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 for 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, and with these
changes the budgets made by companies can be greatly affected. Because of the static nature
of the traditional budget, I think there is a need for a dynamic budget that considers 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.
A budget is an essential planning tool for estimating your business’s future revenue,
expenses, and profits. It helps control spending and identify potential problem areas where
revenue might not cover spending and potential growth opportunities when you may have
extra cash that could be invested in new opportunities. A detailed, realistic budget can also
help the company secure funding from banks and investors (Ali, 2021). Generally, businesses
prepare budgets for 12-month periods, using past and current financials to forecast what will
happen in the following time frame. Some of the universal benefits of preparing a budget are
that it can help motivate employees, prevent overspending, and it can also help a business
obtain funding (Ali, 2021). However, from other perspectives budgeting can be seen as
ineffective management tools (Rygelski, 2018). Rygelski explains that budgets are inherently
inflexible. Because many times they are based off past information, the information may
already be incorrect. Even so, many companies will stick to the budget no matter current
circumstances.
I think that the choice to adhere to the use of a traditional budget over an alternative approach
would depend on the business. Many businesses who do not deal with huge changes in costs
and supplies could use a traditional budget to their advantage. When there are no huge swings
in outside costs then predicting the future is much easier and more accurate. However, for
businesses that rely on many outside costs to formulate their budgets, using a traditional
budget may not provide the most accurate representation. In this type of businesses using an
alternative approach would be more beneficial. I like the idea of creating two months' worth
of forecasts that Rygelski suggests. When outside costs are ever changing using shorter time
frames for your predictions, allows more adjustments to take place to provide the best results
at the end of the 12 months.
In general, budgeting is considered a control tool that offers an action plan to make sure that
the actual activities of the organization are least deviated as compared to the planned
activities. Also, most organizations use the budgets to provide an operation of the
organization as well as an overview of the organization (Management Control Systems (2nd
edition). Budget as an Instrument of Control, 2021). In the present era, many companies are
facing new alternative approaches rather than the traditional budgeting systems because
traditional budgeting is associated with some the challenges.
In the present discussion, the article “Budgets Don't Work: Here's How Businesses Can Do It
Differently” by the Forbes financial council has been examined to determine the benefits and
drawbacks of traditional budgeting practices.
Benefits of traditional budgeting
A solid framework is provided by the traditional budgeting system as it is based on the earlier
year data that permits the organization to base their financial activities and their budget on a
solid framework. Also, the traditional budget practices are helpful for the organization to
make a proper decision by identifying the issues and accordingly asking for making changes
in the organization. Moreover, traditional budgeting encourages decentralization that transfers
the control of an organization or an activity to different authorities. It can be said that it is a
part of the organizational culture. Overall, the traditional budgeting practices are considered
an instrument of control that follows the top to bottom approach (Rygelski, 2018).
Drawbacks or challenges of traditional budgeting practices
The present research has identified that traditional budgeting practices require more time to
manage the work. Also, it has been found that this practice involves too many management
resources. Moreover, the traditional budgeting practices are inefficient as it has version
control issues, are prone to data entry errors, and have difficulty in devising accurate
formulation. Additionally, this practice has other drawbacks such as low change
responsiveness, disconnection from the strategic plan, and failure to motivate desirable
behaviours.
After analysing the findings related to the traditional budgeting practices, it can be said that
these practices are the best for the companies, but a slight modification is required in the
practices. Here, an alternative approach could be taken by a company by focusing on zero-
based budgeting, better budgeting, rolling forecast, and beyond budgeting. Here, the rolling
forecast could be a more beneficial approach to leadership, managers, employees, and others.
This could help to bring more opportunities to achieve the most significant objectives and
goals to fit budget numbers.
When we look at traditional budgeting practices, we can see that it's a proven method that
works and has been around for a while. Most companies make a budget at the start of the year
but sticking with it is very tricky. It all depends on the economy and how well the business is
doing. If the company knows its revenue and the total amount of expenses spent through the
year, it can look over the data over a few years to estimate the budget needed. Companies also
must take any holidays or special events that cause them to spend more money. Budgeting
correctly will make the company more successful, avoid unexpected expenses and possibly
bring in more profits depending on customers spending limits. Identifying the revenue and
expenses can help address any problem that could cause the company to fail below the 30%
recommended profit increase. The company needs to determine whether to use traditional
budget practices or other alternatives based on the business's goals. Companies need to take
into effect sales growth and changes that could affect sales, such as recession, inflation, and
demand. While traditional budgeting is a great way to plan and be prepared, it is important to
look at changes that are happening throughout the year so that expenses and other fees do not
affect the overall budget at the end of the year. Lack of employment is a huge issue in the
economy; it is hard to find good work. d
After reading the suggested text, traditional budgeting seems to be the old way of doing
things. More specifically, budgets are a "frame of reference" provided by upper management
to restrict spending. The article wrote about budgets being spent because the area/department
doesn't want to lose that amount when the next fiscal year approaches. I'm familiar with this
act because, in the department I use to work, we had a budget for permanent ware which
would be plates and silverware. When the end of the year approached, we looked at the
amount left to spend and would spend every penny of it, because we had it to spend. The
department was cutting overtime hours because everyone was working so much but yet, we
spent every penny we could on dishes. Budgets can be wrong.
I would suggest using a non-traditional budget because I guarantee that other places do the
same thing with their budgets as I did with mine. The article suggests 13-week or 2-month
cashflow/forecast. These types of cash assessments are better for a company because things
are always unexpected. Take for instance COVID; everything was turned upside-down. My
department lost 6 employees in a short time frame and the rest of the department had to take
on extra work. Overtime was through the roof and there wasn't much we could do about it
because they weren't interviewing to hire because of restrictions. The company had to
purchase thousands of dollars in equipment for all employees to work from home (I work for
a large company that has hundreds of labs, some that were testing COVID tests and vaccines).
I can only imagine that over-budget spending we endured during this time. But who would
have predicted a global pandemic while doing budgets the prior year?
References:
Datar, S. and Rajan, M. (2018). Horngren's Cost Accounting: A Managerial Emphasis.
Pearson.
Rygelski, Mark. (January 5th, 2018). Budgets Don't Work: Here's How Businesses Can Do IT
Differently. Forbes.
Rygelski, M. (2018, January 5). Council Post: Budgets Do not Work: Here’s How Businesses
Can Do It Differently. Forbes.
https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/budgets-dont-work-heres-
how-businesses-can-do-it-differently/?sh=2cb42dd846b8
Datar, S. M., & Rajan, M. V. (2018). Horngren's cost accounting: A managerial emphasis,
global edition, 16/E 12. PEARSON EDUCATION LIMITED.
Ali, Rami. (2021). What a Budget Is and Why Your Business Needs One?. Oracle NetSuite.
https://www.netsuite.com/portal/resource/articles/financial-
management/budget.shtml#:~:text=A%20budget%20is%20an%20essential,be%20invested%
20in%20new%20opportunities.
Management Control Systems (2nd edition). Budget as an Instrument of Control. (2021).
Retrieved May 25, 2022, from
https://www.icmrindia.org/courseware/management%20control%20systems/MCS04.htm
Rygelski, M. (2018, January 5). Council post: Budgets don't work: Here's how businesses can
do it differently. Forbes. Retrieved May 25, 2022, from
https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/budgets-dont-work-heres-
how-businesses-can-do-it-differently/?sh=7bbb61ff46b8
Ali, Rami. (2021). What a Budget Is and Why Your Business Needs One? Oracle NetSuite.
https://www.netsuite.com/portal/resource/articles/financial-
management/budget.shtml#:~:text=A%20budget%20is%20an%20essential,be%20invested%
20in%20new%20opportunities.
Datar, S. M., & Rajan, M. V. (2018). Horngren's cost accounting: A managerial emphasis,
global edition, 16/E 12. PEARSON EDUCATION LIMITED
Rygelski, Mark. (2018). Budgets Don't Work: Here's How Businesses Can Do It Differently.
Forbes. https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/budgets-dont-work-
heres-how-businesses-can-do-it-differently/?sh=4aa6c9146b8a
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/budgets-dont-work-heres-
how-businesses-can-do-it-differently/?sh=2cb42dd846b8
