Budgeting at a crossroads - The viability of traditional udgeting - A case study

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Volume Title
School of Business | Master's thesis
Date
2013
Major/Subject
Accounting
Laskentatoimi
Mcode
Degree programme
Language
en
Pages
84
Series
Abstract
The objective of this research was to examine the viability of traditional budgeting. In the recent decades, criticism towards traditional budgeting has been notably increased, calling it a relic of the past which hinders companies' effective operations management and even prevents reactions to changes in the market. The most vocal critics favor abandoning traditional budgeting completely. However, at the same time, budgeting is almost universally used. Therefore, the objective was to find out whether traditional budgeting would still be useful and do the critics have a point. The criticism has given rise to a number of alternatives to traditional budgeting and this research analyzed three major alternatives and their plausibility. As the effectiveness of budgeting systems depend on its appropriateness to the particular company and on the company's environment, business and people, this research was carried out as a case study. The chosen company was a multinational professional services company, which requested to remain anonymous. The focus was limited to Finland's organization. The research data was gathered by interviewing the case company's managers. In total 11 people were interviewed, consisting of the CEO, CFO, Business development leader and each of the Service Line leader, with supplement interviews from one additional manager in each Service Line excluding one. The gathered interview data was supported by the researcher's observations and knowledge on the processes based on 4, 5 years of work experience in the case company. The research revealed that the company favors challenging budgets, although global administration emphasizes the planning aspect of budgets; realistic estimates of the outcome. The target-orientation enables a stronger strategic link, especially in the form of growth targets as well as the use of budgets for motivational purposes and target-setting. The company has managed to reduce the need for budget gaming, as even though personal level targets are derived from the budget, achieving them only affects the annual performance rating. While the rating decides the multiplier for the bonus, the actual size of the bonus pool is based on team performance. The company's budgeting system contains a few issues. First of all their expense control is somewhat ineffective due to ambiguity in the responsibility and authority over the costs. The bigger problem lies in the revenue protectionism, which could be partly solved by reducing the amount of budgeting units. The results indicated that traditional budgeting can still be considered to be the best possible system for its purpose. The alternative methods analyzed proved to be problematic to replace the case company's current budgeting system and their plausibility remained theoretical in the company's business context. The case company should, however, put emphasis on developing their current budgeting system and practices within the globally set frames in order to correct at least the biggest concerns in protectionism and expense control.
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Keywords
budgeting, budjetointi, Financial control, Taloudellinen kontrolli, Performance Management, Suorituksen ohjaus
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