The Use of Traditional Budgeting Techniques in Finland
Discuss About The Wedish School Of Economics And Business Administration.
The financial experts of the large business organizations of the current era are in a great dilemma regarding the usefulness of the traditional budgeting system. In a world where information is flowing in seconds from one part of the world to another and thus quick changes are taking place in the business environment, it is often argued that the traditional budgets are not capable enough to deliver the required financial forecasting by incorporating the required changes as per the changing business environment. In order to assess that to what extent the criticism is acceptable this paper has done an investigation on the basis of 650 Finnish companies which are having an annual turnover of more than 16.7 million Euros (FIM100 million).The investigation has been done by sending a set of questionnaire to the top level managers of the chosen organizations [by using the postal survey techniques] of Finland and the investigators revived a total of 168 properly filed up questionnaire. The summary result that has been reflected by the filled up questionnaire is as follows:
The result of the survey investigation describe that 85.7% of the respondent companies who belongs to the conservative group intends to continue with the traditional budgeting process with a little change to fulfil the current demand of the decentralization of power and planning process along with the fulfilment of the requirements of the changed business situations. This section of the respondents have the opinion that it is not possible to leave the traditional budgeting process altogether as a whole as without the traditional budgeting process it is not possible to set any objective for the persons. Besides without the application of the tool of the traditional budgeting process the evaluation of the performance cannot be done Argyris, and Kaplan, (1994 ).
The rest of the companies that forms 14.3% of the respondents and are representing the radical segment have either already stopped the use of the traditional budgeting process as a tool for financial projection or thinking of changing the use of the traditional budgeting process for financial forecasting .The radical group of companies are thinking of changing the application of the traditional budgeting process as a tool of financial forecasting as they think that the traditional budgeting process is very rigid, and time consuming and cannot signal the changes in the environment at all.
The Hybrid Forecasting Process Adopted by Finnish Companies
That is why most of the large companies of Finland are employing the three main type of financial projection systems which are the traditional budgeting system, the · a hybrid forecasting system which includes the traditional budget forecasting along with other instrument of forecasting such as the rolling forecast , the application of the balanced scorecard etc Ekholm, & Wallin, (2000).
As a whole 60.7% of the responding company are thinking of eventually changing the budgeting process by incorporating different other instruments of forecasting eventually. Thus the article describes that most of the finish companies are in the process of applying a hybrid system where the instruments like rolling forecasts and balanced scorecard are used along with the traditional budgeting techniques for the propose of attaining the most accurate financial projection. This hybrid forecasting process has been adopted by the companies that are in different manufacturing industries [paper, pulp, metal, machinery production industries] and non-manufacturing industries [whole sale businesses and industries]
This paper clearly opines in favour of the abolition of the traditional budgeting process for a number of reasons. First and foremost the traditional budgeting process is needed to be abolished as it is needed to remove the centralization of power and hierarchical process in the way of organizational decision making. Moreover quick response to the market development requires the building of a network within the organization that will be spread from the lower to the top level of management so that the decision making process can cover the opinion of all the relevant employees of the organization who are working at different level of the management. In order to realise the full benefits of the newly introduced techniques like balanced scorecards (used for financial projections), EVA (Economic Value Added, used for measuring the value added by a particular investment), Activity based costing (the technique measures the cost incurred by the technique) Reengineering of the process flow of work and up gradation of the IT infrastructure of the organization it is essential to abolish the traditional budgeting process along with centralization of power and centralized planning process.
Moreover in some case it is totally unethical to use the budgets for performance evaluation of the employees of the organization where the performance of the organization is highly sensitive to the changes of the external market. The underlying reason is that that if the budgeted forecast is considered as a benchmark standard, then the standard does not reflect the changes in the external market environment which can bring substantial retardation in the performance of the employees.
Alternatives to Traditional Budgeting Techniques
Most of the traditional budgets are static in nature and use the historical data for the future projection and the process actually delays the response of the business organization to the changes in the market which sometimes done irreparable damage to the business.
That is why most of the companies are currently using the financial techniques like the cost-to-income ratios for setting the gaols and measuring the performance. Besides currently the business unit as a whole is considered accountable for producing certain results and these results are compared with that of the rivals and current industry benchmarks instead of the predefined budgeted targets to make the process of performance appraisal reasonable and relevant to the current business environment.
However mere decentralization of power and distribution of autonomy to the employees will not reveal the result. The revelation of the result requires proper utilization of the autonomy given to the group’s of employees for the fulfilment of the goal. That is why some of the organizations have started to use the process of comparing the performance of the similar working group that are operating within the organization at the same time and working in the same external and internal environment which acts as a very good measure of the performance of the employees of an organization. Thus according to the article the business organizations should essentially adopt the different new techniques of performance management and workflow process management instead of the traditional budgeting techniques for giving the proper business response to the rapidly changing external market or business environment Hope & Fraser ,(2003).
According to the opinion of the author most organizations follow the traditional budgeting techniques for the purpose of setting the target to be attained by the employees of the organization for the fulfilment of the organizational goal. In fact most of the organizations are not ready to abandon the traditional budgeting process as the technique offers the opportunity of setting the goals and measuring the performance of the employees and on the basis of the measured performances the employees rewardedJensen,(2003).
But her lies the misuse of the budgeting process as the process of giving reward on the basis of performance measurement through the budgeting techniques initiates the use of untrue information in preparing the performance statements by both the managers and their subordinate staffs of the different divisions and units of the organization. The underlying reason of doing this is to prove that employees of a particular department have performed up to the standard and thus such untrue performance appraisal report helps them to increase their possibility of attaining reward. But ultimately such activity of performance fraud reduces the overall quality of the product or services produced by the organization.
Performance Management and Workflow Process Management
Therefore in order to remove this vicious impact of the budgeting process it is needed to abolish the budgeting techniques and the process of comparing the employee performance with the budgeted standard or budgeted goal. In otherworld’s the budgeting system should be completely removed from the process of the performance appraisal of the employees and offering compensations and performance bonus. All those are needed to be done for reducing the possibility of preparing untrue performance appraisal report as it can be expected that if the process of performance comparison with the budgeted standard is removed then there will be no incentive among the employees to lie and to represent untrue statements about their performance either individually or as a unit.
Rather the organizations should follow the purely linear methods of performance measurement and process of rewarding for the employees where the payment will be made to an employee for the performance he has given and here the performance will not be compared with any predefined target or standard. Thus removal of the counterproductive cycle that is being initiated by the traditional budgeting process of setting the target and comparing the employee performance with the predefined target will lead to the enhancement of the value of the organization to a great extent. In other words the application of the linear performance appraisal process will enhance the marginal productivity of each and every employee of the organization. Each and every employee of the organization will add true value to the company an d thus the overall creation of value to the company will be maximized and all kinds of incentive to lie and distortion of the system and information can be removed from the organization. Moreover as the elimination of the budgeting process removes the possibility of distortion of the internal system and information within the organization, the process also enhances the development and maintenance of strong integrity of the organization Carreyrou, (2001).
The application of the budgeting system is making the employees to think that if they lie about their performance then they will be rewarded and if they share the truth about their performance then they will be punished and thus for the improvement of the organizational ethics that lies in the honesty of the employees of the organization, an organization must remove the traditional budgeting techniques for the purpose of setting the gaols and making an appraisal of performance.
The Misuse of Budgeting Process
According to the authors of the paper the researchers and practitioners often criticise the application of the traditional budgets on the ground of performance evaluation. According to them the process of performance evolution of the employees on the basis of the budgetary standards initiates the problems of presenting manipulated performance statements and destroys the honesty of the employees and ethics and value of the organization. Therefore according to the critics of the budgetary sytem it is essential to abolish the traditional budgeting techniques in order to enhance the overall all performance of the organization Sivabalan et al.,(2009).
But as per the results of the quantitative analysis done on the basis of the survey data which reflects the opinion of the 331 accountants in medium to large organizations the traditional budgeting system is essential for the purpose of implementation of control and planning.
The operational budgets are to be prepared for the purpose of the management of resources, in order to prepare the pal n frame work and to determine the production capacity on the basis of the available material and human resources. The operational budget also determines the optimum unit selling prices and identifies the areas of innovation and further research that is needed for the enhancing the product quality and production capacity of the organization Lynn,& R (2004).
The traditional budgeting technique should be used as an important tool for implementation of control with ion the organization. One way of imposing control is to use the budget as tool of tracking the overall progress of the workflow of the organization. The other use of budget as a tool of control can be made for the purpose of cost control. The aspect of controlling the operational cost of a business is essential as greater will be the efficiency of the organization in minimizing the operational cost grater will be the savings of the company and higher will be the operational margin of the organization. The budget is an important tool of tracking the costs incurred by the business in the different accounting periods and to impose intra period cost control.
Thus from the above discussion it can be seen that the tool of the traditional budgeting techniques is capable to impose strong cost control over the organization that is essential for the enhancement of the overall performance of the organization.
Moreover the tool of the traditional budgeting techniques are more used by the organizations for the purpose of planning and control rather than evaluation of the performance of the employees.
Besides, the application of the rolling budgeting techniques also delivers the information of the changing business environment to the planners of the organization. Therefore the problem that arises due to the static nature of the budget has also being minimized Sharma, (2002).
Thus the criticism of the traditional budgetary techniques based on performance evaluation is not a strong reason of abolishing the budgetary techniques as the budget plays more important and essential roles in implementation of internal control and panning.
Reference:
Ekholm, B. G., & Wallin, J. (2000). Is the annual budget really dead?. European Accounting Review, 9(4), 519-539.
Hope, J., & Fraser, R. (2003). Who needs budgets? Response. Harvard Business Review, 81(6), 132-132.
Lynn, M. P., and R. L. Madison, 2004, A closer look at rolling budgets,Management
Accounting Quarterly6, 60–64.
Sharma, D. S., 2002, The differential effect of environmental dimensionality, size, and
structure on budget system characteristics in hotels,Management Accounting Research
13, 101–130
Sivabalan, P., Booth, P., Malmi, T. and Brown, D.A., 2009. An exploratory study of operational reasons to budget. Accounting & Finance, 49(4), pp.849-871.
Carreyrou, J., ‘Lernout unit booked fictitious sales, says probe’,Wall Street Journal, 9 April
2001, p. B2
Jensen, M.C., 2003. Paying people to lie: The truth about the budgeting process. European Financial Management, 9(3), pp.379-406.
Argyris, C. and Kaplan, R. S. (1994 ) ‘Implenting new knowledge : the cas e of activity-based costing’, Accounting Horizons, 8(3): 83–105
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