Open Access Te Herenga Waka-Victoria University of Wellington
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A Theory of Constraints analysis of organisational budgeting processes: International research and New Zealand managers' perceptions.

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posted on 2021-12-08, 22:25 authored by Scott, Graham

The purpose of this research was to use the Theory of Constraints (TOC) Thinking Processes (TP) to examine the problems and issues associated with Traditional Budgeting in organisations. TOC gave a framework to look at the causality of the problems, identify missing entities, and test solutions. The research was structured in two phases. Phase one sought to organise the problems identified in the literature review using the logic-based framework of the Theory of Constraints (TOC) Current Reality Tree (CRT) to better understand the interactions and causality between the various problems reported. During phase two, interviews were conducted in two Not-For-Profit organisations to test the existence of these problems, the interactions of the problems in the organisations and to see if the literature-informed Current Reality Tree reflected managers’ perceptions, and to find any further causality.  The findings revealed that the managers of these New Zealand organisations perceive they face the same problems as those outlined in the literature. In particular, the budgeting process is felt to be a time-consuming exercise, that causes competition between budget holders for funds, disempowers staff, lowers strategic focus, and “wastes” money as budget holders build in contingency and then spend it.  These problems occur because costs are often unpredictable and there are often negative consequences for getting budget figures wrong. The findings indicate that organisation governors and upper management want certainty of costs, so they use planning and reforecasting to get it. The findings also indicate that the managers of the budgets want certainty on delivery of outputs and add contingency to their budgets to get it. The actions of Leadership use up time and the actions of managers use up money. There is therefore an increase in the internal competition for time and money, which causes siloing of departments, less focus on strategy, and disempowering of staff.  The findings indicate that managers add contingency to their budgets and can then use it because expenses vary in their level of predictability and in how discretionary they are. Unpredictable costs that cannot be deferred can be the most dangerous for budget holders and cause the most pressure to add contingency. Budget holders can then use this contingency along with the deferral of some types of expenses to keep themselves within budget if expenses are higher than anticipated. Conversely, other expenses may be brought forward or inflated to use up any excess contingency.  Alternative budgeting methods like Activity Based Budgeting, Zero-Based Budgeting, Rolling Forecasting and Continuous Budgeting focus on planning and reforecasting to get certainty. The approach known as Beyond Budgeting may reduce the budgeting workload requirement, which then frees up time and therefore empowers managers. Strategic Budgeting overcomes unpredictability by aggregating the contingencies in the individual budgets into a central buffer so that not all funds are allocated before the financial year starts.  Phase two of the research was limited to a small sample size of 10 interviews across two Not-For-Profit organisations. Further research will be needed to see if it is applicable in other settings. The practical implications for organisations relate to the effect that the Leadership demand for planning and reforecasting has on managers’ time. In particular, Leadership also need to understand that the reason managers add contingency is not to disrupt the organisation but so they can deliver on their outputs.  The contribution from this research are both theoretical and methodological. The research provides a deeper understanding of the systemic complex of cause-effect relationships that link over-arching problems to core causes of the issues arising for the use of the Traditional Budgeting Process. The research also demonstrates the use and efficacy of the TOC TP’s to bring clarity and organisation to the research, findings and insights.


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Te Herenga Waka—Victoria University of Wellington

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Author Retains Copyright

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Te Herenga Waka—Victoria University of Wellington

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Master of Commerce

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Victoria University of Wellington Item Type

Awarded Research Masters Thesis



Victoria University of Wellington School

School of Management : Te Kura Whakahaere


Mabin, Victoria; Bates, Ken