Traditional budgeting is the processing of projected revenue and expenses based on previous
budgets. Advantages of traditional budgeting include making decisions. If you spot any
issues, you can adjust accordingly, cut back, reduce, etc. Essentially it allows a company to
come up with a game plan for operating a business while remaining profitable. There are
some downsides. Traditional budgets are easy to manipulate which would give inaccurate
representation. It is also time-consuming; you must review previous budgets and determine if
any changes are needed.
Open-book management is an alternative to traditional budgeting. Using forecasts within a
shorter span of time allows a company to make an educated guess versus a guess based on
previous traditional budgets. This method paired with open-book allows transparency to
employees, specifically those whose pay and bonus are based on the profits of the company,
to focus on the success of the business. This does come with some disadvantages. If
employees are able to see the company's financials, they may seek immediate compensation if
the company's revenue increases.
In my opinion, based on today's workforce, traditional budgeting is the better choice.
Employee retention is difficult for many businesses right now and cannot afford to lose
employees based on open-book management. While traditional budgeting is more time-
consuming, there is software available that can do this for businesses automatically. d
Traditional budgeting for businesses is becoming less effective for most businesses.
Companies are now adopting the approach of more frequent less intensive budgets. Planning
shorter-term budgets for managers, CEO's and personnel allow for more accurate budgeting.
It allows for an in-depth analysis of expenditures throughout the year. It also allows for
changes to be made should you find that expenditures that have been made so far, have been
negatively affecting the master budget. These adjustments will help to maintain or expand
company profits for the year. Constant analysis of short-term budgets gives managers more
control of company finances. Companies can change budgeting methods when necessary.
Budgets are inherently inflexible, they are usually based on state information and assumptions
about things that are going to happen 12 months or more in the future (Rygelski, 5 Jan 2018).
I kind of agree with that it works in some situations and in others it doesn’t really work, you
see that 12 monthly budgeting in escrow, and it can cause issues with the payments. I think
the highest escrow shortage I’ve ever seen was 13,000 and that’s something that could have
been caught much sooner than when the escrow analysis was ran at the 12-month mark. An
escrow analysis is run once a year and based the escrow payment off the current values for the
year prior and what is assumed to be for the current year as often, we do not have those values
yet, then you compare those amounts with the year before that. Example being an analysis is
run for 1 Jan 2022, we are taking the values that were paid in 2021 and assuming that that will
be the same amount for 2022 as exact values are not know yet. Then you compare the 2021
amounts with the 2020 amounts to get the difference to come up with the new increased
escrow pmt amount. This is budgeting the escrow just like companies do. Its not that efficient
as those values can change. Companies are basing the next year amounts off projections that
could and can change for better or worse. Which is why I am so darn good at explaining
escrow as its about 90% of my call volume and people cants seem to understand it. More and
more companies are moving to a 13-week cash flow instead of the traditional budgeting plan
according to Rygelski. This means that a company can focus on their spending more than
budgeting specifically. This time frame is also much shorter than a 12-month bases as its
more of a 2-month basis and thus more accurate.
Traditional budgeting can work in some situations where as the 13-week cash flow can work
in others. The 13-week cash flow can mean more work in analysing the budget but it would
be more accurate whereas the traditional budget is not as accurate however it’s not as time
consuming. Another thing with traditional budgeting the higher-ups have to check and verify
the budgets before it can be submitted. So, both have their ups and downs, and one may work
in some situations and in other situations the opposite.
The process of projecting your business’s revenue and expenses for the new coming year
based off of the year previous budget is traditional budgeting. This specific tool in the
accounting world gives the business the opportunity to predict and analyze the earnings and
expenses that were used in the prior year. If you review the budgets used in the past, you can
analyze and predict what to expect. There are several advantages when using traditional
budgeting such as, making better decisions and obtaining finance in the future. When you
review the budget, and you can review any issues that may have occurred. By recognizing
these past problems, you can make better decisions on how to run the business and what to
change if needed. When it comes to financing, lenders and investors would like to review
future financial plans before considering loans or investments. By forecasting a traditional
budget and having this handy, the business will be prepared to show these projections. The
disadvantage of this type of budgeting is that it can be a little time consuming and there are
potential changes that can happen causing a misrepresentation of what the goals may have
entailed.
If the company wanted to take a different route or approach, they can consider other types of
budgeting like priority-based budgeting, and zero-based budgeting. When considering the
priority-based style of budgeting this is usually designed to rank high to low bids for
resources otherwise known as decision packages. This means that activities are reviewed
during each budget set and re-evaluated at that time. Zero-based budgeting must have
expenditures justified and that all costs are estimated based off service and output. This
allows the proposed expenditure to be valued consistently and that operations can be analysed
closely. I think the traditional budgeting is something I would use and based off the
advantages I would prefer that method.
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Blkely-Gray, R. (2021, January 25). Traditional budgeting advantages & disadvantages for
small business. Patriot Software. Retrieved May 22, 2022, from
https://www.patriotsoftware.com/blog/accounting/traditional-budgeting-system-process-
advantages-disadvantages/
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