purposes of such approach is to secure that the company’s goals, objectives and standards are met. In more details, there is the elaboration of an annual budget, which should apply the decisions made by the organization’s strategic plan. In a way, the budget plays a role in the planning process as well as to the style of execution. Further in this paper, one may observe that the Beyond Budgeting approach tries to abolish the annual budget step (Frezatti, 2005). According to Welsh (1983), mentioned by Krom (2003), the traditional budgeting process has its benefits since it forces an anticipated analysis of the basic policies and requires an adequate organizational structure. Consequently, it defines clearly the distribution of responsibilities, which align their plan according to the ones previously established by the company as a whole. Moreover, the budgeting process allows the management to quantify what is necessary for an acceptable performance, thereby examining cautiously any possible opportunities before making any concrete decision. It also supports the controlling in a general way, since it shows the efficient and inefficient areas. Finally, it allows the company to measure it progress related to the previously established goals (Campos & Krom, 2006). All these aspects mentioned above might sound positive, but an in-depth analysis might show the contrary. According to Frazetti (2005), the traditional budgeting process centralizes the process where front line workers are told what to do by the head team office. It also focuses on cost reduction, not on creation of value, limiting the initiatives and keeping the planning and the execution separately instead of close (Frezatti, 2005). Complementarily, Hope and Fraser (2003)...
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