Budget and Budgetary Control

Essay by Bereketeab Yacob Yohannes

Budget and budgetary control has being dealt with in different ways in literature, but basically there has being critics on traditional budgetary control as new issues raised with current more unpredictable global internationalized world markets.

Virtually conventional budgeting has roughly some categories of criticism, one being that budgets by the time they are used their assumption are out-dated especially in rapidly changing environments, the second recurrent criticism is that conventional budgeting has vertical command and control structure that hinders initiative valuing more cost reduction rather than creating values.

The traditional way of budgetary control has a highly centralized command-control approach to budgets, this approach has in time shown it was not cost effective, time consuming, has very little use in forecasting in actual organization performance evaluation although it is highly long term performance oriented, and some times it can lead to dysfunctional behaviours of mangers and budget games.

Traditional budgeting has, also, shown that long term inflexible planning has in time proven to be ineffective as it outlives the objective of budgeting, it responds slowly to market shifts, it makes information sharing between different departments of the same organization difficult. Moreover it impedes the allocation of resources to their best uses.

The shortcomings of conventional budgeting has being dealt with in time buy different organization, and there has being proposed two practice-led approaches, in overcoming the shortcomings of traditional budgetary process, these two approaches has being proposed by two different regional department of the same organization, the CAM-I.
The first approach proposes improving the budgetary process trough improving the data collection making budgets based on activity models with detailed financial model, this approach is being called Activity Based Budgeting (ABB).

The second approach has more radical stance since it advocates abandoning budgets in the conventional way. Its approach has two stages the first one being addressing the performance evaluation in the long term, thus proposing either changing traditional budget based performance evaluation or eliminating it. The second stage of this approach proposes to decentralise the organization empowering low-level managers and employees, this approach has being called Beyond Budgeting (BB).

The ABB approach focuses in generating a budget from activities and resources so it avoids unnecessary calculation of infeasible plans, it highlights any source of unbalances and inefficiencies. Moreover ABB provides a richer set of tools so as to make any adjustments early in the budgeting process. By having an operational activity models lower level managers can easily understand budgeting information thus giving them tools to perform their job easily, it can help in evaluating their performance making them more prepared to respond to contingencies. The activity based approach reinforce a more horizontal view or organization compared to vertical one of traditional approach.

The BB Approach on the other hand tries to avoid the rigid annual budget based-performance evaluations as it leads towards much dysfunctional behaviour of managers in many ways. Traditional budgeting has many examples that involve, managers trying to manage and lead by numbers set in budgets, thus manipulating to get those numbers to achieve their goals. In order to do so BB replaces the annual budget based performance with a more relative accurate performance benchmarks targets set from inside the organization or from outside the organization similar to those being evaluated in the organization. This approach allows adjusting to uncontrollable situations thus giving more accurate performance evaluations.
In order to do so BB approach uses hindsight targets based on previous performance incorporating actual operating and economic circumstances on that given period.
The evaluation of performance should be subjective with emphasis on group rather than the individual, moreover the BB recommends evaluation performance using also non-financial measures. Another key aspect of BB is the radical decentralization of management, as it considers centralization as a main factor in non-empowering low managers to make decisions congruent to their situations. As opposed to this, decentralization, gives people more power to take decision and more active role in benchmark performance evaluation, traditional budgetary control fails to give high performance input as it sets a fixed target for success measurement.