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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