Advantages and disadvantages of traditional budgeting

Planning and budgeting are pillars of management of an enterprise. In this quality lays its importance for organizations in general and enterprises in particular and therefore the society in which they act. The results of the management of the companies have a high impact on the lives of its customers, employees, communities, owners, government and the society as a whole. Budget is the key to making a plan and control for an organization and supports to implement organizational strategies (Rickards, 2006). The disadvantages of traditional budgeting are forced business practitioners and researchers developing new approaches that would be helpful to improve the managerial performance. As a result, the idea of beyond budgeting has emerged as an alternative to traditional budgeting that helps managerial contribution of management accounting. 

Traditional budgeting definition

Budgeting is a management control tool that is used widely that incorporated with the organization’s budgeting practices. Traditional budgeting refers to a futuristic financial plan that gives a basis for regularizing, controlling and evaluating the performance of business units along with the coordinating organization’s internal responsibilities (Moller and Chaudhry, 2012). In other words, traditional budgeting notifies the necessary amount of fund that is required for a specific period of time to perform specific organizational obligations. Traditional budgeting is annual and incremental that means it is marginally departing from the year before (Wildavsky, 2001). The major characteristics of traditional budgeting are as follows:

·         Organization first set their income and then makes plan for expenses.

·         Command and control management style are used.

·         Centralize authority and responsibility is exercised.

·          Performance measurement is conducted for fixed targets.

Advantages of traditional budgeting

A number of factors combine to make traditional budgeting decisions that perhaps the most advantageous for an enterprise:

• ·     Traditional budgeting gives a detailed framework of control as a result organization becomes capable of managing activities with stability (Yvanovich, 2012).
• ·        Traditional budgeting provides manager freedom to manage the operational activities as long as the organizational set parameters will achieve.
• ·    Traditional budgeting is involved in the organizational culture in most of the firms. So that abolishment of the traditional budgeting system is completely is risky.

Disadvantages of traditional budgeting

Traditional budgeting has some disadvantages those are discussed in below:

• ·     Traditional budgeting is time consuming, costly and numerous resources are required to conduct it. The use of spreadsheet in traditional budgeting is a big reason behind the time consumption.
• ·     It is low responsive and inflexible as result companies cannot able to success to implement the budget in real time that means it takes a longer time to review the budget than standard.
• ·   Traditional budgeting strategy focusing on cost reduction rather than value creation and often contradictory with the organizational goals (Gardner and Qamar, 2017).
• ·    Traditional budgeting is centralized as a result discourages creativity and high bureaucracy has been seen. 

      

      References

 Moller, C. and Chaudhry, S. (2012). Advances in Enterprise Information System II. Leiden: CRC Press.

Riskards, R. (2006). Beyond budgeting: boon or boondoggle. Investment Management and Financial Innovations. Vol. 3, No. 2, pp. 62-76

Wildavsky, A. (2001). Budgeting and Governing. Transaction Publishers.

Yvanovich, R. (2012). Traditional budgeting approach; advantages and disadvantages. [Online]. Available at: http://blog.trginternational.com/bid/162036/traditional-budgeting-approach-advantages-and-disadvantages (Accessed: 19 May 2017).

Gardner, E. and Qamar, A. (2017) Dissident Voices in Europe-Past, Present and Future. Cambridge Scholars Publishing.