Arguments for and Against Budgets - Paper Example

Customarily, companies see budgeting as a process that is essential in the running of a successful institution. However, in recent times, scholars and practitioners have begun questioning whether budgets are ideally beneficial to some of them advocating that they are done away with. The practitioners and scholars cite the shortcomings of the budgeting process terming it as inconsistent with the contemporary business environment. Hence, despite being perceived as instrumental process years ago, budgeting is widely debatable in the professional field at the moment. Therefore, this paper set to outline arguments for and against budgeting suggesting whether institutions would benefit or not from its use.

Arguments for Abandoning Budgets

According to Hope and Fraser (2003, p. 111), budgets should be abandoned since they encourage a static concept that inhibits performance. The static idea is manifested in the setting of fixed targets, which result in dismal incremental improvements within organizations. Also, budgets are accompanied by set incentives that instill the fear of failure among employees. They also lead to the formation of fixed plans, which result in making people focus on compliance instead of optimal performance. Lastly, budgeting encourages the hoarding of resources as well as centralized decision making which results in ignoring market feedback.

Libby and Lindsay (2010, p. 60) add to the calls of abandoning budgets by stating that the process consumes a lot of managerial time hence making institutions incur high costs that cannot be leveled by its benefits. Similarly, budgets are detrimental since they are an impediment to companies that wish to adapt to changes in the business environment promptly. Libby and Lindsay (2010, p. 61) emphasize that budgets are not beneficial since they make use of a fixed performance contract which consequentially leads to a skewed performance evaluation. Also, budgets delink companies from their strategies. Libby and Lindsay (2010, p. 56) add that budgeting is one of the most ineffective processes that businesses undertake in management. The authors state that budgeting sucks energy and time from a firm. The method also sucks the fun and big dreams from an organization. Libby and Lindsay (2010, p. 56) further add that budgeting brings out the most unproductive behaviors in an organization, stagnates growth and inhibits the exploitation of emerging opportunities.

Ostergren and Stensaker (2011, p. 152) contribution to the argument is that budgets lead to the establishment of a vertical command structure in an organization. Such a command structure is incompatible with some organizational design systems such as flat, network and value chain systems, which helps to empower staff in an organization. Furthermore, budgets result in limited freedom and flexibility since they are somewhat rigid and set by the principle of benchmarks. They, therefore, provide little room for change even though it may be beneficial to the firm. Also, budgets are detrimental since they encourage cost control instead of value creation (Ostergren and Stensaker 2011, p. 172)

According to Marginson, Ogden, and Frow (2006, p. 15), it will be beneficial if the use of budget ends since they contribute to the deterrence of innovation. When an organization is operating with the use of a budget, employees will tend to work with caution so as not to go over budget and to control costs. The working model limits the extent to which employees can innovate and exercise their creativity. In contrast, when an organizations operations are not limited to a budget, employees can embark on the use of creativity to better improve work processes in the company.

Extent to which Budgeting remains Key in Running a Successful Organization

Dugdale and Lyne (2006, p. 35) support the assertion that budgeting is vital to running a successful organization by stating that they are essential for much-needed coordination within business units. Due to the existence of complexity within business units budgets become instrumental in the coordination of multiple differentiated functions. Coordination can be attained by setting resource limits in areas such as research and development. Aspects such as output measures, which contain revenue and margin targets, also accompany it. Hence, when business units are allocated their working budgets, they can work to achieve assigned goals independently.

Dugdale and Lyne (2006, p. 35) further state that budgets are necessary as they help in setting standards. They help in setting standards by establishing whether resources are available. After determining whether funds are available, they can then be able to achieve control through measuring efficient of operations and comparing it to possible levels of output as well as standard allowances required in attaining the production.

Ostergren and Stensaker (2011, p. 152) add on to this perspective by stating that budgets are an integral part of management control systems. They support their assertion by stating that they promote communication as well as coordination between departmental units in a firm. Additionally, they provide a framework for gauging performance. For instance, the successes of a budget can occasionally be assessed by checking whether the project implementation was according to the allocated budget or was over budget. Also, budgets are deemed beneficial for they can motivate managers and employees to work as per a predetermined objective (Ostergren and Stensaker 2011, p. 152).

Libby and Lindsay (2010, p. 56) believe that budgets provide managers and their organizations the ability to rejuvenate. Furthermore, budgets are unmatched when it comes to the translation of qualitative mission statements as well as stratagems into deeds. They are also instrumental in linking short-run and long-run objectives. Additionally, they are credited with uniting managers from different functional areas and hierarchical levels as well as ensure continuity because of the sheer regularity of the process.

Conclusion

From the arguments outlined, one can learn that the benefits of budgeting as traditionally communicated are not entirely realizable in todays working environment. Todays working environment is characterized by the need for flexibility and dynamism, which are greatly inhibited by budgets. Nevertheless, budgets remain to be an essential component in planning and coordination of projects.

Bibliography

Libby, T. and Lindsay, R.M., 2010. Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management Accounting Research, 21(1), pp.56-75.Hope, J. and Fraser, R. 2003 Who Needs Budgets? Harvard Business Review, 81, pp. 108-115.

Dugdale, D. and Lyne, S. (2006) Budgeting,' Financial Management, pp. 32-35.

Ostergren, K. and Stensaker, I., 2011. Management control without budgets: a field study of beyond budgetingin practice. European Accounting Review, 20(1), pp.149-181.Marginson, D., Ogden, S. and Frow, N., 2006. Budgeting and innovation: complements or contradictions?. CIMA. Available at: http://www.cimaglobal.com/Research- -Insight/Budgeting-and-innovation-complements-or-contradictions/