BUDGETING

Traditional & Beyond Budgeting

Table of Content

Introduction2

Discussion2

Traditional Budgeting2

Application of Traditional Budgeting3

Comparison of Two Models4

Advantages and Disadvantages of the Traditional Budgeting4

Advantages of Traditional Budgeting4

Disadvantages of Traditional Budgeting6

Beyond Budgeting Model8

Application of Beyond Budgeting8

Advantages and Disadvantages of the Beyond Budgeting9

Advantages of Beyond Budgeting9

Disadvantages of Beyond Budgeting10

Controls of Beyond Budgeting11

Successful Implementation of the Beyond Budgeting Model12

Why Beyond Budgeting is Considered Better than Traditional Budgeting13

Conclusion14

References15

Appendix17

The Two Budgeting Models17

Traditional & Beyond Budgeting

Introduction

Due to the rapidly changing global conditions such as the Global Financial Crisis (2007), fluctuating energy prices and ever increasing competition from an increasingly globalized world, companies face very uncertain economic conditions. In this economy organizations have to stay ahead of the competition by rebuilding themselves. But they also have to have more complex managerial tools to control operations and monitor stakeholder satisfaction. In the past these roles of planning and controlling were performed by the traditional budgeting system but now this system has become outmoded and outdated. Some organisations such as Svenska Handelsbanken have completely abandoned budgeting to replace it with a culture of decentralization and adaptive management. These companies have come out on top. Here we compare the two extremes: the static traditional budgeting model and the 'no budget' beyond budgeting model (Daum, 2002, pp. 2).

Discussion

Traditional Budgeting

Traditional budgeting encompasses basic budgeting and other aspects of a centralized corporation from centralization and strategic plans to annual budgets and controls to stay within the budgetary limitations. Budgeting in essence is the quantification of qualitative objectives i.e. stating visions of the future in monetary form. A budget is a detailed plan showing how assets are to be acquired and spent over a specific time period. (See Appendix 1)

Application of Traditional Budgeting

Typically traditional budgeting means that senior management made the strategic management decisions and allocated resources. The lower managers then implement those decisions while keeping in line with the goals that have been derived from the strategic management plan. The budget is the main tool to plan, coordinate and control resources (Carter et.al, 1997, pp. 11).

The main steps in a traditional budgeting process include:

Identifying organizational objectives and goals which can be achieved after doing a SWOT analysis (consisting of an external audit of a firm's external opportunities and threats and an internal audit of its strengths and weaknesses).

Including managers of various departments to provide the relevant information for which they are responsible.

Forecasting sales for a sales-driven business in a budgetary period (for banks, forecasting usually is deposit-driven).

Estimating the cost (period and product) to be included in an income statement.

Prioritising capital expenditure e.g. investment in machinery.

Converting accrual accounting into cash accounting to determine the free cash flow.

Preparing pro forma financial statements based on projected ratios.

Reconciling the budgeted financial performance results with goals established in the first step.

Comparison of Two Models

In this report, the two underlying budgeting models will be compared with each other on the basis of their advantages and disadvantages. The advantages and disadvantages of traditional budgeting model are given below:

Advantages and Disadvantages of the Traditional Budgeting

Advantages of Traditional Budgeting

The various roles performed by traditional budgeting (which might ...