After read `ing the article, I have a better understanding of why a company would choose
to forego a budget. The idea behind the budget is to anticipate future performance. As
mentioned in the article budgets are inflexible. By using a forecasting budget, as described a
company will prepare a 2–3-month projected performance. At the end of the projected
timeframe the company can see if they are on target or not. By doing this it allows for
flexibility and ease of updates/changes.
Under traditional budgeting, the master budget is the “formal outline of the company’s
financial objectives and how they will be attained.” (Datar & Rajan, 2018, p. 225) Budgets
are a tool for determining if managers and employees are on target for their growth and
spending goals. Financial budgets quantify managers’ expectations regarding a company’s
income, cash flows, and financial position. They are developed using supporting information
from nonfinancial budgets like units manufactured or sold, number of employees, new
products being introduced. They are most effective when integrated with the company’s
strategy so that capabilities are matched with marketplace opportunities to meet objectives.
(Datar & Rajan, 2018, p. 198)
ADVANTAGES OF TRADITIONAL BUDGETING
There are four main benefits to traditional budgets. They promote strategic analysis and
planning. They help managers to communicate expectations to different departments or
divisions and coordinate efforts. They give a metric to assess performance by measuring
actual performance against predicted performance. Budgets also help manages motivate
themselves and their employees (Datar & Rajan, 2018, p. 200)
CHALLENGES OF TRADITIONAL BUDGETING
Budgeting is a lengthy process that uses a great number of resources. The budget process is
time consuming. It is estimated that senior managers spend 10-20% of their time on
budgeting and financial planning departments spend as much as 50% of their time. (Datar &
Rajan, 2018, p. 201) Effective use of budgeting requires understanding and support of the
budget at all levels.
It is important to understand that meeting the budget is not the goal; using the budget to meet
the company’s goals is. This requires flexibility and responsiveness to changing situations
(Datar & Rajan, 2018, p. 202). Traditional budgeting can create issues when budget variances
are used to evaluate performance resulting in people playing the budget by underestimating
budgeted revenues or overestimating budgeted costs (Datar & Rajan, 2018, p. 220)
According to Rygelski (2018) the biggest disadvantage to traditional budgets is that they are
based on past information and assumptions about the future and are inflexible. Companies
either stick to a budget regardless of circumstances or they constantly make changes so the
budget just ends up reflecting actual performance. Traditional budgets can contribute to lack
of critical thinking and lead to poor decisions made to avoid going over budget or to avoid
losing budgeted money in the future by spending to their allotted budget.
Rygelski (2018) suggests that creating 13-week cash flows as an alternative to traditional
budgets because they are easier to keep updated, provide a better depiction of the state of
business to make decisions, and they replace budget with a dynamic planning process that
includes questioning and discussion around financial decision making
A compromise to static, traditional budgets is using budget data are frequently revised as the
year goes on (Datar & Rajan, 2018, p. 202). Use of a rolling or continuous budget makes
information always available for a set future period by adding to the period just ended.
Budgetary slack can be reduced by providing richer information more frequently, by using the
budget for planning and not for performance evaluation, or by provide stretch targets (Datar
& Rajan, 2018, p. 221).
Budgets are plans…and everyone loves to take a cheap shot at both…so much so that it’s
downright nauseating. One of the most hackneyed expressions I heard in my 39 years (and
counting!) years in the U.S. Army and Army Reserve was, “no plan ever survives contact
with the enemy.”
My response?
“Well, no (excrement)!”
The value in having a plan is not survival; it is knowing where to pivot because having a plan
gives you the agility needed to survive contact with the enemy. The same can be said about a
budget.
All the criticisms listed in the text about budgets, as well as the supplemental reading, are
legit. Budgets are a prediction, and they can prove to be downright inflexible, ineffective,
divisive, time consuming, etc.
“(Budgets) can really lead to a lot of acrimony within the company, and some cases, the
budgets can be grossly inaccurate,” according to an Edspira accounting video on YouTube.
“So, you spend all this time making these budgets, and then they’re inaccurate, you say,
‘Okay, was this even worth our time?’” (Disadvantages of Budgeting in Managerial
Accounting, 2018).
Yes. Budgets are worth our time because they are a tool enabling management to control its
resources. As Professor Michael McLaughlin of the Edspira accounting video series explains,
people naturally focus on the day-to-day activities instead of thinking long term.
“Budgets force people to think about the future,” (Advantages of Budgeting in Managerial
Accounting, 2018). “Putting together a budget and put on paper and say, ‘Okay, what is it
going to look like 12 months from now?”
I am a chief warrant officer, which in civilian word, makes me a mid-level manager. I plan
because I must. The traditional budgets, produced annually, enables management to plan and
control its resources. They also provide a metric by which you can evaluate subordinates. And
that is important because so much of the work we do is nebulous and ill-defined. We must
assign concrete numbers to gray-area work because, otherwise, holding people accountable
would come down to a gut feeling.
None of that excuses all the pitfalls associated with budgets. My trouble is I cannot really
think of a better alternative.
“More and more businesses are moving toward operating without a long-term budget and
working with a 13-week cash flows instead,” according to this weeks’ reading, Budgets Don’t
Work: How Businesses Can Do It Differently. “There are a number of situations where the
revenues are so erratic that doing a budget and trying to benchmark against it is seen as a
waste of time.” (Rygelski, 2018)
I am just not buying it. Maybe it is Army thinking, but I just think in terms of 12-month
increments. I cannot get out of that mindset.
I do not know if they are considered alternatives, but I do like zero-based budgeting, which
forces managers to justify every dollar every year. That is opposed to just assuming that next
year’s budget will start with the same amount as this year’s budget. I think zero-based
budgeting would force managers to use better numbers to justify their spending.
I am also interested in rolling budgets, which means you add a month to the end of the cycles
after completing a month at the beginning of the budget cycle. This continuous or perpetual
budget is always a 12-month budget. This creates constant updates that force more realistic
thinking.
I started with a quote, so I will end on one. Quotes about planning are ubiquitous. Quotes
about budgets? Not so much. But I do like this one from famed financial expert Dave
Ramsey: d
“A budget is telling your money where to go instead of wondering where it went.”
"A budget is an estimation of revenue and expenses over a specified future period of time and
is usually compiled and re-evaluated on a periodic basis." (Ganti, 2022) By having a budget,
there are advantages and disadvantages. Budgeting can "promote coordination and
communication within the company, provide a framework for judging performance and
facilitating learning, and motivate managers and other employees." (Dater & Rajan, 2018).
The disadvantage of budgeting is that by "using the budget to manage a business result in
both leadership and employees not thinking critically about spending or revenue
opportunities." (Rygelski, 2018).
I personally do not support a company's use of a traditional budget. Budgets are "usually
based, like last year's performance, on stale information and assumptions about things that are
going to happen 12 months or more in the future. " (Rygelski, 2018). I feel that assumptions
are never good. You cannot foresee what will happen in the future. For example, when I was
still working as Assistant Manager at Panda Express, the weather affects our revenue for the
day/week. If it rains, there is less guess who wants to drag their family out for lunch or dinner.
We also cannot predict any constructions or mishaps that may happen around the area.
traditional budgeting has many advantages and disadvantages. As mentioned in the Forbes
article, budgets can cause poor business decisions to be made based upon pre-determined
budgets and older information. Budgets can cause poor decisions for example of spending
everything in your budgeted expense total just because you think you can or are allowed to
because it was pre-determined. This is an example of overspending and increasing your
expenses when it is unnecessary. Also, to reach revenue budget employees can also make
poor decisions.
One of the benefits of having a traditional budget though, is the method of planning. You try
to estimate where you should be to see whether you are on par for what you think your
company should be doing financially. This is the better part of traditional budgeting, but your
company should not be over-stressing to meet these but rather use it as a resource and a guide
to see growth.
Rygelski, M. (2018, January 5). Council post: Budgets don't work: Here's how businesses can
do it differently. Forbes. Retrieved May 29, 2022, from
https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/budgets-dont-work-heres-
how-businesses-can-do-it-differently/?sh=449788b146b8%27
Datar, S. M., & Rajan, M. V. (2018). Horngren's cost accounting: A managerial emphasis,
global edition, 16/E 12. PEARSON EDUCATION LIMITED.
Ganti, A. (2022, February 8). Budget. Investopedia. Retrieved May 26, 2022, from
https://www.investopedia.com/terms/b/budget.asp
Rygelski, M. (2018, January 5). Council Post: Budgets Don’t Work: Here’s How Businesses
Can Do It Differently. Forbes. Retrieved from:
https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/budgets-dont-work-heres-
how-businesses-can-do-it-differently/?sh=2cb42dd846b8
Advantages of Budgeting in Managerial Accounting. (2018.). Www.youtube.com.
https://youtu.be/1OXYImMJYW8
Disadvantages of Budgeting in Managerial Accounting. (2018). Www.youtube.com.
Retrieved May 24, 2022, from https://youtu.be/UPbrB2VemFw
Rygelski, M. (2018). Council Post: Budgets Don’t Work: Here’s How Businesses Can Do It
Differently. Forbes. Retrieved May 24, 2022, from
https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/budgets-dont-work-heres-
how-businesses-can-do-it-differently/?sh=355eb82c46b8
TOP 25 QUOTES BY DAVE RAMSEY (of 157). (2009). A-Z Quotes. Retrieved May 25,
2022, from https://www.azquotes.com/author/12070-Dave_Ramsey
Datar, S. M., & Rajan, M. V. (2018). Horngren's cost accounting: A managerial emphasis,
global edition, 16/E 12. PEARSON EDUCATION LIMITED.
Rygelski, M. (2018, January 5). Council post: Budgets don't work: Here's how businesses can
do it differently. Forbes. Retrieved May 26, 2022, from
https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/budgets-dont-work-heres-
how-businesses-can-do-it-differently/?sh=c95e50c46b8a
Rygelski, M. (2018, January 5). Council post: Budgets don't work: Here's how businesses can
do it differently. Forbes. Retrieved May 29, 2022, from
https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/budgets-dont-work-heres-
how-businesses-can-do-it-differently/?sh=79621b1746b8
