The Pros And Cons Of Non-Based Budgeting

The budget process is a powerful planning tool for government to make important resource decisions. According the Carney and Schoenfeld‘s article on How to read a Budget, an operating budget is a reflection of government’s financial plans. When a budget is

This research paper is a brief discussion of budget management analysis. Budgeting is the key to financial management, and is the key to translates an organization goals or plan into money. Budgeting is a rough estimate of how much a company will need to get their work done, and provides the basis for evaluating performance, a source of motivation, coordinating business activities, a tool for management communication and instructions to employees. Without a budget an organization would be like a driver, driving blinded without instructions or any sense of direction, that’s how important a budget is to every organization and individual likewise (Clark, 2005).

The 20’s century saw the use of budget involve due to a change in the environment. Indeed the control of output used to be obtained by the dissemination of tasks and so traditional budgets were very much highlighted, with a significant top-down influence. As an example of the importance of budget in the 1970’s IBM had about 3,000 people involved in their budgetary process. During the same period, the oil crisis brought concerns about rising in costs and led to the introduction of zero-based budgeting (ZBB), which can lower cost by avoiding blanket increases or decreases to a prior period’s budget. The increase in business uncertainties was in discrepancy with the stifling effect of fixed plans, promoting the use of rolling budgets. The 1990’s saw the growing influence of shareholders and steered the focus on a budget that included a wider view of organisation results, answering the investment community for quarterly updates on results and expectations (Bill Ryan, 2005). Budgets then started being used as a communication tool between the financial community and the organisation, allowing the corporation to be integrated in the capital market. Moreover companies started using flexible budgets rather than static budgets as nowadays various levels of activities can be observed in most organisations. The use of flexible budgets then enables firms to be consistent with their new environment and the market.

Like every plan, the budget is based on some assumptions about what the costs and revenues will be affected by, and what the magnitude of these effects will be. These assumptions may change each time a budget is made and thus may need to be incorporated in the new budget. As opposed to the conventional form of budgeting which will be discussed later in this paper, zero-based budgeting does not assume that the assumptions made at the time of the last budget are still valid in the present context. Therefore, the assumptions have to be developed again and justified before senior management in order to win approval for the allocation of financial resources planned in the budget (Prokopenko, 1987).

Programme and Performance Budgeting system (PPBS) was introduced in order to replace Line-item Budgeting Systems (LIBS) due to there are some drawback of LIBS. PPBS were introduced in Malaysia on 1969 under Treasury Circular 5/1968.This system helps management make better decision on allocation of resources in order to achieve government objective through selection of best feasible objective. Furthermore, intends to reduce poverty and achieve government development objective. There are some of characteristics of PPBS in overcoming weakness in LIBS which is objective are highlighted, involved performance evaluation, budget express in term of function also effectiveness and efficiency in management.

It is possible that managers will set budgets which are not in line with the organization’s strategy as lower-level managers lack strategic focus. Moreover, lower-level managers may have difficulties to set up the budget because their budget may depend on the forecasts of other departments as for example, the cost of production may depend on the scale of production which has to be estimated by the sales department. Furthermore, employees need to be trained in setting up budgets and there needs to be someone who controls the submission of all budgets at a specified time. In this respect, absences and changes in position may become a challenge when conducting a bottom-up budgeting method.

Budgeting performance provides as a basis for judging actual results because the inefficiencies of past performance can be eliminated or adjusted in the budget. Another reason is that

As it uses previous year expenses report, the material required to plan for the current year static budget is readily available, making it easier for managers and staff without rich experience to develop the budget. It allows the management to channel resources on other areas of the company instead of developing a more advanced budget. Therefore, it will increase the effectiveness of the company’s management. It’s underlying basis on budget planning depends majorily in manager's judgement, allowing managers to plan for expenses with great flexibility and no restrictions in mind.

Budgeting is a management control technique that can be used as an early warning system. Budgets are of great help as a support performance management (Pietrzak, 2013). It can provide a detailed information insight of the next fiscal year, which allows managers to set performance objectives much more easily, make decisions and plan ahead. For example: When recession hit Europe in 2008, Davis Service Group was able to assess effects and was able to build new and accurate theories for the remainder of 2008. By recognizing and handling risks, Davis has been able to return profits, dividends and cash flow for shareholders in a challenging economic environment.

Abstract: Budgets are essential business practice embedded in organizations since the 1920’s and are considered key drivers and evaluators of managerial performance and key elements for planning and control. Budgets are thought to be the most powerful tool for management control; they play essential roles in the organization’s political structure as they are used often to increase the power and authority of top management and limit the autonomy of lower-level managers. Despite its ambiguous benefits, traditional budgeting presents organizations with various challenges. In recent times critics of traditional budgeting have increased vastly. The basis of this criticism is that traditional budgeting is a relic of the past. It prevents reactions to change in the market, it cannot keep up with the challenges and requirements of today’s business world and it isn’t useful for neither business management nor stakeholders. In an attempt to eliminate criticism, researchers and practitioners in the field of management accountancy have developed more systematic concepts of budgeting which that better suits the needs of the modern business environment. Developments resulted in beyond budgeting, better budgeting, zero-based budgeting, rolling forecasts and activity based budgeting as main alternatives to the traditional system. Reka et al. argue that beyond budgeting is the most effective alternative to traditional budgeting. This paper focuses on evaluating the usefulness of

Budgeting is a main instrument of management control for most organizations’ systems. Recently it is a controversial phenomenon, the disappointment with budgeting is occurring. This is because some people find that budgeting processes is time consuming and often lead to dysfunctional behavior. Additionally, they make organization fail to be flexible in such an uncertain financial environment. Many people think traditional budgeting systems should be abolished, but others wish to improve them. Hope and Fraser (2003b) provide a few European companies that have abolished traditional budgeting systems successfully. On the other hand, Eckholm and Wallin (2000) observed approximately 61% of firms will improve the budgeting processes and continue to use them as control purpose. This paper argues that whether budgeting should be abolished or not mainly focus on three aspects, “fixed performance contracts”, time consuming and the changes of budgeting in real life. Evidence is presented that as a control instrument although budgeting has some shortcomings, it should not be abolished. Instead, those shortcomings could be addressed by some improvement measures.

Traditional budgeting method analyses financial index by organization structure, while ABB could put financial index to every activity person by the activity characters and make the person responsible to the index. So that it could allocate the scarce resource more efficiently.

Budgets lie at the core of every business practice. The tools are the major evaluators of managerial effectiveness and overall organizational performance. Businesses can achieve effective control and planning through the application of the right budgeting approaches in financial and accounting activities. Nonetheless, these benefits can only be realized if the managers of a company use the most effective models that take into account all relevant factors, which influence a firm’s budget. An inefficient method automatically leads to attainment of poor results. In this light, practitioners in the financial and accounting sectors evaluate different budgeting techniques in terms of efficiency, flexibility, accurate results, and ease of use. One of the approaches that attract immense criticism in respect to these considerations is the traditional budgeting approach. It is, therefore, essential to look into the reasons as to why the model has been criticized as a rigid method that should be eliminated (Zeller & Metzger 2013).

Zero-base budgeting is a cost benefit approach, Lucey (1994) that requires budget estimates to start from zero and every budget estimate justified in order to be included. Managers are required to justify the existence of the cost item and the benefit the expenditure brings to the organization. Each year’s budget is compiled as if the programmes were being launched for the first time. ZBB are prepared without reference to the budget of the preceding period, Appiah-Mensah (1993).

Although participation in budgeting may enforce the managerial performance, it has constrains and can cause some problems as well. This article analyses the possible advantages and limitations of the role of participation in budget setting. In the next section, the possible merits of budgetary participation are demonstrated. This is followed by a section that explains the equivocation existing in the relationship between budgetary participation and performance. Then, in the following section, some negative effects on the application of participation in budgeting progress are illustrated. The final section is the conclusion of the study.