Traditional Budgeting - Literature review Example

Traditional Budgeting Name Institution Date Course Traditional Budgeting Introduction A budget is a financial plan that incorporates systematic analysis and the financial forecasts in relation to the market, product and the use of resources. It is prepared annually by all organizations due to the vital role that it plays. According to Becker (2014), planning is required during the process of preparing a budget. This is because the managers have to put into consideration all the financial requirements and aspects of every activity in the organization. Operational and financial resources are required during the process of preparing a budget. The traditional method involves the use of an incremental approach based on the previous budgets (Diamond, 2013). An assumption is usually made in terms of percentages which are then used for obtaining the increment in the budget. It is important to note that the justification for the increases is usually based on increased cost of inputs, materials or labour. Zeng (2010) points out that traditional budget have a number of challenges which have contributed to a lot of inefficiencies and inaccuracies, hence, operations of the organizations. The paper discusses the issues of budgets in support of discarding the traditional budget as it is too rigid and has negative impacts on the organizations. Discussion According to Zeng (2010) tradition budget is too rigid and it takes time for it to be prepared. The rigid nature of the traditional budget requires detailed information. In most cases, the process of making the traditional budget usually takes a lot of time. For instance, the companies that start their budgeting process in summer have to continue all the way till December. This contributes to inefficiencies as the process affects most operations of the company. Huge input is usually required in the traditional budget and hence contributing to the long delays which affects the process (Otley, 2001). The traditional budget making process requires extensive negotiations with different departments and managers of the company. According to Diamond (2013) this is aimed at determining the amount to be allocated. The negotiations usually take time and mainly depend on the size of the organization. Large organizations have to take more time to prepare the budgets due to the negotiations with different departments within the company and hence impacting negatively on the process. The negotiations with the managers in different departments give room for internal politics which affects the allocation of funds in different departments. This makes the traditional budget complicated and unreliable to the organizations. Otley (2001) argues that the traditional method of budget preparation has negative impacts on the costs and resources. The inputs and negotiation that are involved in the process of preparing the budget is costly. The budget making process may take up to 20% of the total budget. This has negative impacts on the financial resources of the company. To add on that, the executive management staff spent at least 20% of their time in the budget making process. This affects their productivity as the time could have been spend on other activities. The activities of the company may be affected by the budget making process during the process of looking for details. The focus on the customers is usually reduced to some extend when using the traditional budget making process (Becker, 2014). This is because of the meeting that the employees and the managers have to be involved in during the budget making process. The level of accountability is low when using the traditional method of preparing a budget. This is because the managers have to request for a particular amount but they do not necessarily have to justify. The lack of a clear mechanism for allocating the amount may lead to some of the departments being provided with inadequate finance while others being provided with funds that they do not require. The traditional budget consumes a lot of resources and time while it is prone to a lot of weaknesses. The inefficiencies in the traditional budget may affect the operations of the organization. The traditional budget is too rigid and it does not consider most of the factors that may take place during the financial year. In the traditional budget, once it has been established, no changes can be made during the financial year. It is usually more detailed when it comes to the bottom for the purposes of meeting the goals and objectives of the company. Some of the details may be unrealistic depending on the prevailing situation and hence making the budget ineffective. The traditional budget is not flexible at all and it makes it difficult for the companies to respond to some of the situations that may occur during the financial year (Van der Stede, 2000). The economy, market and industry conditions may change during the financial year. Such situations require finances in order to respond to the situations. However, the traditional budget is not flexible and it is fixed. This makes it difficult for the organization to respond to such situations that had not been anticipated during the preparation of the budget. This has a negative impact on the operations of the company and it may affect the competitiveness of the company. New partnerships or innovations may emerge during the financial year and they may have financial repercussions. The rigid nature of the traditional budget makes it difficult for the company to respond to such opportunities. The traditional budget does not consider the changes as most of the information is usually based on the previous budget. A lot of assumptions are usually made in the budget when using the traditional method. Most of the assumptions are usually extraneous. The employees usually face difficulties within the first six moths of the financial year due the irrelevant assumptions in the budget. This is an indication that the traditional method is inefficient in responding to the needs of the employees. The presence of irrelevant assumptions usually makes it difficult for the employees to carry out their duties effectively. Some operations in most of the organizations usually stall before the end of the financial year due the assumptions that are usually made in the budget using the traditional method. The effective delivery of service in the organization is therefore affected by the rigid nature of the traditional budget. The volatility of the market and accelerating speed of the business are situations that can be faced during the financial year. However, the assumptions that have bee made in the budget may not reflect the situations and hence impacting negatively on the operations of the company. When using the traditional budget method, a lot of focus is usually placed on cost control as opposed to effectiveness (Zeng, 2010). This negatively impacts the ability of an organization to carry out its duties effectively. In the traditional budget making process, the costs accountants may influence the whole budget. This ends up affecting the efficiency of the operations of the company in relation to the budget. It is thus important to discard the traditional budget as it contributes to inefficiencies due to the wrong assumptions. The traditional method relies on the incremental approach during the development of the budget. This method contributes to lack of transparency and accountability among the managers. Most of the managers who are responsible for the use of funds in their departments usually ensure that all the amount is spent (Ryan, 2007). This is for the purposes of ensuring that there is no surplus. The presence of surplus amount means that the department will not receive more money in the next financial year. This practice is common in both the public and private organizations including the government. The incremental process impacts negatively on the budget as it managers always try to justify an increase in to their departments. This practice therefore leads to wastages of funds within an organization. In some of the organizations, the managers may decide to purchase items that are not required in the company incase of extra funds in the budget. In some instances, the managers can decide to give employees allowances that re not reasonable due to the availability of the extra funds. The extra funds may promote corruption as some of the managers have ended up with means of ensuring that the extra funds ends up in the pocket. The traditional budget has created a far among the managers that is they do not spend all the money allocated to their funds for the next financial year will be reduced. This is a wrong impression and it impacts negatively on the financial status of the organizations. In most of the organizations, the executive and employee compensation is tied to the performance against the budget. This means that the performance of the employees or the executives is dependant on how the amount allocated was spent. This has led to the employees looking for ways of minimizing the performance expectations. The managers usually negotiate for an overly achievable budget in order to ensure that they can easily achieve the goals which could be much lower. Such employees or executives usually end up with more resources. This is regardless of whether the resources are necessary or not. The resources are spent in a careless manner as it has already been budgeted for the departments. In some instances, exceeding the budget may be an indication of good performance and the employees or managers may get incentives for that. This ensures that the funds allocated to them are increased in the next financial year. The traditional budget therefore has a lot of weaknesses that contributes to poor spending among the managers within an organization. The use of the traditional method therefore makes the budget a tool for internal negotiations among the managers as opposed to being the most important tool in for the company. The traditional method makes the budget more fictitious and arbitrary and hence impacting negatively on its relevance to the organization (Otley, 2001). The traditional budget has flaws that impact negatively on the company together with its employees. The traditional budget should be discarded due to the flaws which affects the operations of the company. The traditional budget is unable to motivate desirable behaviors within an organization. This is because the traditional method encourages gaming and unprofessional attitudes among the cost center managers. This fails to protect the interest of the company and hence its inefficiencies. The traditional budget encourages the use of budget for personal benefits by the managers and hence failing to consider the interest of the employees. Bureaucracy and vertical control within an organization is strengthened by the use of traditional budget. This is because it gives the managers a lot of powers to control the process while the views of the employees are never considered during the process. Bureaucracy and vertical control have a negative impact on the organization as it makes the employees feel undervalued (Van der Stede, 2000). This is an indication that the traditional budget not only affects the financial aspects of an organization but also the human resources issues. Departmental barriers are reinforced through the use of the traditional budget method. In most cases, the departments usually receive different amounts. The managers from different departments may not be willing to work with those of other departments if they feel they may end up spending more during the process. The use of the traditional budgeting method has negative impacts on the employees of the company and hence affecting the entire company. In some instances, some of the departments may end up performing poorly due to lack of adequate funds as the method is mainly based on the negotiations with the managers (Van der Stede, 2000). The traditional method of budgeting creates a disconnect from the strategic goals of the organization. The traditional budget method mainly considers costs as opposed to the strategic goals of the organization. It is for this reason that most of the organizations fail to meet their strategic goals and objectives. This is an indication that the traditional method has negative impacts on the organization. The spreadsheets are usually used during the preparation of the budget using the traditional method. The use of spreadsheets exposes the budget to a lot of inherent shortcomings. The data entry errors are common when using the spreadsheets (Becker, 2014). The presence of errors in the budget has the potential of affecting the whole organization. Some of the organizations have ended up in deficits due to the presence of errors in the budget. The errors may be difficult to notice considering that the traditional budget has a lot if details. The traditional method has problems with devising accurate formulations and hence impacting negatively on the process of allocation of funds. The rigid nature of the traditional budgets leads to longer time being taken when carrying out the review processes. This defeats the purposes of the reviews as it may not be useful by the time the review is completed. The use of the traditional method of budgeting therefore makes it difficult for the organizations to carry out some of its strategic tasks. This method should therefore be discarded as it impacts negatively on the organizational growth and development. Conclusion In conclusion, it is evident that the traditional method of budget has a lot of weaknesses and flaws that negatively influences the organizations. The traditional method should therefore be discarded as it has negative impacts on the organization. It is evident that the traditional method is inefficient and hence its negative impacts on the organization. The method is promotes undesired behaviors in the organization like gaming, wastage of funds and corruption among the managers. The method is also prone to errors and hence affecting the whole budgeting process. The traditional method has negative impacts on the employs as the methods promote bureaucracy which locks out the employees from participating in the process. It is evident that the method is not responsive to changes during the financial year which makes it difficult for the organization to deal with economic or market changes. The method is time consuming which affects the operations of the company. A lot of resources end up being used during the process of making the budget using the method. It is evident that it requires a lot of details and it affects the productivity of the managers and employees. The method is complicated and should therefore be discarded. List of References Becker, S, 2014, When Organisations Deinstitutionalise Control Practices: A Multiple-Case Study of Budget Abandonment, European Accounting Review, (ahead-of-print), 1-31. Diamond, J, 2013, Policy Formulation and the Budget Process, The International Handbook of Public Financial Management, 193. Otley, D, 2001, Extending the boundaries of management accounting research, British Accounting Review, 33, (2001), pp. 243-261. Ryan, Bill, 2007, Budgeting, the individual and the capital market: a case of fiscal stress, Accounting Forum, 31, (2007), pp. 384-397. Van der Stede, W, 2000, The relationship between two consequences of budgetary control, Accounting, Organizations and Society, 25, (2000), pp. 609-622. Zeng, C, 2010, Comparison of Performance Budget and Traditional Budget, Canadian Social Science, 3(5), 71-75. Read More