Budgeting, nearly for all organizations, is considered as the foundation of the management control process. It is conventionally defined as a common accounting tool used by organizations to implement their strategies. The fundamental idea of a budget is to give a monetary value to plans and targets so that progress can be measured easily. Traditional budgeting has faced numerous criticisms as unable to meet the demands of the current competitive business environment. However, there are some arguments still made in favor of traditional budgeting, including its strengths, limitations, and viability.
Strengths of Traditional Budgetary Process
Traditional budgeting is set as a quantitative representation of a plan of action proposed by the management for a specific period. It is used to assist in coordinating activities required to accomplish that plan. The strengths of the traditional budgeting process are identified as:
- Inducing planning by aiding management in setting realistic goals requires a plan of specified actions to meet those goals. Budgeting makes managers anticipate and ask the question, “What if?”
- Endorsing communication and coordination. To propose and agree on a budget requires the organization’s activities to be coordinated and communicated, especially about the activities that influence results.
- Evaluating performance. If the budget is prepared properly, it can provide detailed facts for the next financial year, making it easier to set objectives and become an important tool for decision-making.
- Motivating employees as the process or actions needed to achieve goals are clear.
Limitations of Traditional Budgetary Process
The limitation or the weakness of the traditional budgeting process can be listed as:
- They are costly and time-consuming to put together
- Traditional budgets rarely focus on strategies and can contradict company goals
- There is a constraint of responsiveness in traditional budgeting, and there are often barriers to change
- The value addition in traditional budgeting is minute
- Focus is placed on the reduction of costs and not on the creation of value
- Updates and development of the budgets are infrequent and usually updated annually
- They are often based on guesswork and unsupported assumptions
- They command and control are strengthened vertically
The Viability of Traditional Budgeting System
Even though traditional budgeting has faced numerous criticisms, it is still universally used. Moreover, most companies do not seem to have plans to abandon it. About 90% of organizations across the world are using budgets for coordination, activities evaluation, planning, as well as to support the internal system of control of the company. It was found that managers accept the importance of traditional budgets in controlling, planning, and performing activities and disagree with the statement that traditional budgets lead to dysfunctionality. In addition, those companies also indicated that there is no plan to abandon traditional budgeting.
Despite the fact that traditional budgeting is widely used, academics consider it far from perfect as traditional budgets have lost relevancy in the modern business environment and are no longer satisfactory. In order to address these limitations, new approaches to budgeting have been proposed in contrast to the traditional budgeting process, which are:
- Activity-Based Budgeting. Activity-based budgeting is a method that provides more transparency in the budgeting process. In activity-based budgeting, revenues generated from research and instructional activities are assigned directly to the responsible units of the activity that empower the management for greater accountability and local planning.
- Rolling Budget. A rolling budget is prepared as an annual budget, but it keeps rolling by frequently updating monthly or quarterly. A rolling budget remains a budget of a year, but the additional month is added from the end of the period once a month is passed.