Advanced Management Accounting
Essay: “Traditional budgeting is counterproductive in today’s fast paced and highly competitive environment. Instead of tinkering with current budgeting systems, managers would be better off abandoning budgeting altogether – that is, companies should move beyond budgeting.” Discuss
In the worsening economic conditions we live in today the question of the efficiency of budgets is constantly being discussed. “The usefulness of budgets has generated much recent discussion and debate. Though budgets are useful for coordination, communication, and performance evaluation, many people consider them the cause of gaming and earnings manipulation by managers, time-consuming and costly to develop, and a barrier to change.”(Murray-Lindsay and Libby, 2007) Van Mourik (2006) states, “Research suggests that 80% of companies are dissatisfied with their planning and budgeting processes and it has been estimated that these processes use up to 20% of all management time.” Research completed by Schmidt (1992) states, “In a study of 10 large energy, transportation and banking companies, we found that, on average, the equivalent of 5% of all staff employees were devoted full-time to budgeting activities. At one of these companies, which has a staff-support team of 3,000 employees, 160 employees devote time to aspect of budgeting. “Total budgetary costs in this company “may exceed $20 million a year”. I believe if a company is investing this much time and money in the process they should trust it whole heartedly but alas even a company with that much committed to the process are voicing their concerns at the process. Jack Welch, former CEO of General Electric, is attributed as saying, “the budget is the bane of corporate America.” (Daum, 2002) There are those that plump for the abolishing of budgets altogether, “Budgeting, as most corporations practice it, should be abolished. That may sound like a radical proposition, but it would be merely the culmination of long-running efforts to transform organizations from centralized hierarchies into devolved networks that allow for nimble adjustments to market conditions.” (Fraser and Hope, 2003) On the other side of the argument lie those who will openly agree that that the current budgeting techniques are not without their faults but they argue for the adaption of current techniques for the improvement of the company as a whole. “In recent times, headlines have appeared whose controversial nature have gained attention, for example ‘beyond budgeting’ and ‘who needs budgets?’ (Hope and Fraser, 1997, 2000) and which might have great emotional appeal to managers. As we shall see, less controversial and arguably, more appropriate, alternative headlines could be ‘time to change the nature of our budgets’ and ‘time to change how we use budgets’. (Van Mourik, 2006) In this paper I will outline:
1. The problems with current budgeting.
2. The arguments for abandoning budgets altogether.
3. The adaption of current budgeting techniques.
4. Give my thoughts on which is the best way forward for modern day budgeting. Criticisms of Budgeting
Budgets as they stand currently are laden with criticisms. “Our study indicates that the budget process is obsolete given today’s economy, resulting in documents that are time-consuming to produce, of little predictive value, subject to gamesmanship and, quite frankly, out of date by the time they’re implemented.” (Doucet, 2002) “The budgeting process can often be bureaucratic and expensive, budgeting can fail to meet the needs of managers in competitive environments and budget systems can lead to managerial ‘gaming’ of the numbers.” (Lyne, 2004) “Budgeting seems almost totally divorced from the company’s overall strategic direction.” (Bourne, 2004) I feel that a document that is intended to help the company as a whole should at the very least be aligned with the company’s strategic goals. “Good...
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