Traditional budgeting practices have been around because it is a
proven method. The benefits include communicating directions and
goals to different departments, judging performance based on
financial results against goals, and motivating employees to achieve
goals (Datar & Rajan, 2022). It can do wonders when the budget is
integrated into the company goals. Making a budget can vary, but
most companies settle on a yearly budget. I have tried budgeting in
my personal life and frequently go over my budget because of
increased costs that I cannot control, such as the rising gas prices.
However, I still need to drive to work because public transportation
does not exist where I live. When I read through the chapters and
answered the homework, I thought of this issue and how companies
face these. Money is more crucial to companies, and budgeting would
help them so much. The homework has shown how companies will
increase their prices, but it always focuses on the start and end of the
year. The homework also compares one year to another and makes
predictions to create the budget. While the book says that budgets
may change because of unplanned situations and that managers
should spend more if it means to benefit the company in the long run
(Datar & Rajan, 2022), depending on a yearly budget based on last
year still feels too outdated.
It can become frustrating to keep following the budget that has been
based on the previous year’s performance. The book has stated, “One
limitation is that past results often incorporate past miscues and
substandard performance. The other limitation of using past
performance is that future conditions can be expected to differ from
the past” (Datar & Rajan, 2022). However, there is also the issue of
oversetting goals to frustrate employees. While the book had a little
section to explain this, I found this article from Harvard Business
Review named this phenomenon the Stretch Goal Paradox and
further explained this oversetting of goals. One excerpt says: “Our
research suggests that though the use of stretch goals is quite
common, successful use is not. And many executives set far too many
stretch goals... Tesla failed to meet more than 20 of founder Elon
Musk’s ambitious projections and missed half of them by nearly a
year” (Sitkin et al., 2017). The key is to find the perfect metrics. The
book discussed alternatives such as rolling budgets and managers and
employees discussing to keep it within budget, but the fact remains
that it takes much effort and can be time-consuming. There are other
issues, such as employees forgoing good opportunities. It goes over
the budget and uses everything in the budget, whether necessary or
not, so the budget will not decrease next year (Rygelski, 2018).
There are many benefits, but so there are many drawbacks as well.
My main issue with traditional budgeting is that the information there
is already outdated after the budget has been made, mainly based on
last year’s financial results, situation, climate, and ready availability of
resources. The article, Budgets Don’t Work: Here’s How Businesses
Can Do It Differently, is fascinating because instead of a year or a
month, it suggests using a 13-week budget. “Thirteen-week cash
flows are easier to keep updated to the ebbs and flows of business
and provide a better picture of reality to make business decisions
from... sound business decisions should be based on what’s best for
our employees, our customers, our operations and whether the
decision will help us in the future -- not on a budget” (Rygelski, 2018).
I like the idea of an unrestrictive but not a free-for-all type of
budgeting. While the 13-week budget works for some, I admit it does
not solve everyone’s problems. With traditional budgeting, higher-
ups have to check and verify the budgets before being submitted, and
sometimes, traditional budgeting works. Despite the outdated
information, it still provides an excellent reference for some
companies in their upcoming months.
References:
Datar, S., & Rajan, M. (2022). Master Budget & Responsibility
Accounting. Pearson.com. https://etext-
ise.pearson.com/courses/6926628/products/FETLM2ODV8T/pages
/a5c8cd5f0d78599f237f5e66e4d4aa1926213980f-
id_toc59?locale=&isTpi=Y&key=1374012843135122534252022
Sitkin, S., Miller, C. C., & See, K. (2017). The Stretch Goal Paradox.
Harvard Business Review. https://hbr.org/2017/01/the-stretch-goal-
paradox
Rygelski, M. (2018, January 5). Council Post: Budgets Don’t Work:
Here’s How Businesses Can Do It Differently. Forbes.
https://www.forbes.com/sites/forbesfinancecouncil/2018/01/05/b
udgets-dont-work-heres-how-businesses-can-do-it-
differently/?sh=2cb42dd846b8
