The Process of Budgeting and Its Advantages

Paper Summary:

This paper provides an overview and background of the budgeting process, including budget planning and the types of budget statements commonly used. An examination of the budgeting process in action is followed by a discussion of some constraints to effective budgeting. An analysis of strategic budgeting as an alternative is followed by a summary of the research in the conclusion.

From the Paper:

"An old saying advises that, "We don't plan to fail, we fail to plan." The budget process was developed to allow companies to better understanding where they have come from, where they are currently, and how they can get where they want to go. According to Jack Welch, then CEO of General Electric, "The budget is the bane of corporate America. It should never had existed." Christian Babbini points out that Bob Lutz at Chrysler has made similar statements and a significant number of large European companies such as Ericsson, Volvo, Ikea, SKF and Diageo, have also abandoned the traditional budget or substantially altered the process. The reasons this disillusionment are well-known to everyone: budgets are frequently late, overly political in terms of trade-offs made, take too long to develop, take too many organizational resources and, fail to measure the critical things that make organizations successful in today's fast paced, global economy. In this view, "The budget becomes God and people manage to the budget and not to the realities of the competitive environment." This is not to say, of course, that the budgeting process does not have its place and function; it is to say, though, that companies may want to use some of the better alternatives which are available today which provide "what if" analysis and change the budgeting process into a strategic planning tool rather than an annual exercise in stone carving."

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