The budget and the budgeting process is a never ending cycle of
planning and implementation that "...includes both the plan's financial
and nonfinancial aspects and serves as a road map for the company to
follow in an upcoming period" (Datar & Rajan, 2018). The traditional
budget has several advantages. A budget allows every person in the
organization to know and understand the overall company financial
goals for the period and the financial goals for individual
departments. With every member of the organization on the same
plan company goals can be prioritized and achieved. There should be
no question as to leadership's expectations. Knowing the company's
financial goals allows each department to assess performance relative
to those financial goals. The company is only as strong as its weakest
department. If a particular department is falling short of meeting
budgeted goals, investigation and research must be conducted to find
out the reason for the short fall. This allows the company to perform
better: provide better products or services, improve customer
service, improve inventory management, etc. With an established
budget employees have a goal to reach or maintain. In some budget
years employees are required to create solutions to cut costs while
maintaining a strong level and quality of output. The traditional
budget does have some disadvantages. A traditional budget is
planned utilizing last period's quantitative and qualitative data along
with what management thinks will happen in the future. This can be a
major issue when moving from one period to another that has
drastically different conditions, or when actual future events are
drastically different from what management predicted during the
planning phase. According to Datar & Rajan (2018) budgeting is a
time-consuming process. Not only does budgeting take time from
leadership, but lower level employees that give input into the process
have their time taken by the budgeting process. I would also consider
an inflexible budget a disadvantage. What if the company came
across a new idea or innovation that would make the company better
and this occurred in mid-budget year? Possibly waiting six months to
implement the new idea or innovation could put the company behind
its competitors.
Due to the advantages and disadvantages of the traditional budget I
would encourage a company to look at a combination of traditional
budgeting and alternative budgeting. In a Forbes article Rygelski
(2018) mentions that his company looks at budgeting on a thirteen
week cash flow basis and not a fiscal year basis. The benefit to having
an organization wide plan for all to follow plus the ability to meet
intermittently to make changes would make an organization stronger.
The budget would also be in real time as opposed to twelve months
or more behind. For example, in Texas public schools the financial
office is required to submit a fiscal year budget to the school board
for their approval before September 1 of every year. We are also
required by law to perform improvement plans at the district and
campus levels. These improvement plans drive the spending of
federal and state dollars within our district. This means that the
budget that is planned and submitted to the board must include all
expenditure items from the district and campus improvement plans.
Every month, the committees that develop the improvement plans
meet to reevaluate the plans and make adjustments as needed. This
could mean a change to budget expenditures. This means our district
is looking at expenditures on a monthly basis and utilizing those
evaluations to spend money in a way that best educates students.
This is a process that could benefit all businesses no matter the
product or service provided.
Reference
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.
