Do Modern Organizations Still Need Traditional Budgeting?

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1.3Introduction

Why do organisations need traditional budgeting? But then again, isn’t traditional budget an outdated attempt in performing a very critical organisational function , whereby targets are set for the organisation’s expenses by forecasting procedures and through a control environment of measuring, monitoring and reporting? According to Boone and Kurtz (2003) a budget “Is a planning and controlling tool that reflects the firm’s expenditures, sales revenues, operating expenses, cash receipts and outlays.” Alternatively, it can be termed a short term-financial plan of the organisation.

Budgeting, is mandatory for every organisation whose primary objective is profit and can be considered to be one which is very time consuming due to the dependency of input from each functioning unit or department. This is imperative for the end result of an effective creation of a ‘Master or operating budget’.

This is normally performed by the accounting or financial division whose goals are to manage and monitor processes , systems and other financial resources to be able to identify and gauge its effectiveness for the purpose of implementation. Subsequently, this can be simplified and compared to a tool with a responsibility of planning and controlling.

There are different types of budgets namely:

1. Cash budgets

2. Production budgets

3. Capital expenditure budgets,

4. Revenue budgets

5. Advertising budgets

6. Top down budgets

7. Sales budgets

8. Bottom up budgets.

These budgets are normally prepared annually, but the control process is less effective and mundane if left for preparation over this period. Today, organisations are changing the status quo and antique methodologies and preparations are being shelved for more frequency i.e performed over a monthly and quarterly basis resulting in a lower variance or outcome after the forecasts. In this way the budgeting process is impactful as it compares targets to actual levels of performances.

However, there is newness to budgetary preparations and the actual budgetary process, whereby some organisations have already implemented this new method known as ‘Rolling or Continuous budget’. According the Author Ken Wolf, President and CEO of Revelwood firm this type of adaptation allows for a better management of allocated institutional resources, less time consuming, less expensive, allows for flexibility and prohibits a direct linkage with budgetary results to employees’ package or remuneration.

Here, we would present our arguments and our findings based on the topic “Why must organisations shift from traditional budgeting and provide substantial evidence which would identify the flaws, deficiencies and weaknesses of traditional budgeting when compared to the ‘Continuous or rolling’ budget. Our research would show that rolling budgets and its effectiveness surpasses traditional methods. The research would also strive to convince and persuade organisations that adaptation to new modernised techniques of a ‘rolling budget’ impacts positively and is advantageous over the long term to producing realistic and accurate reports and to warrant greater leverage when making comparisons between actual performance and projections, whilst giving room for resources and efforts to be directed to other relevant areas within the organisation.

1.4Defining the problem

Is it advantageous for organisations to introduce contemporary methods of budgeting such as the ‘rolling budgets’ within their organisations, instead of sticking with traditional budgetary methods?

This question is important for organisations that genuinely have an interest in the distribution of resources. The traditional type of budgeting technique whether in the area of sales, revenue, production, capital, top down or advertising all bears certain similarities in that the financial resources are misallocated and misused. The forecasting procedures are often inaccurate and costly.

Nonetheless, many organisations are moving away from the traditional budgeting methodology and are keenly looking for new ways which is found in revamping internal systems to accommodate new budgetary methodologies namely rolling budgets.

1.5Context of the Research

The context of the research is geared towards providing evidence that traditional budgeting is long outdated as there are modernised methods of budgeting in place which can be implemented in order to harness better results. The focal point or goal is to identify specific financial organisations within our individual and ethnic borders and through the process of collection of data and analyses using non probability and probability samples determine an outcome. The methods used would quantify, qualify and verify the credibility of the data provided. These would be examined from a legal standpoint with emphasis on ethics to provide a workable framework to guarantee the information and investigate valid materials through literature and other conclusive means to ascertain our stance on the premise of whether or not “organisations need traditional budgeting”.

1.6 Objectives

The primary objectives that drive organisations today to pursue contemporary budgeting in comparison to traditional budgeting can be seen from two main perspectives of costs and stakeholders satisfaction. This is further highlighted in one famous quote by Andrew Carnegie who simplified this as, “Watch the costs and the profits will take care of themselves.”

This is further exemplified from the implementation of rolling budgets which most organisations have incorporated within their financial obligations. This new development creates better organisational awareness to better manage the resources where high costs are paramount. Rolling budgeting allows for cost cutting measures which impact the balance sheet in the long run. In addition, it ensures internal and stakeholders’ satisfaction for as the financial resources are channelled correctly and better managed it creates a happier environment which filters downwards to our customers. As traditional budgeting has now become an outdated alternative, organisations are now better equipped for creating greater efficiencies as efforts