Traditional Budgeting:
Process: Traditional budgeting involves creating a detailed plan for the entire fiscal year. It typically starts top-down, with authority firmly seated at the executive level. The budget is then built bottom-up to meet fixed goals set by management.
Rigidity: Once the budget is locked down, it becomes inflexible. Any changes require significant effort and negotiation.
Time and Resources: The process is time-consuming, often taking six to eight months. Many corporate resources are consumed during this period.
Perceived Problems: Traditional budgets may promote internal politics, mistrust, and deception. They do not always adapt quickly enough to market changes and therefore prevent full potential realization of the business’ success.
Modern Approach:
Flexibility: Modern budgeting allows for more flexibility. It incorporates rolling forecasts and continuous monitoring of financial performance.
Adaptive Planning: Rather than fixed annual budgets, companies use adaptive planning methods. These approaches align better with dynamic business environments.
Focus on Value Creation: Modern budgeting emphasizes business value creation over mere cost reduction. Strategic initiatives receive appropriate priority.
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