Approaches to Budgeting

1.1 Traditional approach to budgeting and budgetary control:

The traditional approach to budgeting and budgetary controls includes the process of developing a plan in advance for the factors that may influence the budget of the next year. Budgets usually include the incomes and expenditures and the capital yet to be utilized. Traditionally the budgets regarding any segment of an organization such as any department or sales or division or for the entire organization was approved before the beginning of the budget year. Moreover budgetary controls makes regular comparisons of budget and actual performance and on the basis of comparisons actions are taken to correct any differences where necessary (Hofstede, 1968).

There are many organizations using traditional budgeting, which provide them with the forecast of the budget for the up coming year and that does not change during the budget cycle. Companies find traditional budgeting easy with simpler coordination of budget assumptions for different department. However with passage of time and changes occurring in business world, companies complain that the traditional budgeting is not coping up with their needs the major criticism on traditional budgeting is due to:

* Inappropriate measure they are either very simple or very complex.

* Not flexible with changing business situations.

* The budget is incorrectly timed either too short or too long.

* Traditional budget is considered very political.

In order to avoid the above inconveniences the organizations are adopting alternative approaches of budgeting. Similarly for the business that businesses operates in a very stable and static market place, where there is little change in either products or demand year on year, and the other that business operates in a very dynamic, rapidly changing, innovative environment I would suggest that the businesses should adopt the alternative approaches of the budgeting (Neely etal.,2003).

2. Alternate Approaches to Budgeting:

The key point to any of the budgeting approaches is that budget is the main management tool with which the managers can assess whether the business is going in the right direction or there is need of any adjustments. As budgets take in to consideration the conditions of market such as margin pressure, macroeconomic factors such change in tax rate along with external budget takes into account the internal factors of the organization such as allocation of resources. With passage of time and changing business conditions any business whether in a dynamic innovative environment or in stable market place should bring changes in the approaches to budget and budgetary controls as well encompass other changes to be updated and cope up with the needs of new business