Traditional Budgeting

Content type

User Generated

Subject

Accounting

Type

Homework

Uploaded By

Znqvanovyn099

Pages

Rating

TRADITIONAL BUDGET CRITICISM

Budgeting can be described as a process of allocating money for various purposes, and it ranges

from simple household funds management to country wise budgeting. Traditional budgetary

model has its advantages, but it is deemed to be an inflexible model in comparison with the other

modern alternative budgetary models. Whether or not to discard this budgetary model, has been a

bone of contention across the business world. In my opinion, it is more prudent to discard the

traditional budgetary model and embrace the revised and widely used tools.

Traditional budgeting, a century old budgeting model, was solely invented to manage costs and a

respective cash flows. It is based on analysis of the historical performance of an organization and

respective modifications in an effort to improve the organization. In its inception, it was basically

supposed to ensure that objectives of the company are attained as indicated in the financial

planning. In addition, the model involved evaluation and quantification of the company’s

resources, both financial and non-financial. It would then give a detailed report on the

requirements of achieving the objectives stated in financial planning. These requirements include

financial resources, other inputs and associated processes in achieving these objectives. Finally,

the model assigned percentages of the total resources available to various purposes as required to

achieve the stated objectives in agreement with the existing budget constraint.

The main purpose of embracing this budgetary model was its ability to depict the company’s

picture in terms of strategic plans and its operational goals. This is achieved by the close

coordination of the organization’s costs and cash flows. Among its pros, it is the ability to match

individual units of resources with the organization’s overall objectives. As a result managers are

able to keep all departments at par, because budgeting helps in decision making for the senior

management.

TRADITIONAL BUDGET CRITICISM

Additionally, it serves to inform budget centers accordingly of the organization’s plans, for they

are held accountable for the outcomes of the departments. The budget is especially advantageous

to decentralized managers for it gives them a clear indication of the overall firm’s expectations,

in terms of costs, savings and revenues. In some cases it improves employees’ morale to work

toward achieving the organization’s objectives. However, not in all cases, for it may promote

unforeseen behavior. For instance, a manager may extravagantly use the remaining amount of

money to avoid reduction in his money allocation portion in the following year’s budget. On the

other hand, he may overvalue the budget to receive unwarranted credit for achieving goals.

Jack Welch, former CEO General Electric, strongly thinks the traditional budgeting should be

discarded completely. He is the author of the book Winning. In this book he describes the

budgeting process as the most ineffective practice in management, and contrary to the title of the

book it can cause failure. He points out clearly that budgeting is an unnecessary expenditure in

capital, energy, and time. More often than not, companies win despite their budgets as opposed

to the common misconception that good budget implicates success. His distaste for the

traditional budgeting backs my opinion for its immediate dismissal.

He claims that traditional budgeting is very rigid and is carried out as a ritual without a mere

consideration of the potential merits of that ritual. He speaks from experience, because he ran the

world’s largest corporation and the most diverse business enterprise ever. He points out that

traditional budgeting technically depletes the organization’s fun and big dreams, due to its

rigidity and complexity in setting out goals. However, he acknowledges budgeting is essential to

a business and thus suggests reinvention of the traditional ritual. He insists doing it in a different

and right way which would guarantee easy winning. This way involved negotiated settlement

and phony smile.

End of Preview - Want to read all 9 pages?

Access Now

Unformatted Attachment Preview

TRADITIONAL BUDGET CRITICISM Budgeting can be described as a process of allocating money for various purposes, and it ranges from simple household funds management to country wise budgeting. Traditional budgetary model has its advantages, but it is deemed to be an inflexible model in comparison with the other modern alternative budgetary models. Whether or not to discard this budgetary model, has been a bone of contention across the business world. In my opinion, it is more prudent to discard the traditional budgetary model and embrace the revised and widely used tools. Traditional budgeting, a century old budgeting model, was solely invented to manage costs and a respective cash flows. It is based on analysis of the historical performance of an organization and respective modifications in an effort to improve the organization. In its inception, it was basically supposed to ensure that objectives of the company are attained as indicated in the financial planning. In addition, the model involved evaluation and quantification of the company’s resources, both financial and non-financial. It would then give a detailed report on the requirements of achieving the objectives stated in financial planning. These requirements include financial resources, other inputs and associated processes in achieving these objectives. Finally, the model assigned percentages of the total resources available to various purposes as required to achieve the stated objectives in agreement with the exi ...
Purchase document to see full attachment