Management Accounting: Budgeting Process

Critically discuss the challenges in today’s business environment and assess the relevance of budgeting in today’s business.

 

This study deals with understanding the limitations of annual budgeting process that is adopted by the companies at the time of making business decisions (Wilson, 2013). It has been criticized that annual budgeting is incompetent in meeting the demands of the competitive market in information age. The above statement has been argued and debated by bringing the limitations of annual budgeting system. In this particular assignment proper emphasis has been given on critically analyzing the challenges in recent business environment as well as assessing the relevance of budgeting in the business. Several measures had been identified that will help in mitigating the potential difficulties faced by annual budgeting system (Roche, 2014).

In the recent years, it has been found that yearly budgets are accused of being unable of meeting the demands of the spirited surroundings especially in the information age (Drury, 2015). Some of the critics (management consultants) are of the opinion and tried in persuading the companies for changing their management models as part of the criticism. This has been classified as hyperbole. It has been observed that some real actions had taken place in countries like Sweden whereby large companies have abandoned the traditional budgets as a whole. Academic researchers have even showed little interest in this particular phenomenon. The present segment deals with investigating the validity of the criticism as perceived by CFO (Chief Financial Officer) as well as other high-ranking officers especially in large Finnish companies (Mahon & McGowan, 2013). According to the result of the survey, few companies planned in abandoning the annual budget. At the same time, some number of respondents majorly represents companies that intend in holding on to the annual budget that indicate strong agreement considering the main elements of the criticism. Some of the respondents are of the opinion that alternative or complementary systems are mostly similar to existing Balanced Scorecard like financial forecasts and monitoring systems (Bourmistrov & Kaarbøe, 2013). Balanced Scorecard approach play important role as it maintains internal effectiveness as well as communicate information with the shareholders and other interested parties.

As rightly put forward by Roberts (2015), Traditional annual budgets belong to the ordinary decision-making tools that are used by organization for various purposes. Addition to that, these conventional budgets based upon given annual secretarial periods as well as associated with forecasting of simple monetary indicators for decentralization of business units. Budgeting is connected with the planning of activities that defines the designing of desired future as well as effective ways. On the contrary, budgets mean detailed plans or plans used for transforming into currency units. This means budgets give the strategic ideas that will be transformed into understandable operative actions (Petrick & Quinn, 2014).

According to Lohan (2013), there is some evidence noticed whereby traditional budgeting is based upon automatic alteration of non-financial forecasting in the monetary statements by focusing real needs of an association. In other words, it explains the problems related to rigidity of traditional budgets and this act as a restraint as well as inability in taking on board changes in a newly business environment. There is strong criticism noticed relating to traditional budgeting mechanisms (Bourmistrov & Kaarbøe, 2013). It majorly focus on incapability of traditional budgeting that reflects upon real performance of a particular organization. This will help in utilizing the performance that act as significant issue of worker assessment. On the contrary, other authors balance that traditional budgeting is a relic of the past ages as well as cannot be helpful for bringing change in circumstances as well as necessities in the innovative information age (Mahon & McGowan, 2013).

Budgeting as well as planning practices are facing dramatic changes in the present contemporary business environment (Kaplan & Norton, 2014). In other words, Traditional annual budgets are widely used for control purposes as well as criticized by limitations that have been replaced by flexible systems resulting to increased level of performance. The main cause of the trend reveals lack of flexibility in traditional budgets that is itself incapable for representing the relevant system of gauging performance. It has been noted that limitation of traditional budgets reveals inflexibility in connecting with changes in the business environment. This help in highlighting the increased unpredictability of business environment as well as bringing out the problems relating to rapid changes at the time of financial crisis that took place in the year 2008. In some circumstances, the expected study was the predictability of individual features of budgets that is relatively low whereby companies give accurate predictable future events. It is also intended for comparing the level of predictability of the budget features with given GDP indicators as used by measuring the economy fluctuation levels (Kaplan & Atkinson, 2015).

It has been noted that high level of predictability for a company revenues as well as material input prices leading to availability of input material from the suppliers (Horngren et al., 2013). In other words, least predictability was noticed at the time of understanding the ability of behavior of competitors. This reveals the predictability of customer demands that is easy in understanding in most of the cases. It was found that greater predictability of external environment will be compared with the Czech companies. Hereby, Czech companies will be acting as suppliers to other EU companies for selling the product on retail market. This will help in negotiating with the future events signifying Czech companies for working in a far predictable environment (Mahon & McGowan, 2013). At the time of comparing the level of predictability as well as economy environment fluctuations, it was easy to relate perceived level of predictability in the given budgeting process after viewing the GDP fluctuations. Most of the Czech companies can less predict the individual features of budgets aligning with higher GDP fluctuation levels. There is huge difference between USA and Canada as they are significant in making relevant conclusions at the time of presenting relevant statistical verification. This includes accuracy of the study that has the potential in influencing the fact whereby there is GDP indicators and fluctuations. These are strongly dependent on economy structure as well as selected time periods (Ekholm & Wallin, 2013). Therefore, it is essential for considering the fact by mentioning the possible effects of financial crisis that has negative effect in the accuracy of the study.

As rightly put forward by Drury (2015), Traditional budgeting has been majorly criticized for several reasons and limitations. Addition to that, it was claimed that budgeting is incompetent as well as unproductive and incomprehensive. This reveals how budgets get into conflict when an association uses general budget for several purpose like motivation as well as planning. It takes into consideration budgeting as well as planning as an annual ritual for several companies by using additional mechanisms for eradicating weakness. Most of the managers agree with their research that budgeting is ineffective as well as inefficient as it estimates the volume of resources (Bourmistrov & Kaarbøe, 2013). Budgets act as one of the most contentious decision-making tool. Budgets are even criticize as it is lengthy in nature. Preparation of budgets requires lot of guesswork that takes managerial time that is roughly 20% of time. However, budgets fails in taking into account the major aspects such as customer and quality that leads to ineffective practices in a business changing environment. Therefore, it has been argued that option to traditional budgets are not way considered as budgetary development but superior organization process at the same time (Mahon & McGowan, 2013).

There are several measures that should be used in minimizing the limitations as far as possible. Efforts should be made in cutting government spending by reducing fiscal deficit. For instance, in Canada they reduced the public spending in significant terms. The other measure is tax increases such as high taxes increase revenues that will help in reducing the budget deficit at the same time. Efforts should be made in lowering the spending as well as lead to fall in economic growth In order to reduce the fiscal deficits; government should be using a combination of policies. One of the key factors will be the timing of deficit reduction plans (Bourmistrov & Kaarbøe, 2013). The best way in reducing the budget deficit by positive economic growth

This study elucidates in presenting the overview of companies for predicting the various features of budgets as well as relations with economic fluctuations at the same time. This will contribute towards the discussion in the accounting field. There are several limitations noted in the study such as size of the sample at the time of surveying the subjectivity of the poll as well as results indicating current approach of individual firms in the budgeting process. This aims at indicating the ability of the firm in predicting the individual features of budget depending upon the fluctuations of the budget as measured by using GDP indicator.

Bourmistrov, A., & Kaarbøe, K. (2013). From comfort to stretch zones: A field study of two multinational companies applying “beyond budgeting” ideas. Management Accounting Research, 24(3), 196-211.

Drury, C. (2015). Management and Cost Accounting 9th Edition, London: Cengage Learning 

Ekholm, B.G. & Wallin, J., (2013). Is the annual budget really dead?. European Accounting Review, 9(4), pp.519-539.

Horngren, C. T., Sundem, G. L., Schatzberg, J. O., & Burgstahler, D. (2013). Introduction to management accounting. Pearson Higher Ed.

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Kaplan, R. S., & Norton, D. P. (2014). The strategy-focused organization: How balanced scorecard companies thrive in the new business environment. Harvard Business Press.

Lohan, G. (2013). A Brief History of Budgeting: Reflections on Beyond Budgeting, Its Link to Performance Management and Its Appropriateness for Software Development. In Lean Enterprise Software and Systems (pp. 81-105). Springer Berlin Heidelberg.

Mahon, J. F., & McGowan, R. (2013). Industry as a player in the political and social arena: Defining the competitive environment. Greenwood Publishing Group.

Petrick, J. A., & Quinn, J. F. (2014). The challenge of leadership accountability for integrity capacity as a strategic asset. Journal of Business Ethics, 34(3-4), 331-343.

Roberts, A. (2015). Blacked out: Government secrecy in the information age. Cambridge University Press.

Roche, E. M. (2014). Managing information technology in multinational corporations. Barraclough Ltd.

Wilson, J. (2013). Financial management for the public services. McGraw-Hill Education (UK).