Today, many small businesses, including partnership firms and sole proprietorships, are using traditional budgeting processes since they do not have to focus as much on larger market competition. Furthermore, as small-scale organizations, they are less influenced by the factors in their external environment. Therefore, following a traditional budgetary process plays a beneficial role by their size and nature since it enhances their centralized structure, which allows a small organization to create a stronghold on the company’s operations. The first and foremost step is formulating a budget that projects company sales revenue within the existing financial period. While formulating forecasts, certain contingent factors are analyzed that can affect the company’s ability to produce forecasted results.
In a traditional budgetary process, budgets are prepared annually by addressing certain changes based on the company’s previous annual financial data and forecasting potential profits. Similarly, with this technique, short-term changes do not have the capacity to adversely affect the company’s performance. To compute forecasted profit, management brainstorming is essential to determine potential factors and influences that can cause critical changes in the budget and revenue. Profit forecasts are conducted by subtracting the earnings from their associated expenses. The amendments introduced in the budget can address deficiencies that the company addressed in the previous year to increase accuracy in the current year. The budgeting technique can also play an essential role in identifying the company’s weaknesses and strengths among different operational areas.
However, traditional budgeting techniques are ineffective in coping with the associated needs of the company when it is affected by influential factors and technological changes in its external environment. For example, globalization has increased significantly, which has affected the modern business world. This means certain external factors can impact the company’s ability to generate long-term profits. Furthermore, companies operating in multiple countries will have to address political and economic factors compared to companies operating in only one country. Operating in different countries and meeting different legal factors can increase the need for the management to conform to all of them. NIC is one of the companies that operates a global enterprise; therefore, implementing traditional budgeting techniques can affect its ability to meet the changing needs and the legal influences on its operations. Using the following technique will decrease company efficiency to achieve and maintain growth in the market, generating a company’s survival risk.
The weakness of the traditional budgetary process discussed above makes an organization less effective in coping with changes in the modern business environment. It was reported that almost 20% of the time is required to formulate a budget. The main reason behind this time-consuming task is that the stakeholders are not involved in the process.
The centralization approach is utilized and maintains a focus on the cost-based approach, which will ultimately maintain a reward-based system in the organization. Although the system sounds attractive, it will maintain and sustain the employee’s motivation level, which can ultimately maintain a sustainable position in the company’s profitability. Furthermore, it will affect the company’s ability to maintain a competitive advantage in the market. Therefore, along with the reward system, it is important to recommend that the company should prioritize long-term benefits to remain attractive to employees. Another limitation is that the budget is forecasted based on past information from a company’s financial data cannot generate appropriate and efficient results. This aspect can enable the company to introduce extensive changes and survive and grow in the market. It is pertinent to mention that the migration of management accounting practices from traditional to modern is a cumbersome process, and the accuracy of data maintenance is the biggest challenge.
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