Over the past years, budgets have been under attack in fast-moving economies. Although most of the organisations spend considerable time and effort on budgeting, many managers doubt the value of it. This scepticism seems to be corroborated by a survey. About 60% of 152 business professionals said that the annual budget became out of date within the year (Kenneth, as cited in Garrison, Noreen, & Brewer, 2018, 363). The budgeting, however, has been believed to function planning, communicating, allocating, controlling and evaluating for a long time. This essay will critique the use and practice of budgets in response to the changing environment that organisations operate in. For this purpose, literature review and case studies will be involved.
Abernethy and Brownell (1999) studied how top management in organisations in the course of strategic change use management accounting control systems. To put it more concretely, they examined whether and to what extent the style of budget use impact on performance under a change in strategy. In their study, management accounting control systems embody budgets which are used as the medium of communication and conventionally evaluation. Therefore, they classified the style of budget use into interactive use and diagnostic use. Here, interactive use means top management uses budgets for planning, controlling activities or emergencies and communicating. As a result of their examination, the use of budget has a correlation with strategic change and performance. The correlation is that more interactive use of budget in the organisation undergoing a strategic revision results in higher performance. It can be concluded that interactive use of budget plays a positive role in the performance of the organisation in dynamic environments. Their study, however, left much to be desired. One is the fact that they obtained the result from the interviews with only eight CEOs only in the hospitals. The other is that it is a timeworn study and thus it is uncertain whether their conclusion is still valid in the current turbulent times.
Nevertheless, there is a range of recent practices that prove budgeting is still the key to success in business in particular under the contingency and uncertainty. The Civil War Trust (henceforth “CWT”) is a charitable organisation established for the preservation of battlefields of America Civil War. According to its purpose of establishment, acquiring battlefield land is involved, which donations enable this. The CWT has saved a considerable battlefield land even though there have been threats from commercial development or reductions in donations in the recessions. The CWT has thrived because of the budgets. Firstly, the CWT has created a relatively elaborate yearly budget so that its budget can adapt to changes in assumptions or circumstances. Via this delicate budgeting, the CWT has been able to focus on a major mission by allocating the limited resources even under the unexpected business (Garrison, Noreen, & Brewer, 2018, 362).
Another best practice of budgeting is of BabyCakes NYC renamed to Erin Mckenna’s Bakery NYC which has provided vegan bakery. The founder found that lifestyle has changed and the demand of consumer would change accordingly. Erin’s prediction was right on the money and thus her first shop made a profit within the first year despite the necessary high cost. She pointed out thorough budgeting as the success factor. She not only budgeted making a plan but also frequently reflected the changes. The bottom line is that careful budgets allow a business to adapt to a whole new environment (Weygandt, Kimmel, & Kieso, 2015, 360).
DDC Australia also has a good example of the practical use of budgets. This company has remarked a new era in the textile manufacturing industry. DDC initially provided a disposal service for the military industry but succeeded in transposing army tents from the military to other lines such as outdoor and wet weather gear including backpacks. DDC kept extending the range of businesses. Meanwhile, budgets kept raising a question about the status quo and induced the managers to rethink their businesses. At last, the top management decided to downsize a part of businesses in order to focus on their core businesses. In the course of downsizing, DDC was able to convert its cost without redundancy by using budgets. Through this case, it can be clearly seen that the valuable use of budgets not only is still valuable for decision making in the changing world but also leads to a change (Mowen, Hansen, Sands, Heitger, Winata, & Su, 2016, 319).
Turning back to the survey of 152 business professionals with regards to budgets year, approximately 20% of 152 business professionals did not make preparation for “what if” forecasts in response to economic changes. Another 60% of them responded their scenarios were less than six (Kenneth, as cited in Garrison, Noreen, & Brewer, 2018, 363). The obsolescence that they felt about budgets is likely to come from not having adequate scenarios for possible contingency. Budgeting without scenario planning can be a waste of time and effort. Mckinsey & Company also suggests alternative scenarios in response to any changes for the effective use of budgets. In addition to scenario planning, zero-base budgeting is useful to mitigate the limitation of budgets. It allows managers to reconsider the business and assumptions as well as uncover the perpetual errors. The shorter-term budgeting is also an important factor for the valuable budgets but it is said that it should be based on the long-term budgeting (Langfield-Smith, Thorne, Smith, & Hilton, 2015, 389).
In conclusion, in spite of all the advantages of budget, there are criticisms that the budget is easily obsolescent in the changing circumstances. However, those criticisms probably come from rough budgeting or inadequate use of budgets. Through several cases, it can be ascertained that the wise user of budgets can take the merits of budgets even in the turbulent world and this is exactly where the role of budgets become more important.
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References:
Abernethy, M.A, & Brownell, P. (1999). The role of budgets in organizations facing strategic change: and exploratory study. Accounting, Organizations and Society 24 (1999), 189 – 204.
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial accounting (16th ed.). New York, NY : McGraw-Hill Education.
Langfield-Smith, K., Thorne, H., Smith, D., & Hilton, R. W. (2015). Management accounting : information for creating and managing value (7th ed.). North Ryde, Australia: McGraw-Hill Education.
Mowen, M. M., Hansen, D. R., Sands, J. S., Heitger, D. L., Winata, L., & Su, S. X. (2016). Managerial accounting. South Melbourne, Australia: Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Managerial accounting: tools for business decision making (7th ed.). New York, NY : Wiley.
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