In the budgeting process, the management aims to allocate capital and financial resources according to the organization’s current needs. For example, in the production department, the manager aims to decide the budgeted cost of production.
After the completion of the production, they address the gaps between budgeted and actual results. Its management can reduce the cost and expenses across all the functional divisions of the origination, which can be essential to increase the overall organizational profits and revenues. Through the budgetary process, a company can achieve organizational goals by effectively managing financial resources. One of the managers who design the budget’s main tasks is deciding on the budgeted sales, overviewing the production and overhead expenses, and the organizations’ capital required to conduct the company-wide operations.
The traditional or classical budgeting system is one of the earliest budgeting processes in which the budget is formulated annually. In this system, the company usually formulates the budget based on the previous year’s budget and, based on certain changes, are adjusted in the new budget. These changes or amendments can be essential to eliminate the company’s issues in its previous budget; therefore, it is referred to as an incremental approach. One of the main benefits of using this system is that it provides a budget limit in the allocation, which means that the company cannot spend more than the allocated amount. For the formulation of the company’s budget, previous financial information of the company and its performance are analyzed, resulting in fewer budget allocation changes.
Weaknesses of the Traditional Budgetary Process
Along with it some of the advantages, this system also has certain weaknesses. One of the main disadvantages is that the company’s strategic plans matter a lot, but these plans are not focused on under this system. It omits the company’s ability to focus on the organizational plans. The system cannot be used when the budgeting system requires major changes to achieve new opportunities as it only focuses on the marginal changes. The system determines a lot of change responsiveness, due to which the company cannot focus on the innovation in their organizational systems.
Reviewing the old budgetary system will increase the period to review the old budget. Therefore, it takes a much longer time to prepare the budget. The budgetary system did not incorporate any external factors, which makes it inflexible towards organizational change. After the budget formulation, the management cannot change it if any changes are required to overcome errors identified; only fewer changes can be made if required. The system is less focused on motivating employees’ desirable behavior to achieve the organizational objectives.
The viability of the Traditional Budgetary Process
In today’s world, every organization wants to focus on innovation and creativity to gain a competitive advantage in the industry. Innovation and creativity have led to several changes in the business environment and today’s organizations. Today management uses new and innovative approaches rather than old ones as it uses decentralized hierarchy and enhances organization-wide communication. Old approaches like centralized hierarchy and authoritative leadership have been omitted from the organizations.
These approaches were used to address the changing needs of the industry. The organizations have adopted these changes to survive in the market and achieve new growth opportunities. Traditional budgetary systems are not focused on the organization’s flexibility and adaptability towards industrial changes. It cannot be used. Furthermore, the customers’ changing needs and the increase of competitors have also increased the need to focus on new and innovative management approaches and techniques. Therefore, the traditional budgetary system cannot be employed due to its inability to meet the industry’s changing needs. Some of the budgeting processes have been discussed that can be used to meet the changing needs and gain a competitive advantage in the industry.
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