Question

Budgets can be useful tools for planning and control, but they can also present challenges for many managers and spur unintended negative consequences. Some companies have begun exploring alternatives to traditional master budgeting.   The chapters in the textbook provide a thorough examination of both the benefits and challenges of budgeting, while the article Budgets Don't Work: Here's How Businesses Can Do It Differently points out some problems caused by traditional budgeting practices and offers an alternative approach.

For this discussion, carefully review each resource and provide a thorough assessment of the benefits and drawbacks of traditional budgeting practices. Explain whether you support a company's use of a traditional budget or recommend an alternative approach. Support your viewpoint by directly citing from your learning resources and any other resources you choose to use.

Answer 1

Benefits of traditional budgeting :

• it provides a solid framework - since it is based on previous years data, it allows the company to base their budget and financial activities on a solid framework.
• Encourages decentralization - since everybody can participate by looking at the last year figures, the idea becomes decentralized.
• part and parcel of organizational culture- since it is the most simple method, it becomes a part of the organization.

Drawbacks of traditional budgeting :

• chances of human error are high - since its about looking at lot of spreadsheets, natural to make mistakes.
• time consuming - managers depends on previous year data, till takes a lot of time to sort things out and make all the comparisons.
• doesn't encourage expected behaviour - if company is planning for some innovation, it needs to spend more in those departments, but this budget doesn't encourage such expected behaviours as it depends on last year spending.
• inaccurate predictions - since it depends on past year data as base point, predictions for next year can't reach accuracy.

Traditional budgeting is not ideal for all the businesses. but if it is a small firm and it has less overheads to include in its budget, then traditional budgeting works.

Zero based budgeting can be way more superior since you can think about the next year with a new slate and mindset taking the base as zero as if there is no historical or past data.so any firm irrespective of size or revenue should go for zero based budgeting. it is more flexible in nature. Although little time consuming but it covers a lot of different aspects as compared gto other approaches. also it allocates the resources wisely to activities in a way as they provide benefit to the firm.