There are many critiques against the traditional budgeting and planning. Amongst them are that budgeting are time consuming and costly, major barriers to flexibility, add little value, focused more on cost rather than on value creation, strengthen vertical command and control, updated infrequently, reinforces departmental barriers rather than encouraging knowledge sharing (Bourne et al, 2002), prepared in isolation form instead of aligning to company goals, focus on financial outputs and excludes other performance measures and tend to be manipulated by managers (Hope and Fraser, 2001).
Most companies were adapting their planning and budgeting processes but not using the term ‘budget’, new approaches were widely used. Examples of such approach are rolling forecasts and separation of re-forecasting and budget to increase speed and accuracy. Hence, budgets have to be reengineered in order to maintain its usefulness and to survive in the changing and competitive business environment. The tool used most to control overhead costs now is called a flexible budget. This budget is based not only on one level of activity.
The flexible budget analysis gives correct basis for comparison between actual and expected financial costs, give actual activity. Traditionally, most companies used standard costing as part of their budgeting process. This is found to be concentrating mostly on financial numbers, short term and performance was based on variances to the budget. Therefore, more strategic approaches have been adopted to enhance budgeting and performance measures such as the Activity Based Costing, Beyond Budgeting, Key Performance Indicators and Benchmarking. One of the early works in reformatting budgets is the ABC.
In making changes to budgeting, the activity based budgeting has been constructed to further enhance the master budget. With the elements of ABC in budgeting, it provides solid reasoning for budgeting costs at particular levels which is more useful for management, because it reveals the cost level along changes with cost drivers, if changed (Hilton, 2005). Besides that, the zero based budgeting is also introduced by President Carter (McGill, 2001). ZBB highlights ranking instead of categorization which would force managers to rethink each phase of operations before allocating resources.
Budgeting is still a worthwhile method as long as five principles are stick by (Howard, 2004). First, budgets should be planned from bottom up making sure no communication break down which would lead to worthless budgets. Secondly, to make sure the budget is realistic because if it is not, the whole point of budget would be lost as one knows well the target is not achievable. Next is that employees must clearly know where the business is heading to and align departmental objectives to it. Recognizing the concept of flexibility is important as well.
Finally, is to learn from mistakes. In the ever changing world of business, mistakes are unavoidable. Hence, the smart way to tackle this is to learn from process and work on it afterwards. Most recent development is the Beyond Budgeting Round Table (BBRT) which is focused on replacing budgeting with respect too new organizational and behavioral changes needed to support this new mechanism such as delegation, co ordination, leadership, resource management and motivation (Hope and Fraser, 2001).
Successful companies now shift from ‘make and sell’ to ‘sense and respond’ (Haeckel, 1999) and therefore managers need to create a climate for fast response, generate new business concepts, operate in low costs, find and keep customers and shareholders satisfied and engage the best people. Beyond Budgeting principles strengthen these key success factors. Due to the falling prices and costs as well as demanding shareholders, Beyond Budgeting seek to operate with low costs and places customer value needs at the center of strategy and it leads to consistent shareholder value creation.
For companies who prefer to remain using budget as their means of planning, they should adopt four principles to boost budget performance. These four cornerstones are the application of strategic framework to avoid redundancy, public annual reporting to trace the connection between outputs and impact, to allocate resource against future intention [plan] and to test inputs, outputs, efficiency and impact (McGill, 2001). The other performance measures currently developed are benchmarking and key performance indicators. This is to improve internal performance and to establish the best practice amongst companies.
Return on investment and residual incomes are common performance measures which relate profit earned from selling to capital required. The economic value added is also a contemporary measure used. However, all three can result in misleading conclusion as they focus solely on short term (Hilton, 2005). Therefore, since the above changes in budgeting would still result in problems as they only value financial measures. Non financial numbers are important as well, Hence the development of Balanced Scorecard which considers non financial numbers too.