Analysis of Traditional Budgeting in Today's Business Environment

This report critically evaluates traditional budgeting within the current business environment. It emphasizes the importance of integrating financial and non-financial information to effectively forecast risk. The report explores how budgeting provides clarity and facilitates the allocation of resources. It discusses the limitations of traditional, fixed budgeting and highlights the value of incorporating tools like dashboards and balanced scorecards. Furthermore, the report delves into forecasting techniques, including the Delphi technique, scenario writing, subjective approaches, and time series forecasting, to minimize risk and enhance financial projections. The analysis underscores the need for businesses to adapt and adjust their budgeting processes to remain competitive and responsive to dynamic market conditions. The report concludes that effective budgeting is crucial for forecasting future prospects.

Traditional Budgeting in
Today’s Business
Environment

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Critical evaluation of possible value of assimilating financial and non-financial information
and tools available in forecasting risk....................................................................................1
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Budgeting is crucial in the business so that income to earned and expenditures can be
estimated. Present report deals with critical evaluation of traditional budgeting. Furthermore,
adjustment of risk in respect of financial and non-financial data is made and forecasting
techniques are explained relevant to the company.
Critical evaluation of possible value of assimilating financial and non-financial information and
tools available in forecasting risk
The budgeting has been quite useful for company in achieving clarity about various types
of information and requirement of department can be fulfilled in a better way. Furthermore, it
can be said that budgets are financial goal which are formulated in order to meet capital and
operating expense's requirement in the current financial year by company. Traditional budgeting
is used to evaluate performance of firm on the basis of past performance and as such, budgets
were made in accordance to the requirement of departments. It is also known as fixed budgeting
as no flexibility can be made in budget once made which means that any change when required
amendments is to be made are totally ignored. This budgeting specifies expenses to be incurred
and income to be earned in the financial year (Ponticelli and Voth, 2017).
There are favourable arguments in traditional budgeting as provides entire aspect of
financial requirement of firms in the best possible manner. Creation, follow up and analysis are
three steps which are used in budgeting process by the management. Budget creation is just an
inception or developmental stage of such procedure. On the other hand, follow up stage is used
to assess and compare deviations in actual performance with that of budgeted performance in
effective manner. Thus, improvement is done with the implementation of corrective action. The
last stage is analysis used to attain opportunity from performance in the future course of action
(Deschênes, Greenstone and Shapiro, 2017).
However, there are several unfavourable arguments such as it is rigid in nature as once it
is fixed, it cannot be altered to modify changes might prevail in the company as it operates in a
dynamic environment where nothing remains stable. The behaviour of staff changes and
efficiency as well as productivity hampers a lot. To overcome weaknesses of traditional
budgeting, dashboards and balanced scorecard is used by business which helps to forecast
effectively about future performance of firm which is not provided by traditional budgeting. The
1

possible value of risk adjusted in accordance to the financial and non-financial information is
required so that firm can initiate budgeting process in effective manner.
The financial information are required to furnished in the financial budgeting process by
which correct estimation of requirement of each department and as such, firm can easily achieve
clarity with regards to demands and needs of units. This helps to have clarity to management on
which department need more funds to operate efficiently and as such, proper allocation of funds
can be made to them. Forecasting is done with the help of estimation of expenses and income
which are listed in the budget. If expenditure in previous year's is maximised, then firm takes
initiative to effectively control upon them so as to inject income. Hence, monitoring of business
performance can be done with much ease (Yadav and et.al, 2018).
Apart from this, non-financial information is also required so that business may be able to
analyse risk and adjust accordingly while preparing budgets in effective way. The classic
example is that if customers have given feedbacks regarding the shortcomings of performance,
then it has to be taken into consideration by firm's management. If they do not take into account
such important factor, it may land into trouble. The non-financial information includes all
relevant data but excludes cash collected from debtors, number of newer commodities presented
in the market. Hence, by compiling financial and non-financial information, firm can easily
adjust risk and budgeting process can be streamlined in a better way.
Forecasting risk is important in the business and as such, to minimise risk, forecasting
techniques can be applied with much ease. Delphi technique is quite effective technique often
involving panel of experts to whom series of questionnaires are provided to attain responses.
They are unaware of each other and then responses are recorded. Moreover, results obtained
from first questionnaire is accumulated and furthermore, second questionnaire is provided to the
experts of responses of first questionnaire. As such, responses can easily be revalidated. Hence,
this continues till experts come at constructive opinions.
Another technique is scenario writing which means that forecaster produces various
likely outcomes on the basis of starting criteria (Young. 2018). It is now the turn of person who is
involved in decision-making has to chose most appropriate outcomes from numerous scenarios.
This helps to effectively make financial projections in effective manner. Subjective approach is
another forecasting technique which is used in estimate outcomes usually based on feelings and
2

thoughts. Brainstorming sessions are conducted in order to attain clarity and solving problems up
to a high extent. Hence, time constraints are used so as to predict future forecasts (Golden and
McMahan, 2017). However, this technique is subject to biasness and should be taken with due
diligence and better control. Time series forecasting is useful quantitative technique which
means that data is collected over time frame in order to extract out trends. There are many time
intervals by which data can be collected such as hourly, weekly, yearly etc. Various components
are used to effectively carry out trend and thus, forecasting can be made quite effectually. Hence,
it can be interpreted that firm may be able to adjust risk by taking into account information in
budgeting process.
CONCLUSION
Hereby it can be concluded that budgeting is important in company and it may be able to
forecast future prospects in effective manner. Furthermore, financial and non-financial
information can be carried out and budgeting process can be initiated quite effectively.
3

REFERENCES
Books and Journals
Deschênes, O., Greenstone, M. and Shapiro, J. S., 2017. Defensive investments and the demand
for air quality: Evidence from the NOx budget program. American Economic
Review, 107(10), pp.2958-89.
Golden, B. and McMahan, C., GRIDPOINT Inc, 2017. Energy budget manager. U.S. Patent
Application 15/259,851.
Ponticelli, J. and Voth, H. J., 2017. Austerity and anarchy: Budget cuts and social unrest in
Europe, 1919-2008.
Yadav, G.S and et.al, 2018. Energy budget and carbon footprint in a no-till and mulch based
rice–mustard cropping system. Journal of Cleaner Production, 191, pp.144-157.
Online
Young. 2018 What Are Four Primary Forecasting Techniques? [Online] Available Through:
<http://smallbusiness.chron.com/four-primary-forecasting-techniques-4489.html>
4