The Pros And Cons Of Traditional Budgeting

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Budgeting process is defined as “a detailed financial plan that covers a specific future period of time, determining the managers’ targets and summarizing the financial consequences of company operations during that specific period” (Kuppusamy, K., & Sumanti, V.). Budget considered as the main driver for the managerial performance, more else budget is a powerful tool for management planning and control. Traditional Budget system were implemented through the great depression as a tool to help companies to overcome the crisis also to help managers to control costs, expenditures and cash flows. (LORAIN, M., GARCÍA DOMONTE, A., & SASTRE PELÁEZ, F. (2015). Traditional budget is also known as incremental budget, where current budget based on previous…show more content…
(Réka, C. I., Ştefan, P., & Daniel,C. V. (2014). it faced many criticisms. Where many consider traditional budget is time consuming and costly, rarely focused on strategy, motivated by cost reduction rather than focusing on value creation. mainly Traditional budgeting process is based on past results what makes it backward looking and lead to ineffective in unpredictable and fast changes in businesses overall. “Libby and Lindsay” summarized these criticisms in four main points: Time Consuming: Preparing incremental budget takes too long, usually budget starts at least four or five months ahead of the fiscal year, where operating division, business units provide their forecasting of sales, profits and capital expenditures. What eventually makes the budget a compendium of details. lack of flexibility: traditional budget is set in advanced, based on gathered forecasting from different departments, where in this budgeting process the uncertainty is not considered, consequently, the mangers will avoid managing any uncertainties and future opportunities when they were not mentioned in the budget. ( Kuppusamy, K., & Sumanti, V.) another aspect ignored in preparing the budget is once the budget is set it can’t be changed. Having unfixable Budget does not support changes in prices, margins, life cycles which may affected by customers’…show more content…
Thus, this will cause contrast in budget and strategies, due to budget preparation in isolation and not aligned with strategy. (Libby and Lindsay 56-75) Fixed: Performance of the employees in many companies is evaluated and controlled by the budget, that budgets often serve as a “fixed performance contract.” (Libby and Lindsay 56-75). hence, performance contracts in most cases limits the creativity where plans are strictly defined, limited and constrained by the single aim to attain the target budget instead of value creation. Many companies recognized the problems and limitation within traditional budgeting system, so they attempted to improve their current budgeting system and process. Nowadays, these companies changed their budgeting system, to more effective with less barrier to achieve their goals. Regarding to the criticisms against traditional budgeting and to overcome its limitations, alternative approaches covering both financial and non-financial were developed such as better budget with its techniques such as zero-based and rolling budget, furthermore, beyond budget and balanced scorecards and many other budgeting systems and
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