Benefits of Traditional Budgeting System
Traditional budgeting has been a subject of fierce debate among scholars. Critics of traditional budgeting have argued that the process may not be useful because it serves too many purposes– resource allocation, performance management, financial planning and establishing operational targets. Furthermore, some have argued that since fulfilling budgets are most of the times tied to payment packages, there are often biases and negotiations during the budget preparation process. However, not all scholars and managers agree with these criticisms. Traditional budgeting is a powerful control and performance management tool that organizations should not ignore.
The budget is among the most powerful management control tools. It can also play a critical role in the power and politics of a firm because top-down budgets may enhance the authority of the top management and decrease the autonomy of lower and middle-level managers. The traditional idea for budgetary control is error-based, which focuses on regular feedback and analysis of variances (Aydin, 2017). Through accurate reporting, actual figures may be compared to the budgeted figures, thus enabling managers to determine the current situation of the enterprise in relation to the projected objectives. A significant variance should prompt the management to react and make adequate adjustments to enhance the profitability of the firm.
Budgets can also be used to aid in performance management to ensure that the firm achieves its financial objectives. If the budget is prepared correctly, it provides the management with detailed information concerning the next financial year. The management may use such information in making critical financial decisions. Although the budget presents the guidelines, managers must coordinate operations to ensure that the targets are achieved. Annual budgets also help in setting frames for operations, which enhances discipline in the firm. According to the traditional school of thought, the destination of the firm cannot be predicted without budgets.
In summary, traditional budgets are powerful tools of control and performance management. Budgets enable firms to identify their sources of income and plan adequately for their expenses. Besides, budgets enable firms to conduct variance analyses to determine their level of deviation from their goals, which enables the management to act in case of significant deviations. Therefore, for organizations to set adequate financial goals and plan for their incomes and expenses, traditional budgets cannot be avoided.