Over the years, budgeting has been considered as the one of the most important functions of accounting and management system. However with the passage of time, the focus of management has changed from traditional budgeting to beyond budgeting. One of the reasons for this change is that organizations have realized that investing resources and time in preparing budgets is not fruitful.
The research will therefore be analyzing the reasons why organizations have started to change their focus from the traditional budgeting to beyond budgeting. This report will define what traditional budgeting is and its uses in organizations and then the report will differentiate between traditional budgeting and beyond budgeting. After that the report will analyze cases of some of the organizations that have implemented beyond budgeting techniques and then examine whether these organizations have been successful or not.
Budgeting and its uses
Budgeting has been used by organizations over the years for different purposes. Budgeting helps the management to identify the costs and revenues of the organization in advance. Over the years, many decisions have been made after analyzing the budgets prepared by the organizations. Van der Stede and Wim (2000) have claimed that budgeting is one of the reasons for the success of the companies. Using budget, companies are able to predict the revenues and costs and thus they are able to plan their activities and manage their cash flows accordingly.
Budgeting has been used for several purposes over the years as Bunce, Fraser, and Woodcock, (1995, p. 255) have suggested and some of the most important purposes for which budgeting has been used by different organizations around the world are forecasting financial statements, managing the cash flows of the business, resource planning, setting objectives, evaluating the performances etc. The following diagram is an extract from the research of Bunce, Fraser, and Woodcock (1995) and it shows the use of budgeting in organizations and it can be found that budgeting is not only used for financial purposes but it is also used for operational purposes as well.
(Bunce, Fraser, and Woodcock, 1995, p. 255)
Difference between traditional budgeting and beyond budgeting
Beyond budgeting is different from traditional budgeting as in traditional budgeting the front line managers have the authority to make decisions according to the situation (Daum, 2001). According to traditional budgeting, front line managers have sufficient knowledge and they are capable enough to make decisions themselves and therefore this technique encourages decentralization. However in traditional budgeting, the decision making is centralized and the top management makes the decisions. In the case of beyond budgeting, the top management plays the supporting role and helps the front line managers to make sure that the customers are satisfied (Player, 2003).
Different businesses have adapted the technique of beyond budgeting after realizing that investing in traditional budgeting is not profitable enough. This research report will analyze different companies that have adapted or changed their structure to adapt beyond budgeting. Some of the organizations that will be studied and examined in this research study will include; American Express, Aldi, SpareBank1, UBS Wealth Management and Business Banking and Guardian Industries Corporation. Most of these companies have previously been using traditional budgeting however they have changed their structure and have now started focusing on beyond budgeting technique instead of traditional budgeting techniques.
The conclusion of the research study will analyze the reasons why organizations have shifted their focus from the traditional methods of budgeting that they have adapted for years. Also after analyzing the case studies of different companies, this research report will also identify whether organizations can be profitable without using traditional budgeting or they still need to use the traditional concepts of budgeting.
Bunce, P., Fraser, R., and Woodcock, L. (1995). ‘Advanced budgeting: a journey to advanced management systems.’ Management Accounting Research, 6(3), 253-262
Daum, J. H. (2001). ‘Beyond Budgeting: A Model for Performance Management and Controlling in the 21st Century’, Controlling & Finance. Retrieved from http://www.juergendaum.de/articles/beyond_budgeting.en.pdf
Player, S. (2003). ‘Why some organizations go beyond budgeting.’ Journal of Corporate Accounting and Finance, 14(3), 3-9.
Van der Stede, W., and Wim A. (2000). ‘The Relationship between Two Consequences of Budget Controls: Budgetary Slack Creation and Managerial Short-term Orientation’, Accounting, Organizations & Society, 25, 609-622