The Role of Budgeting in the Current Economic Climate Essay

The Role of Budgeting in the Current Economic Climate - Essay Example Problems with the traditional budgeting system Any budgeting system has three major roles, viz., â€Å"planning, motivation and evaluation† (Banovic, 2005, pp. 4-5). Hence there are chances of three types of conflicts to arise. For the effectiveness of a budget, the planners are supposed to assess the company’s functioning capabilities and therefore they make an optimistic budget. They are under pressure to create a plan that would merge the targets desired to be achieved with feasibility of achieving the desired performance. This leads to the setting of more attainable targets thereby under using the available resources to the fullest extent. It causes lack of motivation among the employees. Secondly, the level of motivation might conflict the evaluation standard in the company. For the evaluation of performance certain rigid standards are maintained. This may not take into the consideration of unforeseen or uncontrollable incidents. Thus, while on one hand the detaile d knowledge about the evaluation standard might make the employees take it for granted at work for the fulfillment of the desired level, on the other hand, the occurrence of some uncontrollable incidents would not be accounted for the system and reflect a faulty judgment of a lesser performance. Finally, a minor conflict might arise in lieu of the differences between the realistic assessment of the future prospects by the planning personnel and the need to get rid of the unfavorable environmental factors from the budget that goes for evaluation purposes. However this conflict is not a big one since adjustments can be made as required after the budget period ends (Banovic, 2005, pp. 4-5). Besides, the budgets are formulated on the basis of the functions of the different departments of an... This essay offers a comprehensive review of the current state of budgeting theory and its implementation in the process of central planning of corporate firms. Initially the concept of budgeting was designed for the senior executives in an organization to control the activities in the organization directly from the business head. It acts as a management tool by which the financial health of the company can be controlled. The benefits of budgeting include that of forecasting the future performance of an organization, addressing its developmental issues, promoting cohesion amongst the different departments and also predict any possibility of unforeseen expenses The facility of system traditional budgeting system has made the budgetary practices to remain unchanged throughout the decades. Yet, the managers and administrators noticed various dysfunctional behaviors associated with the system. A company might encounter several unpredictable events which require rapid responsive action. But the prevailing budgeting process does not provide such space for immediate action. The budget which is designed to handle long term complex problems, cannot serve the purpose of the managing small failures with preciseness. Several companies now feels the need for modification in the traditional budgeting system. Research is still on in this sphere and more can be added to the element of risk management in the model of Beyond Budgeting. The ultimate objective is to construct a management model which is â€Å"coherent, simple and integrated†