Question

Traditional budgeting is now ingrained in all areas of organisational activity. However despite its objective of planning for future operations, traditional incremental budgeting has been criticised for relying on past information as a basis of future targets. The whole purpose and function of budgeting therefore has been called into question.

Requirement

Review the budgeting literature to outline the criticisms of traditional incremental budgeting and the arguments in relation to whether budgeting needs to be maintained and improved (mention any techniques that you have found to do this) or whether it is time to scrap the budgeting process completely.

Answer 1

Criticisms or Disadvantages of traditional incremental budgeting are as under:

• One of the key assumptions in this budgeting system is that the activities will continue in the same historic fashion. Therefore, it ignores any change in activities and extraordinary circumstances.
• There is no space to include any form of incentives for developing new ideas.
• Neither does it allocate any incentives to processes that result in reduction costs.
• The budget may become out of date and no longer relate to the level of activity or type of work being carried out.
• In practical scenarios, there is always a possibility that the priority for resources utilization changes. However, the same is not fostered into the budgeting process.
• It takes the position of increasing each part of the budget by a certain amount each year. However, some departments may not, need more money each year. However, they will still be allotted an increase, because that’s how the budgeting process works. In this way, the budgeting process may be wasteful and less than optimally efficient.

Arguments that state that the budgeting system should be maintained:

• Budgeting helps in planning for the future. It is method by which the expenses are balanced or matched with the earnings. If they done properly, it can trace any financial imbalance which may exists in the organization. It can also assist in managing the debt.
• Budgeting also represents a comprehensible binding contract with every department of the organization to deliver outputs in simple quantitative terms. The top management can assess at any given point, how their priorities are being worked on. They can track the implementation of strategies, plans and programs in the most minute detail and make instant adjustments.
• Budgeting facilitates action. By adjusting the budget, top management can cut through the unnecessary internal debate and send clear-cut signals to everyone in the organization about its goals and priorities. They can highlight that they wish eliminate waste by way of budget cuts, as well signify that they want to increase outputs by increasing budget allocations.
• Budgeting is also a measure of performance. Using the budget as a point of reference against the actual events, a clear performance objective can be arrived. This can further again, stand as a guide to issuing rewards and punishments.

Some of the ways in which Budgeting can be improved are as follows:

• Have room for uncertainty. i.e ensure Flexibility
• Ensure clear and timely communication with various departments to help minimize issues and to ensure alignment between operational and management strategies.
• Involve the entire team
• Ensure the goals are clear and unambiguous
• Track Everything

Arguments that state that the budgeting system should be Scrapped:

• The budget process itself is costly, as there are many disputes as to how to reconcile the conflicting items on the budget. There are often are many months of in-fighting over not-much-change from last year.
• Because the budget numbers are a sub-optimal, they constitute a poor basis for performance evaluation.
• Adjusting the budget is an enormous task. given the interlocking nature of the overall system. The budget is often updated on a quarterly basis, but major changes are difficult, even when they are obviously needed.
• It is demoralizing to the participants and often cripples innovation.