Criticisms about budgets have been frequently voiced and acknowledged ever since Argyris (1953) first identified ‘human problems with budgets’ over 60 years ago. This debate has continued since then and has become more refined in the last two decades. Marginson (2013) criticises and evaluates budgetary control, eventually reaching the conclusion that there is no obvious consistent view or application of budgeting in practice.
CIMA defines a budget as ‘a quantitative expression of a plan for a defined period of time’. This definition is very broad and does not indicate how it relates to a business, or why it is necessary. Budgets are generally seen as significantly helping with control, co-ordination and communication.
Budgeting has long been viewed as ‘the cornerstone of management control’ (Otley, 1978; 1987). This indicates that budgeting is seen to be a very significant and valued tool within a company. Management control is a method of gathering and using information to evaluate the performance of a company. This can be done using different organisational resources such as profits, cash flows, cost ratios, customer satisfaction and quality of product. Budgets are also considered to be the key drivers and evaluators of managerial performance; and the key elements for planning and control. They are a powerful tool for management control and can play a valuable role in the internal structure of a company. This is because they can increase the power and authority of higher management and limit the influence of lower level managers.
The most outspoken critics of traditional budgeting have been Hope and Fraser (). In their report they identified four main criticisms of traditional budgeting. Their major criticism of budgeting is that the annual budgeting process is incapable of alteration to meet the demands of ‘today’s information age’. In their article they mention that a number of innovative companies such as ‘Svenska Handelsbanken’ (a Swedish Bank) and Volvo are in the process of abandoning traditional budgeting. Their report mentions that Volvo has changed to favour the use of a rolling forecast. Alternatively, ‘Svenska Handelsbanken’ has chosen to disperse the responsibility for reducing costs, satisfying customer needs and boosting income to individual branches. It is reported that this method is effective., however has not been tried in other companies. This shows that there is not enough evidence to support the idea of ditching budgeting as only one company has been tested.
Another popular criticism of traditional budgeting is that is it time consuming. Hope and Fraser (2003) claim that budgeting is a ‘protracted and expensive process taking up 30 per cent of management time’. It is argued that this time could be used to conduct more important tasks. This claim is supported by the studies by
Budgeting is also said to be ‘disconnected from strategy and innovation’ (Hope and Fraser). This means that it fails to encourage continuous improvement and modernisation. Hope and Fraser go as far as saying that ‘Budgeting, as most corporations practice it, should be abolished’.
The term ‘Beyond Budgeting’ (BB) is used by Hope and Fraser to convey alternative approaches that should be used instead of annual budgeting. It advocates for rolling forecasts, ambitious target setting, more decentralised decision behaviours and relative external performance evaluation. Hope and Fraser wish to encourage managers to strive to ensure their performance is better than external and internal competitors. This is supported by the study by Bourmistov and Kaarboe (2013), which concludes that one of the main problems with traditional budgets is the establishment of ‘comfort zones’. Beyond budgeting also focuses strongly on companies working as a team. It concentrates on ‘term-based rewards’ rather than individual rewards due to the difficulty in identifying the precise contribution of each individual. This is meant to create more motivation and improved key performance indicators within a company.
‘Better budgeting’ is another term commonly used. According to the Better Budgeting approach, there are five techniques that are believed to generate improvements (Neely, Bourne, Adams, 2003). The first technique mentioned is Activity-based budgeting. This is an approach to budgeting which builds on well-established ideas such as activity-based costing and activity-based cost management `Marginson). Its aim is to ensure that resources are allocated consistently with the idea of activity-based management. It is meant to create a more meaningful budget as well as increasing cost savings. The second technique is zero-based budgeting. CIMA defines this as a method of budgeting that requires all costs to be specifically justified by the benefits expected. It requires managers to justify their entire budget requests, as if each activity were being performed for the first time. This can therefore be time-consuming, just like traditional budgeting. ‘Better budgeting’ also advocates for the use of rolling forecasts and budgets. This is when a budget is continuously updated by adding a further accounting period (month or quarter) when the earliest accounting period has expired. Its use is particularly beneficial where future costs and/or activities cannot be forecast accurately (2005, CIMA Official Terminology). The idea of this would be that planning can occur more successfully throughout the year, and that changes can be handled more easily. In the studies conducted by Ekhom and Wallin in 2000 there was evidence that organisations were contemplating adopting this method. The final two techniques mentioned in ‘Better Budgeting’ are value-based management and profit planning. There are few examples of either of these techniques being adopted.
There are many additional criticisms of Budgeting identified by further research including Ekholm and Wallin (2000) and Dugdale and Lyne (2006). However, research carried out by Libby and Lindsay (2010) suggests that budgeting is ‘alive and well’ in North America. Their findings indicated that budgeting is still a very significant tool within firms. They reported that only 5 per cent of companies were considering abandoning traditional budgeting, although they added that many were taking steps to improve their systems and overcome the criticisms. They concluded that instead of going to Beyond Budgeting, most firms have chosen to improve and alternate the process to fit their needs. They believed that the claims made by Marginson that budgets are flawed are probably overstated.
The survey carried out by Dugdale and Lyne (2006) supported the findings of Libby and Lindsay (2010). They surveyed forty Financial and Non-Financial UK Companies. It found that budgeting was ‘alive and well’. All of the companies still used budgets and believed them to be important for planning, control, performance measurement, coordination and communication. Elkholm and Wallin also surveyed 168 Finnish companies. They also reported that few companies were planning to abandon the budget. However, they stated that there was agreement with many of the criticisms. It was discovered that the suggestions made by Hope and Fraser (such as rolling budgets) were in fact run in parallel with the annual budget.
In conclusion, the data seems to conclude that budgeting is still widely used in practice despite the large amount of academic literature criticising it. Few companies have chosen to actually abandon the technique, and it would appear that a better alternative has not yet been found. However, as found in the study conducted by Elkholm and Wallin, alterations to the traditional budgeting method have been adopted by many companies. For example, running rolling budgets in parallel with the traditional budget. This supports the claim of ‘diversity’ in the conclusion made by Marginson. He also states that there is ‘no consistency of view/evidence’. However, this could be counted by the evidence in more recent studies.