Assessment Description:
Budgets are developed months before the end of the current year and are best guess estimates of future performance. What do you think might be some pitfalls of budgeting, and how can they be avoided?
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SOLUTION to ACC 240: Fundamentals of Accounting- Topic 6 DQ 2.
Hello class,
From my life experiences as an Emergency Room (ER) nurse, I now understand that budgets, despite being effective tools for managing financial resources, have some drawbacks. The first one is the uncertainty of the company's performance in the future, it is challenging to predict different outcomes in a fluctuating business environment. This uncertainty often gives way to wrong estimations, thus leading to the wrong allocation of resources or setting of unachievable performance milestones. To address this problem, what companies can adopt is rolling budgets or continuing forecasts, which enable frequent review and amendment based on existing circumstances (Kunnathuvalappil, 2020).
Another weakness is that budgets are sometimes set and fixed, and this negates flexibility, creativity, and the ability to adapt to change in the market. This rigidity can result in managing activities for the purposes of achieving short-term specific targets irrespective of the consequences on long-run value. To mitigate this, organizations can implement beyond budgeting strategies or zero-base budgeting techniques as they embrace intangible qualities that encourage the continuance of the evaluation of expenses and priority (Promise, 2023). Additionally, budget padding, where managers intentionally overestimate expenses or underestimate revenues to create a safety buffer, is another common issue. This practice can cause resource waste and inhibit the possibility of evaluating the true performance. Aceron (2019) posits that to reduce the incidence of the practice, companies should engage in a participative budgeting process that includes several levels of management and pursuant to which all parties are held accountable to the budgetary process.
When managers become aware of these limitations and biases, they then have the tools needed to counteract them which can in turn help organizations improve the budgeting process, forecasting capability, resource utilization, and organizational performance. This approach will also allow companies to be more responsive to market conditions, integrate strategic planning with financial management, and establish better information to work from.
References
Aceron, J. (2019). Pitfalls of aiming to empower the bottom from the top: The case of Philippine participatory budgeting. Accountability Research Center. Accountability Working Paper, 4.
Kunnathuvalappil Hariharan, N. (2020). Rethinking budgeting process in times of uncertainty.
Promise Akor ORDU, D. I. E. T. (2023). Public Sector Budgets: Types, Processes, Implementation and Controls; Issues and Prospects. Journal Homepage: https://gjrpublication. com/gjrbm, 3(06).