Table of Contents
- 1 Meaning of Traditional Budgeting
- 2 Advantages of Traditional Budgeting
- 3 Disadvantages of Traditional Budgeting
Meaning of Traditional Budgeting
Traditional budgeting is a method of preparation of the budget in which last year’s budget is taken as the base. Current year’s budget is prepared by making changes to previous year’s budget by adjusting the expenses based on the inflation rate, consumer demand, market situation, etc. Past year’s revenues and costs form an integral part of current year’s budget. Only those items in traditional budgets need to be justified which are over and above the last year’s budget.
Traditional budgeting method is different from zero-based budgeting method but quite similar to incremental budgeting method.
Advantages of Traditional Budgeting
Traditional budgeting method has various advantages as well as disadvantages. Let us have a look at its advantages first.
It is easy to implement. Moreover can be prepared faster as not many changes are required in the previous year’s budget. This saves a lot of time and efforts of managers.
This is an old budget preparation method and most of the organizations are used to it. This brings stability in the functioning of an organization, as the financial activities are done with coordination and everyone knows what needs to be done.
Traditional budgeting helps in promoting decentralization in the organization like in the case of banks. Any branch situated away from its headquarters can prepare a budget on its own and can make changes within the allowed limits.
The Traditional budget method gives the opportunity to consolidate various projects together into a single larger one. This helps in improving the performance of those projects which were underperforming before they were clubbed with a good performing working project.
Ease of Preparation
Traditional budgets are easy to prepare as they take previous year’s budget as a base. Only changes are required to be made in last year’s budget as per the need of current year’s budget requirements.
Disadvantages of Traditional Budgeting
After looking at the advantages, let us see some disadvantages of Traditional Budgeting:
Fixed and Rigid
Traditional budgets are fixed and inflexible. Once prepared, traditional budgets cannot be changed. Many factors like a new competitor in the market, change in policy, change in market conditions, etc. may take place, yet the budget stays the same.
Traditional budgets are prepared by the top management by making few changes in last year’s budget. Therefore, it promotes bureaucracy. So other people in the organization feel ignored or unimportant. This acts against the motivation of the employees of the organization.
Traditional budgets put excessive reliance on past year budgets, which can prove fatal at times. If the past budgets are prepared with inaccuracy, the same would be carried forward to current year’s budget and years to come. This would lead to the preparation of incorrect budgets of the organization, which can harm the growth of the company in the long run.
Managers may deliberately increase their budgeted cost and request the top management to allot them the increased cost without justifying such expense.
No Priority for Allocation of Resources
In traditional budgeting, the resource allocation depends on past levels. It does not take into priority any project which should be ranked higher according to their importance to the survival of the organization. This affects the profitability of business.