University of Sunderland

Budgets are central to the process of control and planning. A budget should be set within the overall organization planning and control framework. Budgetary controls are used in a traditional way by most organization in the word. In the rapidly changing business environment traditional budgeting cannot be the only budgeting approach that can be used in the company. There are many alternatives like ZBB, ABB, beyond budgeting etc that are more advantageous and rewarding for an organization.
A traditional budget is prepared by reviewing past year’s actual expenses and budget with deduction or additional towards extra business activities and also taking into account the changes due to changing factors like inflation, growth etc. It is usually based on centralized leadership and organizational hierarchy.
1. Benefits and Limitations of traditional budgeting and budgetary control for a business operating in dynamic environment.
Business that works in innovative, rapidly changing, dynamic conditions traditional budgeting is not an appropriate budgeting practice. This budgetary method is not suitable for dynamic business because this type of business requires flexibility, innovation, fast response, customer focus, process improvement and shareholder value. These demands cannot be fulfilled by the traditional approach to budgeting. The ever changing business should be at par up with the changes and adapt itself to recent developments to achieve success.
The other budgetary control alternatives are:
· Beyond The Budgeting Approach: This is a performance management system made up of series of interlocking and interdependent process. The main motive is the creation of an adaptive method for the actual world which develops a business plan that is ideal from the surroundings i.e. performance of competitors, growth of markets etc.
The process of beyond budgeting can be described in 12 principles of BBRT 2005. The first six principles describe the performance management system that helps the employee to respond faster to the requirements of customers and competitive environment. The second six are leadership principles which provides decentralized framework of responsibility to employee which facilitates them to adapt quickly and improve their relative performance.
Beyond Budgeting Process principles:
1. Targets Set aspirational goals which is based on continuous improvement, there is no fixed target.
2. Rewards are based on performance with hindsight and are not based on meeting fixed targets.
3. Planning is made an inclusive and continuous process and not an annual event.
4. Resources are made available when there is demand and by the way of annual budget allocation.
5. The coordination cross company actions dynamically not through annual plans and budgets.
6. There are controls on KPIs, relative and trends indicators and not variance against plans.
The Leadership Principles of beyond Budgeting are:
· There should be governance on clear boundaries and values not on budgets and detailed rules.
· A high performance culture is build based on success not on meeting targets.
· There is full freedom so it helps in developing decision making authority to frontline teams.
· The accountability helps to develop a network of small units accountable for results and not the centralized hierarchies.
· Everyone should focus on improving customer outcomes not on meeting the internal targets.
· The open and shared information provides help to everyone.
The advantages of beyond budgeting are:
· It thoroughly examines strategies, targets, forecasts, action plans and management reports.
· Comparisons are made against past year performance and competitors.
· It concentrates on the important drivers of business performance.
· This system facilitates in taking advantage of new opportunities and responds to threats with the help of advanced information system to take decisions beforehand.
In beyond budgeting the firms would differ in culture, scale and business context. The challenge this system would face is to convince the stakeholders that control might be achieved even without a budget. The issues like doubt of loosening control, trusting employees to act in the interest of the firm, giving frontline people the decision making authority is not an easy change to contemplate.
· Activity Based Budgeting (ABB)
The other alternative for dynamic driven business is ABB.The activities and resources of the organization are used to generate the budget. The financial budget is made after the preparation of operationally feasible budget.
The advantages of ABB are:
· This method helps in better process, activity, the costing of product, decision making and good allocation of resources.
· It helps in identifying capacity problems and make earlier adjustments in the budget than the traditional budgeting which do not keep track of resource consumption pattern.
· It enhances manager’s ability to respond to the contingencies and also helps in improving performance evaluation decision making and measurement.
· It is most suitable to business which operates in dynamic innovative and relatively changing environment as it provides accurate analysis which helps in quickly forecasting the next budget as compared to traditional budget.
Limitations of ABB are:
· The managers could be doubtful of this approach as this method is a bit tough to understand.
· It does not help in establishing links between resources and activities.
· Thus before choosing any one of the alternatives they must be thoroughly examined taking into consideration the current business location.
2. The...