BUDGETING

The Evolution of Budgeting

The Evolution of Budgeting

Introduction

The world is evolving at a very rapid pace where hundreds of new technologies get developed on a daily basis. To survive in such a dynamic environment, businesses need to be flexible by constantly adapting to the changes. Without proper planning, businesses would fall far behind others in this competitive race, ultimately dying a slow and painful death. To steer such businesses away from their untimely demise and to steer them towards financial prosperity, the accounting and finance departments play key roles. One of the major purposes for finance and accounting department is the creation of the company's budget.

What is Budgeting?

Budgeting involves creating a budget for a company's financials or its expenses. It is the groundwork and the basis of every financial plan and encompasses a complete understanding of any business's current and future cash flow positions. Financial managers are responsible to create budgets in such a way that allots the company's funds in the most efficient and profitable way (Kemp, 2003, pp.4). A well made budget allows companies to keep their spending in control and even allows them to discover problems in their cash positions. There are several categories of budgeting, including traditional budgeting and beyond budgeting. Each category has its own set of benefits and drawbacks.

Traditional Budgeting

Traditional budgeting is the most widely adopted category of budgeting in businesses. Traditional budgeting involves formulating a plan or a road map for a company and then deciding on the activities that would allow companies to reach at the end of that road map. Traditional budgeting uses historical data, ranging between 1 and 5 years, to forecast the future spending of the company (Stokdyk, 2007, pp.n.d). Traditional budgeting also looks past decisions, and then correlates these decisions with actual results to create the most feasible and profitable financial plan for the company. Tradition budgeting usually involves a top-down approach, in which the top level management sets goals and objectives for the entire company. Traditional budgeting usually creates certain restrictions for the company's departments and sets target for each department and its employees. Experts consider these targets motivational tools to enhance employee performance and productivity. Traditional budgeting generally supports an authoritative style of management (Trost, 2005, pp.n.d).

Beyond Budgeting

In the midst of an evolving economy, experts have developed a new approach in the field of finance. Beyond Budgeting involves a freshly developed theoretical framework and a new management model. This framework and model are based on the observation of highly successful companies such as Google and Toyota (Hope, 2004, pp.163). Unlike traditional budgeting, Beyond Budgeting involves a more flexible and adaptive approach by the company. In Beyond Budgeting, there are no fixed targets, goals, and restrictions on expenses. A fixed budget does not bind departments, allowing both the departments and employees of companies to become more flexible (Rothberg, 2011, pp.3). As a result Beyond Budgeting promotes autonomy in company, empowering its employees to make certain decisions without prior approval of the company's ...