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 times, we don’t have
those values yet, then you compare those amount 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 of projections that could and can change for better
or worse. Which is why I’m 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 were as the 13-
week cash flow can work in others. The 13-week cash flow can mean
more work in analyzing the budget but it would be more accurate
whereas the traditional budget is not as accurate however its 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.
Reference:
Rygelski, M. (2018, January 5). Budgets Don’t Work: Here’s How
Businesses Can Do It Differently. Forbes.
https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/bu
dgets-dont-work-heres-how-businesses-can-do-it-differently/?
sh=c95e50c46b8a
