Hope and Fraser (2002) argue that traditional budgeting is “out of kilter with [companies’] competitive environment”. Indeed, traditional budgeting has faced harsh criticism in the recent years. Eye-catching titles, e.g. ‘The budget – an unnecessary evil’ (Wallander, 1999), ‘Bye, bye budget – the annual budget is dead’ (Gurton, 1999), and ‘Take it away’ (Hope and Fraser, 1999b) show the “anti”- traditional budgeting campaign led by some critics.
According to Hope and Fraser (1999a), some big European and American companies have dismantled the budget or are about to do so. It seems that the theoretical debate increasingly changes the companies’ attitudes towards the traditional budgeting. Especially some Scandinavian companies head for new forms of operational and strategic control means, e.g. balanced scorecards. About 40 per cent of Swedish companies stated in a survey that they already work on changes to the budgeting process (Glader et al., 1996). Above all, rolling forecasts should play a more important role in the future, raising the responsiveness to changing external factors. According to Hope and Fraser (2003) only 20 per cent of organisations change their budget within the fiscal year. This rigidity is not up-to-date to the fast-changing competitive economy. Therefore rolling forecasts could be more effective for observing and controlling short-term changes.
This paper will primarily deal with the criticism on traditional budgeting, especially in relation to Hope and Fraser’s assertion. Furthermore, this paper examines whether there is an impact of the above noted campaign on economy, and companies increasingly abandon its budgeting systems due to the criticisms.
Table of Contents
- Introduction
- The purpose of traditional budgeting
- Budgetary control and its disadvantages
- Is the traditional budget really out of kilter with competitive environment?
- Summary
Objectives and Key Themes
This paper examines the criticisms leveled against traditional budgeting practices, particularly in the context of Hope and Fraser's assertion that traditional budgeting is out of sync with the competitive business environment. It investigates the impact of this criticism on companies' adoption and abandonment of traditional budgeting systems and explores alternative approaches.
- Criticisms of traditional budgeting methods
- The limitations of traditional budgeting in competitive markets
- The shift towards alternative budgeting models
- The influence of theoretical debate on company practices
- The effectiveness of rolling forecasts in dynamic environments
Chapter Summaries
Introduction: This introductory chapter sets the stage by highlighting the growing criticism of traditional budgeting methods, referencing publications that advocate for alternatives. It introduces the central argument—that traditional budgeting is ill-suited for today's competitive landscape—and outlines the paper's focus on examining this contention and exploring its impact on business practices, particularly the shift toward models like rolling forecasts and balanced scorecards. The chapter emphasizes the increasing theoretical debate and its influence on the practical application of budgeting systems, citing examples of companies abandoning or modifying their traditional budgeting processes.
The purpose of traditional budgeting: This chapter defines traditional budgeting, describing its function as a monetary plan outlining estimated sales, revenues, and costs over a year. It highlights the integration of budgeting with strategic planning, resource allocation, and performance evaluation at the responsibility center level. The chapter contrasts the suitability of traditional budgeting for the post-World War II economic environment, characterized by high demand and low competition, with its increasing inadequacy in the face of stronger competition and fluctuating customer demand. It explains how traditional budgeting's reliance on past data and limited adaptation to external factors can lead to inefficiencies and an inability to effectively respond to market changes.
Budgetary control and its disadvantages: While not explicitly titled as such in the provided text, this section likely covers the shortcomings and disadvantages inherent in traditional budgeting systems. It likely discusses the inflexibility of traditional budgets and their inability to adapt to changing cost structures, sales variances, or external factors that impact marketing or PR expenditures. The chapter would also likely present various alternatives to traditional budgeting methods and analyze their respective strengths and weaknesses. Ultimately, this section would further reinforce the central argument against the rigid and inflexible nature of traditional budgetary practices in a dynamic competitive environment.
Keywords
Traditional budgeting, competitive environment, budgetary control, rolling forecasts, balanced scorecards, alternative budgeting models, organizational change, market dynamics, performance evaluation, strategic planning.
Frequently Asked Questions: A Comprehensive Language Preview
What is the main topic of this paper?
This paper examines the criticisms of traditional budgeting methods, especially in competitive business environments. It explores how these criticisms affect companies' use of traditional budgeting systems and investigates alternative approaches like rolling forecasts and balanced scorecards.
What are the key themes explored in the paper?
Key themes include the limitations of traditional budgeting in competitive markets, the shift towards alternative budgeting models, the influence of theoretical debates on company practices, and the effectiveness of rolling forecasts in dynamic environments. The paper also critically analyzes the criticisms leveled against traditional budgeting practices and their impact on organizational change.
What are the main criticisms of traditional budgeting highlighted in the paper?
The paper highlights the inflexibility of traditional budgeting and its inability to adapt to changing cost structures, sales variances, or external factors. Its reliance on past data and limited adaptation to external factors are cited as leading to inefficiencies and an inability to respond effectively to market changes. Essentially, traditional budgeting is argued to be ill-suited for today's dynamic competitive landscape.
What alternative budgeting models are discussed?
The paper mentions rolling forecasts and balanced scorecards as alternative budgeting models that offer greater flexibility and adaptability to changing market conditions compared to traditional budgeting methods.
What is the purpose of traditional budgeting, according to the paper?
Traditional budgeting is defined as a monetary plan outlining estimated sales, revenues, and costs over a year. It integrates with strategic planning, resource allocation, and performance evaluation at the responsibility center level. However, the paper argues that its suitability is limited in modern competitive environments.
How does the paper address the theoretical debate surrounding budgeting?
The paper emphasizes the growing theoretical debate surrounding traditional budgeting and its influence on the practical application of budgeting systems in companies. It uses examples of companies modifying or abandoning traditional budgeting processes to illustrate this influence.
What is covered in the chapter summaries?
The chapter summaries provide an overview of each section, including the introduction which sets the stage by highlighting the growing criticism of traditional budgeting and introduces the central argument. Subsequent summaries detail the purpose of traditional budgeting, its disadvantages, and the exploration of alternative budgeting models.
What are the key words associated with this paper?
Key words include traditional budgeting, competitive environment, budgetary control, rolling forecasts, balanced scorecards, alternative budgeting models, organizational change, market dynamics, performance evaluation, and strategic planning.
- Quote paper
- Sven Röhm (Author), 2004, Are traditional budgeting practices out of kilter with companies' competitive environment, Munich, GRIN Verlag, https://www.grin.com/document/24457
