Formal and traditional budgeting

In recent years the traditional budget has been blamed of being time-consuming, costly and incapable of meeting the demands of dynamic environment. Some analysts have suggested to companies that abandon the traditional budgeting and adopt beyond budgeting. This suggestion showed us the way to know what is right and what is wrong? This essay will discuss that what traditional budgeting is? What is beyond budgeting? And which approach is better between traditional budgeting and beyond budgeting. This essay will also discuss some survey and their results - particularly in Sweden, where a number of companies have left the annual budget. The main purpose of this essay is to investigate that whether this viewpoint is true or false.

Drury (2009: 218) describes traditional budgeting so aptly that "Traditional budget is that once per year the manager of each budget centre prepares a detail budget for one year". Traditional, annual budget has been criticized of being rigid and risky because it is based on uncertain estimate.

Bourne, Neely and heyns have done a research which shows that 80 percent of the companies are dissatisfied with their budgeting and planning process and they thought traditional budgeting might have had its day. Team of Cranfield School of management made 12 criticisms on traditional budgeting that traditional budgeting has lost its value and it is not suitable for modern business organisations.

According to fanning, 2000 traditional budget has some disadvantages of being inefficient in cost of budgeting and reducing its effectiveness. These criticisms can be reduced by information technology through heavy investment. Most of the companies were rely on spreadsheet applications, which is the cheapest and elastic tool. Recently, the emergence of new web-based tools has reduced the cost of budgeting as compared to traditional applications (fanning, 2000).

Traditional budgeting is still very popular and can give considerable advantages. Dugdale and lyne argue that budgeting is alive and according to their survey on 40 companies; budgeting is important for planning, controlling, co-ordination and communication. However, point of motivation was less supported by surveyed companies. In only two areas where more than half of the company's financial managers agreed that budgets are too much time-consuming and it might be forced managers to follow standard budgets.

They also claim that most of their surveyed companies use budgeting as part of a whole package of control system and consider budgets as a key element in their planning and control dimensions (Dugdale and Lyne, 2006).

Bourne, Neely and Heyns, 2000 argue that most of the companies were used to term budgeting but now they are moving to different techniques. Companies like Electrolux and credit Lyonnais had moved to rolling forecast. Rolling forecasts are one that produces on monthly or quarterly basis. Companies like Svenska handelsbanken works without budgets and companies like Bp and Volvo are good examples of who mainly focus on future rather than explaining past performance.

Modern companies are the companies those operate in dynamic environment and use all modern techniques to survive in this competitive environment. These companies are getting more precise, speedy and economical forecasting by using explicit forecasting process. These models are based on clear assumptions: if and when situations vary, the assumption can be changed accordingly and new forecast will produce. They argue that modern companies are investing in IT software to cut the cost of budgets. Modern companies forecast accurately and describe the variance before it occurs. They also argue that modern companies understand that better financial performance comes from day-to-day planning and managing, not from better financial management (Bourne, Neely and Heyns, 2000).

The Beyond Budgeting Round Table (BBRT) has been one of the loud criticisms on budgeting. It argues that budgeting may not be suitable for modern businesses because innovation and competitiveness is essential for modern companies. However, research suggests that most businesses are still using budgeting techniques.

Marginson and Ogden investigate on company called Astoria. The company belongs to a global technology industry and try to maintain its position through continuous improvement. Company runs in a globally competitive environment where cost control is crucial for survival. They found some evidence that mangers of their case study were frightened from engaging in innovating activities because they used to with budgets. So, it means that budgets may deter innovation but it seems far from reality.

Traditional budgeting has been charged of being incapable of meeting the demands of dynamic environment. In Sweden large number of companies has totally abandoned the traditional budgeting. Beyond budgeting such as rolling forecast and monitoring system such as balance scorecard are already exist and operating side by side with annual budgets.

According to Hope and Fraser (1999a: 17), a number of companies like Handelsbanken, Volvo, IKEA and Ericsson have abandoned traditional budgeting. The main criticism on traditional budgeting is that it is inefficient and incomprehensible (Arterian, 1998, cited in Ekholm and Wallin, 2000). Annual budget encourages stiff planning and incremental thinking (hope and Fraser 1999a: 19; Schmidt, 1992: 103, cited in Ekholm and Wallin, 2000). That's why hope and Fraser claim that dismantle the budgets and adopt a system focusing on strategic performance, value-adding processes and knowledge management.

Rolling forecasts, produced on monthly or quarterly basis are the main substitute to the annual budgets (Arterian, 1998; Hope and Fraser, 1999a: 20, cited in Ekholm and Wallin, 2000). This alternative is not a new thought; many companies use rolling forecast alongside with annual budgets. The key benefit of the rolling forecast is that it is elastic; it doesn't have the same inflexible image as annual budget. It is the comparison with the competitors and it is not time consuming. The only disadvantage of the rolling forecast is that it may create the feeling of uncertainty among managers due to being changed frequently. This thing may also create difficulty to fairly distribution of the bonus remuneration (Gurton, 1999: 60, cited in Ekholm and Wallin, 2000). This drawback may stop managers to adopt this concept because managers love bonuses and for the personal profit, they might not want to adopt this technique. Ekholm and Wallin, 2000 argue that budgets have internal effectiveness and share information with interested parties like shareholders.

Dugdale and lyne criticise the Hope and Fraser point of view. They argue that hope and Fraser consider the banking sector and on their behalf they want us all to leave budget which is not possible because most of the companies like manufacturing concerns which have internal complexity cannot abandon budgets.

To know budgets have its active strategic role or not. Ekholm and Wallin surveyed 659 finish companies with more than € 16.7 million turnover including world-class companies such as Nokia, UPM-Kymmene (paper and pulp), Stora Enso (paper and pulp) and Wartsila NSD (diesel engine for power plants and ships).

Result of the survey reveals that 20.5% of the respondent companies planned to stick with annual budgets. Moreover, 60.7% respondent companies intended that instead of leaving it completely, they are frequently enduring to develop it to meet new demands. It means total of 85.7% respondent companies don't want to give up annual budgets. However, rest (14.3%) of respondent companies; 6.5% consider abandoning it; 1.8% of the respondent companies are in the process of leaving budget; only 6% of the respondent companies have already abandoned budget. Result explicitly shows that either there is no need to change budgets with beyond budgeting or budget is so essential that it is not possible to get rid of it altogether.

Ekholm and Wallin also analyse that rolling forecasts are also being used by respondent companies along with traditional annual budget. One comment comes out:

"In addition to the annual budgets we continuously produce a latest estimates on a quarterly basis, or on a shorter-term basis, if the need for this arises".

One comment also shows that balance scorecard is the most important part of budgeting.

"We have chosen a solution according to which a balanced scorecard is made part of the budgeting and strategic planning process. For six key measures we set targets for the next budget year and next five-year period. These are followed up for 5 to 10 years. Thus the budget and the strategy are brought together within the framework of yearly measurement of performance".

As Ekholm and willin so aptly phrased that "It can be observed that a hybrid system consisting of the budget, rolling forecasts and in some cases a balanced scorecard, is most common among the responding companies, with industries ranging from basic Finnish manufacturing industries, such as paper, pulp, metal products and machinery, to non-manufacturing industries such as the wholesale businesses and agencies". It means that system which is called hybrid system consist of annual budget and to meet that annual target companies use rolling forecast and to measure their performance they use balance scorecard. This system fulfils the need of dynamic environment.

According to above survey, Companies that consider getting rid of the budget; get rid of budget or abandoned altogether is 14.3% (24 out of168). This 14.3% group includes industries like food products, wooden artefacts, wholesale business and companies that produce electricity and gas. It means that mangers should see, in which industry their organization falls and either traditional budgeting are appropriate or beyond budgeting. As fanning, 2000 aptly phrased "The challenge for organizations to decide which approach is most suitable for them and then to implement it successfully".

Question arises which approach is most suitable for modern organizations? Inefficiency and time-consuming encourage us to adopt beyond budgeting. However, it depends on industry in which company operates. If your business falls in more predictable sector such as high fixed cost, limited product range and comparatively slow growth rate, than traditional budgeting is best suitable. Beyond budgeting is best for companies who have fast-growing product range and markets, companies where intangible assets are essential like branded businesses. It is time for managers to think which technique is best suitable for their business (fanning, 2000). I personally met with some retail mangers of sports and fashion industry and found that they are using both budgeting system alongside.

Eventually, the final conclusion is that traditional budgeting is not yet ready to put them aside. However, it had its halcyon days and now it has lost some of its worth, still it is very popular and essential. If it fits properly and works, it can give considerable advantages to the modern organisations with the help of rolling forecast.


  • Arterian, S. (1998) 'Sprinting to a streamlined budget', CFO Europe, 23.9.
  • Bourne M, Neely A and Heyns H (2002) "Lore Reform", Financial Management, January, p. 23.
  • Drury, C. (2009). Management Accounting For Business. United Kingdom: Patrick Bond.
  • Dugdale, D. and Lyne, S. (2006) "Are budgets still needed?" Financial Management, November, pp 32-35.
  • Ekholm B and Wallin J (2000), 'Is the annual budget really dead?' The European Accounting Review, Volume 9, number 4, pages 519-539.
  • Fanning J (2000) 'Evolution or Revolution?' Accountancy, October.
  • Gurton, A. (1999) 'Bye bye budget . . . the annual budget is dead', Accountancy, March: 60.
  • Hope, J. and Fraser, R. (1999a) 'Beyond budgeting. Building a new management model for the information age', Management Accounting, January: 16-21.
  • Hope, J. and Fraser, R. (1999b) 'Take it away', Accountancy, May: 66-7.
  • Kennedy A and Dugdale D (1999) 'Getting the most from Budgeting' Management Accounting, February.
  • Marginson, D. and Ogden, S. (2005) "Budgeting and Innovation", Financial Management, April, pp 29-31.
  • Schmidt, J. A. (1992) 'Is it time to replace traditional budgeting?' Journal of Accountancy, October, 103-107.

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