Beyond Budgeting

With rapid changes in today’s volatile economy, it is challenging for businesses to respond and adapt to the new economy quickly. Sheffield Surgical Ltd (SSL) has been around for almost half a century where they started manufacturing top-class stainless steel and titanium surgical instruments for hospitals. Although they started out as the main manufacturer for the National Health Service (NHS) in the UK, SSL is now a world-renowned supplier for dental and veterinary surgical instruments. However in previous financial periods, sales have remained unmoved while operating costs increase, leading their profit to decrease.

SSL is currently under the influence of the traditional budgeting system which the Sales Director has openly criticised for its limitations. This report focuses on trying to convince SSL’s directors of Beyond Budgeting.

Rickards (2006) defined Budgeting’s purpose as “… to support management in successfully implementing its strategies as well as in planning and controlling operational measures”. In addition, Rickards (2006) continued “… managers increasingly voice dissatisfaction with budgeting…” Since the main job a budget has is to control resources so the company is not over-using (Goode and Mali, 2011), having a budget helps although many companies sees budget as necessary.

According to Goode and Malik; 2011), “… the environment now is so competitive that budgeting is no longer useful…” However Libby and Lindsay (2010) argued that it is difficult for companies function without budgets.

Another drawback is that users feel pressure by budgets constantly which affects their work performance as Hope and Fraser (2003) added that this leads to deceitful actions to stay within budget. Morlidge and Player (2010) criticised traditional budgeting further by implying that they are fixed without any room for adjustments and suggested it to be replaced by forecasts and performance measures although (Boesen, 2000) suggest that traditional budgeting can still be used but not in today’s world.

Hope and Fraser (2003) and Goode and Malik (2011) criticised budgeting for various reasons such as troublesome, costly and outdated. According to them, the process starts months earlier before the year and by the time, the process is completed, economic conditions would have changed resulting in resources wastage. Furthermore, the process requires at least 20-30% of manager’s time (Neely et al. 2003). After spending so much time on the budget, the economy might change which makes the allocation of resources during the budgeting process invalid (Bourmistrov and Kaarbøe, 2013). Companies like Ford Motors listed out the overall cost for the process which amounted to $1.2 billion annually (Hope and Fraser, 2003; p.6)

The traditional method also brings benefits like coordinate and control financial activities of a company (Goode and Mali, 2011) where companies are able to lead their budgets (Rickards; 2006, Horváth et al.; 2004) which provides managers an idea of their finances and make changes.

Hope and Fraser (2003) strongly feel that traditional budgeting should be removed permanently