381ACC - Traditional Budgeting: Relevance in Performance Management

This essay critically examines the traditional budgeting technique as a planning and control tool, highlighting its perceived irrelevance in modern organizations due to factors like unstable customer demands, technological advancements, and environmental instability. It contrasts traditional budgeting with modern techniques like activity-based budgeting and value-based budgeting, arguing that the former's inflexibility, focus on cost reduction rather than value creation, and centralized process make it less effective in today's dynamic business environment. The essay also addresses the changing mindset of employees and the increasing importance of strategic alignment. While acknowledging the limitations, the conclusion suggests that traditional budgeting can still be valuable if organizations address its weaknesses and adapt it to their specific needs, considering their environmental and technological contexts.

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TRADITIONAL BUDGETARY CONTROL

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TRADITIONAL BUDGETARY CONTROL
Table of Contents
ABSTRACT....................................................................................................................................3
INTRODUCTION...........................................................................................................................3
Figure 1: The Traditional Budgeting model............................................................................4
WHY TRADITIONAL BUDGETING MAY NOT BE IRRELEVANT........................................5
Unstable customer demands and preference................................................................................5
Unstable Technology...................................................................................................................5
Figure 2: Budgeting Evolution Vs Degree of Impact .............................................................6
Unstable environment..................................................................................................................6
Hierarchical structure of organization.........................................................................................7
High competition.........................................................................................................................7
Figure 3: Comparing Traditional and Modern Budgeting Techniques...................................8
The mindset of today’s employees..............................................................................................8
Lack of value creation.................................................................................................................8
Centralization of the traditional budgeting process.....................................................................9
Companies’ Strategy....................................................................................................................9
CONCLUSION AND RECOMMENDATION..............................................................................9
References......................................................................................................................................11

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ABSTRACT
Traditional budgeting technique has been used as a planning and control tool in most of
the organizations, however it has faced more criticism in the modern organization due to its
inefficiency to address the current organizational needs. Its opponents introduced other
techniques such as activity –based budgeting, value-based budgeting and profit planning
budgeting, which in turn replaced the use of traditional budgeting. Many writers have pointed out
that the technique cannot be applied in the unstable sectors since no comparisons can be made.
The fact that it is also inflexible and only focuses on resource allocation has rendered the
technique so dissatisfying that managers have been forced to adopt other techniques to help them
carry out planning. Today organizations are focusing on the customers’ needs and value creation
and not necessarily on cost reduction hence the need for a Sophisticated budgeting technique that
will enable organization to improve its performance.
INTRODUCTION
A budget is an approximation of the total income and expenses over a given period of
time. In Accounting, it is used as tool to help one in forecasting and analyzing business’s income
and expenditures (Zeller and Metzger, 2013). Traditional budgeting is the act of being able to
foresee your business’s income and revenue for the subsequent year based on the previous
budget. For a company to remain in business, it has to strictly monitor and maintain its budget so
that the expenses does not exceed the revenue and hence a good reputation to a company. By
comparing the actual previous expenditures with the actual current expenditures, one is able to
trace where there was unnecessary spending and reduce the expense incurred or look for a
supplier that will supply the same product/service at a relatively cheaper price (Andrews and
Hill, 2003). In addition, the budget can be used to obtain money from the financers. With the

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advancements experienced in the budgeting sector, this research work seeks to prove that
traditional budgeting is gradually becoming irrelevant as new budgeting ways are shaping the
business sector.
Figure 1: The Traditional Budgeting model
Source: (Ouda and Makhlouf, 2014).

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Companies are forced to adopt the technological and environmental changes in order to
thrive well in today’s economy. The directors are therefore left with no option but to ensure that
the management and the budget systems are reviewed from time to time so as to ensure that the
planning and control as a function of management is achieved. (Zimmerman and Yahya-Zadeh,
2011).
WHY TRADITIONAL BUDGETING MAY NOT BE IRRELEVANT
Even though budgeting is one of the most widely used management tool for planning and
controlling, however today, the traditional budgeting may not be as relevant as in the 20th century
due to the following;
Unstable customer demands and preference
Due to the unstable economy, customers cannot predict how much to stock for the future,
moreover, their preferences also change from time to time hence rendering traditional budgeting
un-useful (Popesko and Socova, 2016). For instance, a customer may prefer Infinix to Techno
today but because he/she did not get the utility expected from infinix, the customer may switch
to Techno or other brands (Ramey, 2013).
Unstable Technology
Technology is a body of knowledge devoted to creating tools, processing actions and the
extracting of materials (Ramey, 2013). Technology keeps on changing from time to time, and for
a company to survive today, it has to adopt with the changing technology so as to guarantee
quality products/services, maintain its customers and acquire new ones. The technology that was
used in the previous year’s budget may not be necessarily the same technology that would be

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used in the current year’s budget. For example, if the actual current budget shows an increase in
sales compared to last year’s actual budget say in the banking sectors. This increase in sales
could be as a result of introduction of ATM which were not previously used. Automation has
also led to the development of software that pulls numbers directly out of the general ledger and
can also pull history instantly (Popesko, 2015).
Figure 2: Budgeting Evolution Vs Degree of Impact (Réka, 2014)
Unstable environment
This can arise as a result of political instability or inflation among others. Inflation is the
long-term rise in prices of goods and services caused by the devaluation of currency
due to inflation it may not be possible to compare the previous year’s budget with the current
year’s budget since it may not give accurate results. For example in July 2018, prices of
commodities in the United States increased by 2.9% compared to July 2017.Traditional
budgeting may not work well when comparing the sales of these two year’s and if used in this
case, it will give unreliable results (Zimmerman and Yahya-Zadeh, 2011).

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Similarly, when a country is politically unstable, this might affects its economic
performance thus making comparison not practical. For instance, Kenya is known for political
violence especially during elections. During this time looting takes place and so forth as a result
this will impact the material budget. Kenya therefore does not realize the importance of the
budget put in place (Njogu, 2009).
Hierarchical structure of organization
Most companies today have a narrow chain of command hence faster decision making.
Such organizations are highly effective, can work as a team and pass information faster to the top
down mentalities and hence cannot adopt the traditional budgeting system (Popesko, 2015).
High competition
Companies are competing against one another in order to remain at the top. Traditional
budgeting being inflexible cannot cope up with this competition because for an idea (that
requires resources) to be implemented it has to take a long period of time before it is approved
just because it will interfere with the budget and as a result so many idea that would have
benefited the company are left unimplemented (Libby and Lindsay, 2010). As a result today’s
companies are doing away with the traditional budgeting and adopting other methods of
continuous planning. Due to competition, most companies are forced to migrate from the
traditional budgeting to other techniques such as Activity-Based budgeting system. For example,
most listed companies in the Netherland have adopted the Activity based costing technique as a
method of planning (Libby and Lindsay, 2010).

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Figure 3: Comparing Traditional and Modern Budgeting Techniques (Business
Jargons, 2018)
The mindset of today’s employees
The environment is changing very first, likewise the people. With the changes in
Technology, people are ready and willing to learn and change. Today so many people are
exposed to information and with this information the front liners and the decision makers have
found it easy to implement new ways of doing things unlike the previous decades when the mind
of people was so fixed into what they are used to (Hansen, 2003). For example, the managers do
not have a hard time explaining to others the importance of using forecasting as a method of
planning. With this mind, almost all companies have abandoned the use of traditional budgeting
and are now venturing into other methods of planning such as forecasting (Hansen, 2003).
Lack of value creation
Today’s modern Organizations have changed their focus from cost reduction to value
creation. The traditional budgeting has become obsolete in regard to this since it does not solve
clients’ needs hence it has missed the strategic sole purpose of budgeting (Libby and Lindsay,

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2007) (Neely, 2003). For examples in the automobile industries, customers are looking for a car
that is efficient in terms of fuel saving and also convenient. On the other hand, managers will try
to cut down the budget so that they can satisfy their self-interest thus compromising on quality.
Managers can also manipulate the actual projection so that they look more appealing yet this
may not have a positive impact in the long-run (Libby and Lindsay, 2007).
Centralization of the traditional budgeting process
The today’s markets are so complex and so requires a budgeting technique that is
collaborative so as to meet the objectives of its customers in various markets and companies. The
traditional budget however does not provide opportunities for the different business functions to
work together in order to reflect the corporate overall strategy and position (Daum, 2002). Since
the task of centralizing the budgeting process is normally given to a person in charge of Finance
in the finance department, the person in charge may produce results that do not reflect the
companies’ true image. That is to say that the person may project that the company is
overspending when it is not and vice versa (De Waal, 2005).
Companies’ Strategy
Today most companies work on a set strategy in order to achieve their vision. According
to Nolan (2005), it is argued that the top management lay out the strategy which is translated into
numbers and carried out by different employees of the organization and hence the blame on the
budget that it is not in line with the company strategy.
CONCLUSION AND RECOMMENDATION
In as much as traditional budgeting is irrelevant but still it can be of use to most
organization if they feel the need to. This is because organizations have got their visions and
mission statements and if a company does not know its previous expenditures, then it means that

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it would not be able to predict future expenditures. This may result in overspending or under-
spending hence interfering with the normal running of the organization’s activities.
Organizations need to work on the weaknesses of the traditional budgeting and come up
with more advanced techniques to help solve organization’s financial problems that arise from
inefficient budgeting practices. To achieve this organization need not to completely abandon the
traditional budgeting system because an organization is propelled forward when it can monitor
its past and present financial requirements. The bottom line is, companies should know their
environmental and technological needs, its culture and weaknesses before amending their
traditional budgeting practices.

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