Lecture 5

Understand the primary approaches to budgeting

Some practical examples of how budgeting is used

Be introduced to the ‘beyond budgeting concept’

Imposed style (‘top down’)

Participative style (‘bottom up’)

When best used:

During periods of economic hardship When operational managers lack budgeting

skills In very small businesses

Benefits

Strategy likely to be linked directly with the budget Based on what the company can actually

achieve/afford Budget construction time/cost is minimised No need to train staff in budget preparation

Problems

Management/staff likely to be de-motivated Will lack local knowledge – so unachievable Budget will be seen as a ‘stick’ Will ignore local external conditions

When best used:

A structured business Financially aware/trainable managers/staff Where elements of the business are profit

centres

Based on local knowledge Motivation improved More realistic Increase managers commitment to

organisational objectives

Problems

Time consuming process Managers/staff may need training Managers may set easily achieved budgets Changes by senior management may cause

dissatisfaction

Benefits

Budgetary control in a hotel

Flexible budgeting in McDonalds

Performance Measurement & BSC in McDonalds

9© 2000 Colin Drury

Style of evaluation: Budget- Profit- Non-constrained conscious accounting

Involvement with costs High High Low

Job-related tension High Medium Medium

Manipulation ofaccounting information

Relations with superior

Relations with colleagues

Budgeting & Performance Evaluation

Budget-constrained style

(Hopwood, 1976)

Profit-conscious style

Non-accounting style

‘The budget – an unnecessary evil’ (Wallander, 1994,

1999), ‘Bye bye budget . . the annual budget is

dead’ (Gurton, 1999)

‘Take it away’ (Hope and Fraser, 1999)

Beyond Budgeting Round Table: An independent research collaborative

www.bbrt.org proposes that budgeting as most

organisations practise it, should be abandoned.

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Time consuming and expensive

Failure to focus on shareholder value

Too rigid and prevent fast response

Protect costs rather than reducing them

Stifle product and strategy innovation

Divorced from strategy

Reinforce dependency culture

Move towards devolved networks with personal

responsibility