Traditional budgeting is a system of budgeting whereby the budget is calculated basing on the last year's budget. This year budget is estimated based on the inflation rate, consumer demand, and market situation. Budget expenditure is categorized according to the type of expenditures. Ever y expenditure and receipts have to be clearly explained how and when it happened.
This type of budgeting helps in financial planning. It explains where the money was obtained from and how it was used. It provides a framework for doing business and coordinating a company activity (Lorain et al. 2015). Planning is done by cutting down unnecessary expenses and concentrates on those activities that directly benefit the business and generate maximum profits.
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Traditional budgeting helps in decision making by making business changes based on the previous year operations. What was done during the last year contributes to performance? All these operations provide a game plan on how to operate the business.
This type of budget also contributes to ways of obtaining finance. Lenders and investors want to see the business financial plans and the previous financial statements of a business (Uyar, 2009). A traditional budget can explain to them last year's finance hence helps them to decide if to invest or not.
Many companies recognize decentralization in running its business activities. Therefore budgeting and use of budget cost centers give managers the ability to run the business to the highest limit as long as they can achieve the target of the company. Traditional budgeting helps to decentralize a business activity.
Traditional budgeting is therefore essential in planning and controlling the business operations despite the ever-changing business environment due to competition and technology. Companies adapt traditional budgeting approaches after understanding their own culture, conditions, and weakness. Combining the company's operations and traditional budget may bring the best advantage for the government
References
Lorain, M. A., García Domonte, A., &SastrePeláez, F. (2015). Traditional budgeting during financial crisis.
Uyar, A. (2009). An evaluation of budgeting approaches: traditional budgeting, better budgeting, and beyond budgeting. Journal of academic studies , 11 (42), 113-130.
