Traditional Budgeting Versus Beyond Budgeting Essay

Question:

Discuss about the Traditional Budgeting Versus Beyond Budgeting.

Answer:

Introduction:

As per the statement made by Jensen the contemporary budgeting practice has been critically acclaimed. The statement shows that contemporary budgeting practices often lead to lying, cheating and fabricating of the financial information, which paves the way for distrust in the organization. The different aspects of the given statement has further stated about the time required in enforcing the policies related to corporate budgeting practices. As per the Harvard business review it has been taken into consideration two examples, one being the case of managers setting on achieving quarterly revenue related to the shipment of the unfinished products from the plant based in England to the warehouses based in Netherlands. It has further observed that the shipments of the products related to the incomplete items were set to be sold before the end of the quarterly year ending and fulfill their budget goals to earn their bonuses. The high cost related to assembling the goods at a distant location was needed for an additional rental cost associated to the warehouse and labor (Jensen 2001).

The review of the literature further shows how budgets drive compensation. Jensen argues that the total cash compensation received by the managers is seen to be constant, until the management is able to reach the minimum hurdle point of 80% of the given target. While in various cases, the cheaters prosper, as the compensation is wrongly presented in terms of 120% of the usual target and in exceeding the same. However, the overall compensation remains the same. The primary reasons for the companies to have a budget are seen in form of coordinating of the disparate parts in the business. The act of openly sharing the accurate information and relying on the decisions on a common set of numbers ensured prosperous interactions within the organizational units. This has further led to efficient process and high quality products along with lower level of inventories (Arnold, 2014).

The implementation of the same in the current business relevant to management control and budgeting can be seen in the analysis of the budget targets. This practice has the possibility to determine the integrity related issues in the organization. Hence, as a result managers begin to fetch misleading information to the suppliers and the customers. This has been further identified as a threat to integrity in the entire organization. As per the statement given by Jensen, it further states that the damage of this can go beyond the individual organization. For instance during the time of boom, the financial analysts are seen to raising the expectation and managers of the company start to gather funds from the future to fulfill the present demands. The net result of such a situation is seen in form of overstatement of the earnings and the cash flows. On the other hand, during the economic slowdown it has been seen that the demand falls considerably. It has been further seen that the inventories started to rise during this period and the managers of the company often find it excruciating to react and take big decision (King, 2014).

The Jensen views have further provided the solution to the various types of the rising problems related to the budgeting decisions. According to him the only possible way out of this issues are directly related to the removal of all kinks which tends to arise from the pay-for-performance line—and in turn the management of the organization should emphasize on purely linear bonus schedule. He has exhibited this concept, with the “A Linear Compensation Plan”. The application of this will be able to ensure that the manger of the company, were still able to get rewarded for the good performance along with greater amount of other benefits for the various types of the independent budget targets. Therefore, bonus received by the managers for a given level of performance is observed to be same, even if the budget goal is observed to below or above the level of the actual performance. The solution to the budget gaming problem is seen in terms of adopting a purely linear pay to pay for the performance. The removal of the kinks related to the budget sets beneath the budget target both above and below, eliminating the incentive program for the managers. Hence according to the assumptions made by Jensen it has been stated that the various types of the constraints related to budgeting decision is seen to be associated to the effective coordination of the various types of disparate units (Jensen 2001).

Criticism of the traditional approach of budgeting

In my opinion, the varied constraints of the present budgeting system can be related to the increased use of the traditional budgeting system. The main criticism to the traditional approach to the budgeting can be directly related to the various types of the constraints associated to the prevention and accommodating the various types of the changes related to the changing business scenario. The addressing of the various types of the limitations related to the present budgeting system has been resolved by an alternative approach, which are more suited to the need of the modern business. Some of the inclusion of the modern method of the budgeting method has been discussed with the use of the techniques such as rolling forecasts and application of activity-based budgeting (Hagel, 2014). The budgeting system, which was developed in the 1920s has been subjected to various criticisms for many decades. However, it was also accepted that corporate budgeting acted as unavoidable element and the various types of the the benefit related to the same outweighed the cost.

Counter agreement related to the statement given by Jensen

Despite of the several criticisms rerated to the traditional and the contemporary methods related to the budgeting techniques. There are several types of the counter agreements to the statement, which has been given by Jensen. The main agreements related to the concept of the counter budgeting can be directly related the inclusion of the following components into the budget:

  • As per the traditional concept of budget, it is seen to be a useful tool for controlling the income and expenditure and establishment of the priorities and the various types of the specific factors related to the setting of the priorities for the organization.
  • It has been further seen to provide the direction and the coordination of the business objectives into practical sense.
  • It has been seen the purpose of budgeting has been seen n terms of application of the techniques related to assigning of responsibilities to budget holders and allocating the resources.
  • In various situations, the usefulness of the contemporary budgeting has been seen with the inclusion of the various types of the factors in determining the cost constraints. These factors are related to enhance the coordination of the different types of the activities and in increasing the efficiency in the key areas of the business.
  • In various types of the other aspects, traditional budgeting allows knowledge of the meaning and importance of deviations for comparing them with forecasts. This leads to greater amount of efficiency in the important sectors of the economic management of the entity.

From the discussion based on the inclusion of the several type of the budgeting technique, it can be stated that there are several advantages of the traditional budgeting system to counter the statement given by Jensen. The considerations has been also taken into account to give the final argument on the given statement (Conferinta, 2013).

Opinion on the statement given by Jensen on corporate budgeting

The main viewpoints given by me have been further segregated into two portions. The first part of the report reviews the development of the present budgetary practices and the various types of impacts it has on the development process. The second portion of the opinion further states the various types of the relevant literature relating to budgets and structure of the organization. According to me the present traditional system of budgeting, prevents the organization to make the necessary changes related to the market scenario. Hence, in my opinion alternative budgeting methods or beyond budgeting will prove to be more appropriate in suiting to the needs of modern business. The implementation of such a technique in the traditional approach of the corporate budgeting technique will be able to ensure that the organization is able to maintain improving planning, control and better forecasting, which will ultimately result in improvement in overall performance of the business. Although the main initiation of such as approach was found to be predominant in the nations such as France, Germany, Belgium, Holland, Norway, South Africa, Sweden, Switzerland and the United States during 1997, the application of the same will be able to provide a substantiate improvement in the overall budgeting of the different types of the resources of the country. The application of the beyond budgeting technique will be able to state on the key components related to the success of a particular business; it will be further be able to identify the various types of the constraints related to the continuous improvement in the adaptive planning and control to increase profit. According to my opinion the beyond, budgeting will be able to enable the companies in managing its various types of the performance related factors. In addition to this the beyond budgeting concept will be able to related the decentralizing the overall decision-making process and the need for traditional budgeting practice (Hope and Fraser, 2013). The beyond budgeting practice will be further be able to put more amount of emphasis on the concepts of the activity based costing hence the associated cost polls will be able to be related to the various types of the cost drivers related to the project. The adoption of this method will be able to state on the cost related to the different types of the items (Du, Meng and Wang, 2015).

In my opinion the adoption of such a budgeting system will to focus on the proper allocation of the various types of the financial activities which will prove to be essential in maintaining the various type so the business requirements. The implementation of such a technique will further be able to save lot of funds with proper allocation of the cost constraints, hence the organizations will able to allocate more amount for the funds for the compensation requirements. It has been further observed that the different types of the cost constraints related to the needs to the incentives, the bonus to the employees can be provided in a better way, and the employees will be able to get higher amount of benefits due to the proper allocation of the finds in the appropriate overheads of the company. The changes responsible for the inclusion of the different types of the budgeting system can be further used for the purpose of greater amount of involvement of the junior team and the in different types of the budgeting processes. The more detailed approach related to the budgetary constraints is able to state the different types of the issues related to the inclusion of the detailed analysis and intensification of the different types of the usage related to the of budgets (Robinson and Burnett, 2016).

Hence, the various types of the viewpoints, which have been given by Jensen, are related to the usage and the implementation of the various types of the budgeting decisions based on the traditional approach. Hence, due to the several limitations as discussed in the report, I partially agree to the viewpoint given by Jensen. In order to consider a more holistic approach to the budgeting various types of the modern tools and techniques need to be put to use such as the use of the beyond budgeting techniques (Blank and Eggink, 2014). The implementation of this form of technique can be seen in form of rolling forecasts and application of activity-based budgeting. In my opinion the approaches related to the adoption of the linear compensation is the right approach to any budgeting decisions. The budget should be framed in such a manner that the different levels of the employees and the staff are able to get the benefit out of the various types of the budgeting decisions taken by the company (Shin, 2013). The various types of the considerations for the Target-based bonuses have been seen to be deeply ingrained in the minds of managers and in terms of the managerial codes in case of many organizations. The implementation of the linear approach to the compensation and adding the same to the corporate budgeting system has been further identified as a challenge for many organizations, this is mainly due to the consideration which are need to be made by the manager of the company,. The effective implementation of the linear compensation system would mean that the mangers of the company are able to give up the promotion related benefits (Becker et al., 2015).

The potential reasons for managers to exceed budgetary targets have been seen in form of the inclusion of the several types of reasons, some of them has been shown below as follows;

  • Subcontract- In case the management team has decided to subcontract employees in various divisions for meeting additional targets. In this, in such a situation the employees will be able to get the benefit of the several types of improvement leading to the excess profit of the company. The nature of the employment as per the agreement of subcontracting may be seen to be partial in nature (Imf.org., 2017).
  • Overtime: In case it has been found that the management team decides to do overtime then it may be possible that the managers are able to exceed budgetary targets (Simons, 2013).
  • Introduce the shift work: The presence of both night shift and day shift in a particular organization is able to sate the different reason for the improvement which are directly related to the increasing the overall work performance and meeting of the targets of the company.
  • Hire or buy additional machinery: The decision to introduce newer machinery or equipments in the manufacturing plants of the company may be also taken into consideration for the reason leading to the excess capacity of the items (Aranda, Arellano and Davila., 2014).
  • Inclusion of both quantitative and financial constraints– The consideration made for the different types of the inclusion of the financial resources as well as the quantitative factors may be the potential reason for the exceeding the budgetary targets (De Baerdemaeker and Bruggeman, 2015).


The different types of the refinements to the budgeting system can be seen in form of the implementation of the various types of the techniques, related to the “beyond budgeting techniques” and “Beyond Budgeting Round Table”. The “Beyond Budgeting Round Table” has been seen to be based on the important concept related to the growing satisfaction. “Beyond Budgeting” concept is referred to as the technique associated to beyond command-and-control and adoption of the management technique, which is more empowered and adaptive in nature. This particular concept was coined in the postindustrial era, where the innovative management models have been seen with representing sustainable competitive advantage. The main changes related to the application of the above stated methods will be directly be applied to the several types of the components in a more adaptive way (Tian, Ni, Hao, and Wu, 2015). The beyond

budgeting concept will be exactly be able to incorporate the various types of provisions made for fixed annual plans and budgets that tie managers to predetermined actions and the review of the target is done on regular basis. This technique further takes into account the predetermined action and is further responsible for linking of the targets based in the extension of goals and associating the performance with the world class benchmarking techniques (R?ka, ?tefan and Daniel, 2014). The comparison of the budgeting techniques with the several types of the other companies will be able to assess the different types of the decision based on the budgeting decisions of the other world class companies (Amato, 2013). The technique based on the beyond budgeting approach would be able to ensure that the company is able to get an increased motivation, better service to the customer and higher productivity (Blank and Eggink, 2014). The refinements process of the implementation has been further seen in form of two-step implementation process. The first step has been seen in form the replacement of the existing traditional budgeting technique with the newer approach of beyond budgeting concept. The second step of the refinement process is directly related to the implementation of the various types of the techniques, which will be able to state the different types of the concept related to the application of the decentralization technique in the organization and in turn give a boost to the independence among the lower level managers (Stoddart, 2014).

The improvement related to the incorporation of the various types of the budgeting techniques can be further be incorporated with the implementation of rolling forecasts and application of activity-based budgeting this will enable the company in maintaining the different types of cost constraints to a lower level. Some of the important aspects of the positive changes can be further be seen in terms of parameters such as setting of the targets; rewarding of the exiting personnel; action planning, management of the resources; coordination of the actions; measuring and controlling of the overall performance of the organization. The beyond budgeting concept will further ensure that there is no requirement for the fixed financial figures; and they have been further seen in terms of demonstrating higher level of the key performance indicators. The refinement will ensure the inclusion of both the financial and the nonfinancial target of the company (Gallani et al., 2016).


The various types of improvements related to the performance evaluation system can be seen in terms of the introduction of zero based budgeting. As per this technique, the expenses of the business will be able to be justified for at the beginning of the each financial year. The main application of this technique has been seen to evident in the application of the budget technique which starts from "zero base” and every function needs to be analyzed with the associate need and the cost constraint of the project (Reliableplant.com, 2017). The various types of the other refinements, which can be brought in the budgeting system cam be directly related to the automating the entire service for the maintenance of the budgeting data for future use. The implementation of the regular feedback will be able to ensure that the performance of the budgeting system is being monitored regularly. The introduction of the concept related to zero based budgeting will be able to ensure that the organization will be able to get the maximum amount of the benefit related to the functional areas of the organization. These areas have been further classified as the parameter where the different types of the results need to be first analysis based on the previously obtained results and the present expectations of the business (Questback.com, 2017).

Refinements to the budgeting system

The main suggestions related to the refinement process given to the managers have been stated below as follows:

  • Introduction of the zero based budgeting technique
  • Development for the individual’s goal and a better understanding of the team’s goals
  • Automating the budgeting system and ensuring the auto updating of the data
  • Making employee feedback related to the budget as an integral part of the culture of the organization

Reference List

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