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Article Excerpt
In this article we present the results of an empirical research project on current budgeting practices at companies listed on the Amsterdam stock exchange. Although many articles have been published that contain strong criticism about the traditional budgeting process, a remarkable result of our research is that Dutch CFOs are very satisfied with their budgeting practices. We will elaborate why.
Budgeting is a well-known subject. In the last few years, many articles have criticized the traditional budgeting process and have stated, among other things, that the process costs too much time in relation to the benefits and reduces innovation and changes. Jack Welch, former CEO of General Electric, wrote the following in his book Winning:
Not to beat around the bush, but the budgeting process
at most companies has to be the most ineffective practice
in management. It sucks the energy, time, fun and big
dreams out of an organization. It hides opportunity and
stunts growth. It brings out the most unproductive
behaviors in an organization, from sandbagging to settling
mediocrity. In fact, when companies win, in most
cases it is despite their budgets, not because of them. And
yet, as with strategy formulation, companies sink countless
hours into writing budgets. What a waste! (1)
The published criticism about the traditional budgeting process induced us to investigate the budgeting practices in Dutch-listed companies. This investigation compares current practices with mainstream accounting literature. Here we describe the research design, findings, and conclusions.
RESEARCH DESIGN
Our primary purpose was to investigate the current budgeting practices of Dutch-listed companies and to compare them with the mainstream literature that we have listed at the end of this article. We conducted the investigation among all companies listed on the Amsterdam Stock Exchange, but we excluded investment and real estate companies because their orientation toward budgeting is different. In total, we selected 134 companies for our research.
We gathered research data via a survey, which has the advantage of reaching a large number of companies at relatively low cost. There are limitations, however, so we had to interpret the results carefully and draw only general conclusions. In November 2006, we mailed the questionnaire and an accompanying letter to the chief financial officers of the selected firms and then followed up with a reminder one month later. The final usable response rate was 33%.
RESEARCH RESULTS
The results appear in tables throughout the article. The headline of the table mentions how many firms answered the question, and each table contains the results in percentages and the number of respondents in parentheses. For several questions it was possible to give more than one answer, so the percentages can add up to more than 100%.
Management Control Process
Management control is the process by which managers influence other members of an organization to implement the organization's strategies. (2) This process consists of four different phases--strategic planning, budgeting, measurement and reporting, and evaluation--each of which leads to the next phase. Besides these formal phases, the process also involves informal communications and interactions such as meetings and conversations. This study is about phase two: the budgeting process.
A budget is a plan expressed in quantitative, usually monetary, terms covering a specified period of time, usually a year. Budgeting, a term for several plans, cannot be changed easily and only under specified circumstances. It is also a management commitment. Managers agree to take the responsibility to attain the budget targets. The budget is reviewed and approved by someone who is higher in authority than the person who has to accept the responsibility (the budgetee). All these plans together are called the master budget, which contains an operating budget, a cash budget, and a capital expenditure budget. Our research is done within the boundary of the operating budget, which includes the planned operations for the coming year.
Table 1 states that 63.6% of the firms claim that their current operational budget supports the firm's strategy to a considerable extent, and another 25% say it even supports their strategy to a very great extent. These results are in line with accounting literature that states the operational budget should be based on the firm's strategy.
Budgeting Period
A budget is a plan of action for a unit or activity covering a fixed period, broken down by subperiods. According to the literature, budgets usually cover one year and are usually broken down by months or quarters. In our survey we asked about the budget period and how this is broken down by subperiods. Table 2 presents the responses. Most of the participants (81.8%) have a budget with a period of a year and divide their budget into months, while 18.2% divide their budget into quarters, probably because their environment is not very dynamic. In that case it is not necessary to have budget information each month.
Most organizations prepare budgets once a year to cover the upcoming fiscal year, but it is also possible to follow another practice,...
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