The idea behind the budget is to anticipate future performance. c As mentioned in the article
budgets are inflexible. c By using a forecasting budget, as described a company will prepare a 2–3-
month projected performance. c At the end of the projected timeframe the company can see if they
are on target or not. c 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).
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 do not 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 do not 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
