Advantages And Cons Of Traditional Budgeting

Budget management analysis is used by mangers as a tool and helps determine that all resources available are being used efficiently. The budgets are determined yearly and are based upon the previous year’s budget and variances. This paper will discuss specific strategies to manage budgets within forecast, compare five to seven expense results with budget expectations, describe possible reasons for variances, give strategies to keep results aligned with expectations, recommend three benchmarking techniques, and identify those that might improve budget accuracy, and justify the choices made.

This research paper is a brief discussion of budget management analysis. Budgeting is the key to financial management, and is the key to translates an organization goals or plan into money. Budgeting is a rough estimate of how much a company will need to get their work done, and provides the basis for evaluating performance, a source of motivation, coordinating business activities, a tool for management communication and instructions to employees. Without a budget an organization would be like a driver, driving blinded without instructions or any sense of direction, that’s how important a budget is to every organization and individual likewise (Clark, 2005).

Ineffective practices in creating and monitoring a budget include failure of management to integrate the operating budget with other planning efforts (Academic Writing Tips, 2011). Organizational leaders should ensure that the long term and intermediate goals correlate with the operating budget. Failure to align the operating budget with various assumptions such as size, scope, and nature of future operations can pose a problem (Academic Writing Tips, 2011). According to Finkler and Ward (2006), upper management and financial officers usually create the operating budget omitting frontline and unit managers. This process can lead to failure in the financial management practices

Budgeting systems turn managers’ perspectives forward and by looking to the future and planning, managers are able to anticipate and correct potential problems before they arise (Horngren, Foster & Datar, 2000). Through budgeting, management can plan ahead and maintain enough cash to pay creditors, to have adequate raw materials to meet production requirements, and to have sufficient finished goods to meet expected sales (Kieso, 2002).

A budget is an instrument used to help managers ensure that the resources used effectively and proficiently toward the goals of an organization. A budget projection can be made on a yearly base depending on previous year or existing one. They can further be broken down quarterly or monthly depending on it use. Generating a budget is complex undertaking, and for a budget to be effective the organization ought to follow it strictly. However, no matter how closely a business follows their guidelines there will always be some form of variances. The organization should expect a few variances and be able to work these discrepancies in any budget

A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.

Budgeting is a process to plan budget which is used to describe fiscal expectation, expenditure and future planning of an individual, organization or government within a given period of time (Olawale, et al. 2012). Up until now, there are many methods of budgeting for governments such as traditional (line item) budgeting, zero-based budgeting, and performance based budgeting. Due to its simplicity, the traditional budgeting which listed groups of expenditure using last year’s data such as office supplies, salary, electricity bill and used incremental approach on them (Navin, 2003) has become the most popular one in many countries. However, many people criticize this budgeting method because many believe that this budgeting method is ineffective and inefficient . As a result, since 1990s, many countries have reformed their budgeting method to performance-based budgeting which use performance information in budget processes (Lee and Wang, 2009). Despite the trend of budgeting reform in the world, some developed

Budget formulation and use are tools that guide many decision making strategies in business. The measures that are least effective could create an avalanche of catastrophic events that can negatively impact the decision making strategies. It is in the best interest of the pertinent parties to draft an operating budget based on a collective set of information relating to organizational vision and mission. Ineffective measures can be catastrophic based on the foundation for measures used in creating the budget. Among the many issues organizations face that relates to creating an effective operating budget results from poor

Budgeting is crucial in the well-being of a company especially the financial health status of a company. In fact, no professionally managed firm would fail to budget, since the budget establishes what is authorized, how to plan for purchasing contracts and hiring, and indicates how much financing is needed to support planned activity. It is routine for a company to budget for its expenses. Expense budgets act as a guideline of how much revenue a company would require keeping the activities running. It is used to set the company’s targets for a certain period.

Budgeting can be an important management tool if implemented properly. Identify several positive results when budgets are used properly. Since budgets affect people, identify several negative aspects if budgets are not implemented properly. (20marks)

Required: (a) Describe and evaluate the main findings of this paper regarding contemporary budgeting practice.

The 20’s century saw the use of budget involve due to a change in the environment. Indeed the control of output used to be obtained by the dissemination of tasks and so traditional budgets were very much highlighted, with a significant top-down influence. As an example of the importance of budget in the 1970’s IBM had about 3,000 people involved in their budgetary process. During the same period, the oil crisis brought concerns about rising in costs and led to the introduction of zero-based budgeting (ZBB), which can lower cost by avoiding blanket increases or decreases to a prior period’s budget. The increase in business uncertainties was in discrepancy with the stifling effect of fixed plans, promoting the use of rolling budgets. The 1990’s saw the growing influence of shareholders and steered the focus on a budget that included a wider view of organisation results, answering the investment community for quarterly updates on results and expectations (Bill Ryan, 2005). Budgets then started being used as a communication tool between the financial community and the organisation, allowing the corporation to be integrated in the capital market. Moreover companies started using flexible budgets rather than static budgets as nowadays various levels of activities can be observed in most organisations. The use of flexible budgets then enables firms to be consistent with their new environment and the market.

In developing an annual budget accompanies may choose to adopt either top down budgeting approach or bottom up budgeting approach. In the finance ministry bottom down budgeting was a traditional way used in budget formulation. Top down budgeting came in the 1990s as a motivation to curb the fiscal deficits in which it lead to fiscal crisis in other countries. Top down budgeting was found that it helps and manages well the fiscal deficit efficiently unlike bottom up budgeting approach. Countries like Denmark, Korea Sweden, Australia, Netherlands, and Chile etc actively use top down budgeting because it helps in getting information for the evaluation of new initiatives and also in reviewing of programs for monitoring purposes. Sweden adopted top down budgeting approach because of the series of huge fiscal deficits it used to incur and it came to be that top down budgeting saved them. Top down budgeting is advantageous since it is done multiyear unlike bottom down budgeting which is annually. Top down Budgeting saves on time since it has delegated authority to take care of the budgeting process unlike Bottom down approach which is time consuming. Bottom up approach ignores economic forecast since it involves ministry by ministry analysis unlike top down approach which focuses on economic forecast as it is bases more in fiscal analysis. In top down budgeting there is ownership of proposal whereby the ownership is joint unlike bottom up approach where the ownership proposal is specific. We are able to see that top down budgeting is more advantageous to use in budgeting approach. Countries like Netherlands, Chile and Canada have independent bodies for economic forecast. Since Top down budgeting successes is seen in the office

This paper will be an exploration of what budgeting and forecasting are and how they are determined and why they need to be re-evaluated. Furthermore, the hope is to uncover some of the underlining causes that drivers that trigger the re-evaluations in our organization as well as discover ways to mitigate those factors.

Budget and budgetary control practices though very essential to meeting organizational goals, are mostly hastily and improperly prepared. This eventually leads to unfulfilled budget and budgetary control practices.