Future of Budgeting

Topics: Budget, Budgets, Zero-based budgeting Pages: 23 (7079 words) Published: January 27, 2011

The past decades have seen criticisms of budgeting techniques as management cost controlling systems. We have seen many writers mention about the widespread dissatisfaction with the bureaucratic exercise in cost-cutting that budgeting is accused of having become. Budgets are accused of being out of touch with the needs of the modern business and said of taking too long, costing too much and encouraging all sorts of perverse behaviour.

However, it is generally accepted that budgeting is a necessary evil, and that its benefits outweighed its costs.

A budget is not only a means of planning for various revenue streams, a control mechanism for an administration to keep from spending too much, a procedure for controlling its units, a process to coordinate the many activities that an institution undertakes, and a way to communicate to all stakeholders a summarization of the activities that the various units will undertake, but it is also a technique for setting the organization’s priorities by allocating scarce resources to those activities that officials deem to be the most important and rationing it to those areas deemed less vital. Following the priorities set in a budget is a key element in determining the direction of the organization and its future success or failure, which is why it should be based on a formal plan, such as a strategic plan, that the institution is supposed to be following.

Yet with all these problems and criticisms , research in organisations seems to suggest that this that traditional budgeting remains widespread. Some claim that as many as 99% of European companies have a budget in place and no intention of abandoning it (Kennedy and Dugdale 1999:22 quoted in Vuorinen , CIMA website).

For most companies budgeting is the accounting tool for planning and control and a central importance issue for companies. Budgeting are seen as essential for good management of companies. In some ways, this is true. In order for a strategy to succeed, it’s important for the various departments within a company to collaborate with each other, employing effective communication and efficient control.

According to Upchurch (1998), a budget is a quantified plan targeted at achievement of an organisation’s objectives. It is a form of management tool that stipulates the intended goals of an organisation and the direction to which all organisational activities must follow to achieve the set targets and also sets standards for performance measurement. Uyar (2009) adds that , Libby and Lindsay'" define the traditional budgeting process as it operates within the top-down (hierarchical) "command and control" model in which decisions, resources, and rewards flow down, while information flows back up as in Figure 1 below. They say that the role of line management is simply to operate the established facilities, systems, and personnel according to senior management's rules, regulations and pre-determined targets.

Steven adds that , Conventional budgeting is normally an incremental approach, which uses a company’s existing operations and current cost structure to determine budget costs. The starting point for this process is to obtain forecast costs for the current year. The next step is to make an adjustment to forecast costs based on budgeted output – eg, sales. The sales office budget includes an inflation adjustment, since the budget selling price has been increased in line with the expected rate of inflation.

Linn 2008 adds that a budget is just as important for nonprofit organizations, which by their nature are not required to maximize their profits, as it is for businesses, which exist to bring the utmost return on the stockholders’ investments


Uses of budgets
As shown in Figure 1 , Organisations use budgets for different reasons. Most companies have historically seen budgeting as important due to their usefulness despite their deficiencies. They maybe used differently in...
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