Traditional budgeting uses forecasting to try and determine what the
expected revenues and expenses of next year will be based on what
the revenues and expenses of the previous yer will be. The benefits
of a traditional budget are the years of history and data you have to
make your assumptions moving forward and try to predict what is to
come for the company. These decisions set goals and standards for
the company fro the very start of the year that they can strive for.
However, the drawback is that a company is making 12 months worth
of static planning without any concrete information on how the
coming year will go. Companies expecting large sales growth and little
change in materials prices can be greatly thrown off by large changes
in demand, recession, inflation, and substitute goods flooding the
market, among other issues. A year can hold a lot for a company itself
and the world as a whole, and with these changes the budgets made
by companies can be greatly effected. Because of the static nature of
the traditional budget I think there is a need for a dynamic budget
that takes into account changes as a year progresses on. I think a
strong solution would be to use a rolling forecast budget system.
Rolling forecast systems use data as it becomes available to make
predictions about future performance (Morlidge). While this data
doesn't set goals and standards, goals and standards can be derived
from this. Rolling forecasting would be a great alternative to a static
budget created at the beginning of the year and instead could help
companies see where they stand with their goals and can be used to
create goals that assess factors under management control and out of
managements control.
Morlidge, Steve. “Traditional Budgeting: What Are the Alternatives?”
Traditional Budgeting: What Are the Alternatives? | FP&A Trends, FP & A
Trends, 2017, https://fpa-trends.com/article/traditional-budgeting-
what-are-alternatives.
Rygelski, M. Council Post: Budgets Don’t Work: Here’s How Businesses
Can Do It Differently. Forbes, January, 2018,
https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/b
udgets-dont-work-heres-how-businesses-can-do-it-
differently/?sh=2cb42dd846b8
