Budgeting Vs Traditional Budgeting

Budgeting is one of the most basic strategies that any number of groups and organizations depend on for financial planning. Families use budgeting to renovate their house, businesses use budgeting to continue providing their services: overall, budgeting is a necessity to insure that sufficient assets are available. Furthermore, budgeting is often used as a measuring tool based on variances between expected and realized expenditures (Atkinson, Kaplan, Matsumura, & Young, 2012). However, the effectiveness of traditional budgeting is widely disputed. Unfortunately, traditional budgeting methods are often unreliable in unstable market conditions, or highly fluid competitive environments. Furthermore, while traditional centralized management can …show more content…
In contrast with traditional budgeting, performance budgeting is based on a performance score ; this is useful for government programs that are not designed to generate of profit (Gilmour & Lewis, 2006). Instead of measuring against target profits, sales, customer growth, or other measures – as would be the case for performance budgeting in for profit organizations – government programs can base their resource allocations on programs’ benefits. However, even this practice is questionably effective due to the difficulties in remedying poor performances – “If a program performs poorly, does that mean it should be cut because it is wasting money or increased so that it can do better?” (Gilmour & Lewis, 2006). Another concern is the potential influence of political motivations in a performance merit system (Gilmour & Lewis, 2006). Furthermore, performance based budgets imply fixed expectations, which can lead to behavioral issues: the pressure to achieve target goals induce “distortion, misrepresentation, and gaming” (Gary, 2003). In light of the challenges which are part of the budgeting process and the vast resources required, some critics argue that the return on investment is not worth the efforts and resources; the idea being to “dispense with budgets entirely” (Gary, 2003).The proposed alternative, similarly to the “beyond budgeting” approach, would depend on “ rolling forecasts and key performance indicators” in order to base decisions on customer needs (Gary, 2003). While such a system could have potential, it seems unlikely to take place quickly; budgeting has a somewhat traditional role in business, and changes in government practices would inherently require modifications to budget