Prior to beginning work on this discussion, please read the articles Who Needs Budgets? (Links to an external site.), Traditional Budgeting vs. Beyond Budgeting (Links to an external site.) in the Financial Planning page of the CFO Edge website, and Traditional Budgeting Versus Beyond Budgeting: A Literature Review (Links to an external site.).
In the words of GE’s legendary ex-CEO Jack Welch, Jack Welch, “The budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, time, fun, and big dreams out of an organization (…) [and] brings out the most unproductive behaviors (…)” (Welch & Welch, 2005, p. 189).
Some argue that the purposes of budgeting can be achieved without the conventional budgeting process. These companies espouse an idea called beyond budgeting that proposes to replace annual budgets with rolling forecasts of key performance indicators (Hope & Fraser, 2003). Others disagree, pointing out that the work of continuous planning is costlier than budgeting and that doing something continuously tends to make the process superficial.
So, the jury is still out. But so far, GE still prepares budgets! Discuss in an initial post of 200 words whether the controversial concept of beyond budgeting is a better approach for financial planning and analysis (FP&A) than traditional budgeting.
Guided Response: Review several of your peers’ posts. In a post of at least 100 words, respond to at least two of your peers’ posts in a substantive manner. Provide information that they may have missed or may not have considered about whether traditional or alternative budgeting methods are better and have a positive impact on businesses, or which has more practical usefulness. Do you agree with your peers findings? Why or why not?
Post by classmate 1
Traditional Budgeting and Beyond Budgeting approaches both have their place in business. From a management standpoint, one is not better than the other. Choosing the budgeting method primarily depends on the type of operations a company conducts. The core of the Traditional Budgeting method is command and control (Rothberg, 2011). The Beyond Budgeting method’s core is empowerment and coaching within operations (Rothberg, 2011).
A company’s budgeting methods can be different for decentralized or centralized businesses. A decentralized company could benefit from the “Beyond Budgeting” method and allow divisional managers to make budgeting decisions that could affect their core divisional operations. A centralized company could benefit from the “Traditional Budgeting” method as fewer hands controlling the budget under one roof can make more streamlined operations from quick and decisive decision making.
I align more with the Beyond Budgeting approach. While varying company operations can change which method I would use, I find the Beyond Budgeting approach more flexible. Empowering the right people in the right place can create the proper budget. When a business trusts its managers to operate its divisions effectively, the company can see more innovation, cost-cutting, and proactive business decisions.
The stock market has seen the worst losing streak since 2001, and many companies like Target have lost nearly 25% or more in their company’s valuation. Target was plagued with not identifying decreased customer demand and inventory overage, which led to their negative future outlook. Divisional managers should have caught this before it became an issue. A company is only as good as the weakest link; therefore, no matter what budgeting approach, the right people need to be in the right place.
Rothberg, A. (2011, April 21). Traditional Budgeting vs. Beyond Budgeting. CFO Edge.
Traditional Budgeting vs. Beyond Budgeting
Post by classmate 2
This week’s discussion focuses on two controversial budgeting approaches; Traditional Budgeting (TB) and Beyond Budgeting (BB). Traditional Budgeting is considered to be a more conservative business financial command and control of how actual and estimated should be measured and controlled; decisions are solely made by top-level executives and pass down to department managers. Whereas the Beyond Budgeting approach is more geared towards open communication from all levels of a company, it empowers and coaches decentralized teams closely connected with customers (Ruthberg, 2011). In a TB, executives assume that they are better equipped to set the company goals and initiatives for increasing productivity without input from lower plant managers. It leads to setting impractical and unrealistic expectations for employees without practical approaches for measuring performance adequately. TB creates budget constraints and delays decision-makings necessary to increase production or eliminate waste.
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