Traditional Budgeting: Why it may not be Relevant Today

Traditional Budgeting 1
TRADITIONAL BUDGETARY CONTROL

Traditional Budgeting 2
TRADITIONAL BUDGETARY CONTROL
Table of Contents
ABSTRACT....................................................................................................................................3
INTRODUCTION...........................................................................................................................3
Figure 1: The Traditional Budgeting model............................................................................4
WHY TRADITIONAL BUDGETING MAY NOT BE IRRELEVANT........................................5
Unstable customer demands and preference................................................................................5
Unstable Technology...................................................................................................................5
Figure 2: Budgeting Evolution Vs Degree of Impact .............................................................6
Unstable environment..................................................................................................................6
Hierarchical structure of organization.........................................................................................7
High competition.........................................................................................................................7
Figure 3: Comparing Traditional and Modern Budgeting Techniques...................................8
The mindset of today’s employees..............................................................................................8
Lack of value creation.................................................................................................................8
Centralization of the traditional budgeting process.....................................................................9
Companies’ Strategy....................................................................................................................9
CONCLUSION AND RECOMMENDATION..............................................................................9
References......................................................................................................................................11

Traditional Budgeting 3
ABSTRACT
Traditional budgeting technique has been used as a planning and control tool in most of
the organizations, however it has faced more criticism in the modern organization due to its
inefficiency to address the current organizational needs. Its opponents introduced other
techniques such as activity –based budgeting, value-based budgeting and profit planning
budgeting, which in turn replaced the use of traditional budgeting. Many writers have pointed out
that the technique cannot be applied in the unstable sectors since no comparisons can be made.
The fact that it is also inflexible and only focuses on resource allocation has rendered the
technique so dissatisfying that managers have been forced to adopt other techniques to help them
carry out planning. Today organizations are focusing on the customers’ needs and value creation
and not necessarily on cost reduction hence the need for a Sophisticated budgeting technique that
will enable organization to improve its performance.
INTRODUCTION
A budget is an approximation of the total income and expenses over a given period of
time. In Accounting, it is used as tool to help one in forecasting and analyzing business’s income
and expenditures (Zeller and Metzger, 2013). Traditional budgeting is the act of being able to
foresee your business’s income and revenue for the subsequent year based on the previous
budget. For a company to remain in business, it has to strictly monitor and maintain its budget so
that the expenses does not exceed the revenue and hence a good reputation to a company. By
comparing the actual previous expenditures with the actual current expenditures, one is able to
trace where there was unnecessary spending and reduce the expense incurred or look for a
supplier that will supply the same product/service at a relatively cheaper price (Andrews and
Hill, 2003). In addition, the budget can be used to obtain money from the financers. With the

Traditional Budgeting 4
advancements experienced in the budgeting sector, this research work seeks to prove that
traditional budgeting is gradually becoming irrelevant as new budgeting ways are shaping the
business sector.
Figure 1: The Traditional Budgeting model
Source: (Ouda and Makhlouf, 2014).