Budgeting Practices of listed companies in the Netherlands

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). …