Conventional budgeting involves adding funds to the previous year’s budget to expand or complete projects, such as construction of health facilities or schools by organizations or governments. This method of budgeting contrasts with unconventional, or zero-based, budgeting, as organizations using the unconventional method draw their budget plans afresh at the start of each financial year. However, conventional budgeting comes with various strengths and weaknesses.
Flexibility and Accountability
Business enterprises using conventional budgeting are able to improve accountability. This is because this method of budgeting, also known as line-item budgeting, allows for inclusion of every item the company produces in the budget. The method also offers flexibility over the use of resources, depending on expenditure details like the amount of money an operation consumes. This budgeting method, therefore, gives organizations room to account for their financial decisions and use resources in an innovative way.
Ease of Use
Convectional budgets are easy to draw; it is also easy to find budget experts who are familiar with the budgeting method’s preparation procedure. Organizations are able to accumulate expenditure data because the budgeting system’s simplicity allows them to update their books of account frequently. Expenditure data is useful in taxation processes, and can help an organization analyze taxation trends and establish areas of the business that need budgetary cutbacks to increase profitability.
Using conventional budgeting promotes capital restructuring that may involve cost-cutting measures, possibly leading to staff cutbacks in various departments of an organization, or of a country’s economic sectors. Employee retrenchment can be disadvantageous to organizations and governments, as it gives them a bad image and may discourage foreign investment. Governments may also offer the laid off staff huge packages to avoid confrontation with labor unions, increasing the national expenditure.
Weakened Decision Making
Conventional budgeting offers decision makers little information on an organization’s departments. This is because the kind of expenditure the budgeting process projects is speculative and is not reliable for making certain decisions. This forces decision makers in governments and organizations using conventional budgeting methods to adjust their plans often, so as to strengthen their decisions.
Fiona Miller is a resident of Vancouver, Canada. Her writing career began in London in 2004, working as chief editor for the International Finance Journal, an online magazine with readership across Europe. Miller holds a diploma in creative journalism and English from Concordia University, a Bachelor of Commerce in international business and an M.B.A. from the IESE Business School in Barcelona.