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S&OIS Budgeting Advantages

S&OIS Functional Advantages:

S&OIS Process Advantages: The most important budgeting process consideration is sequence, i.e., cause and effect. The traditional budget causes/creates the traditional income statement.

The reserve is true for the Sales&Operations Income Statement (S&OIS). It creates the Sales& Operations Budget (S&OB) = S&OIS +firm’s strictly costs.

Traditional budget’s widely acknowledged process limitations: The following limitations were taken from an Accountingtools podcast,The problems with Budgeting, and an Accountingtools article, Budgeting Problems

Note: S&OIS’s solutions are in bold

  1.  “It’s wrong. A budget is based on a set of assumptions not too far removed from the conditions under which it was formulated…If conditions change to any significant degree…revenues or cost structures may change so radically…actual results will rapidly depart from original assumptions.” S&OIS is always accurate because it is a model and can be updated in real time when it’s conditions or assumptions change .
  2. “Requires revisions: Managers get into the mindset of only doing planning once a year…
  3. “Time required:  It can be very time-consuming to create a budget… especially where many iterations of the budget may be required.”  There is no time delay other than that required to update the current S&OB with whatever assumption changes next year’s plan has introduced. 
  4. Allows gaming: …attempt to introduce budgetary slack, which involves deliberately reducing revenue estimates and increasing expense estimates.” Managers have no chance to game because managers have no input.  S&OIS is built on department’s activities and not the managers’ departments’cost input as traditionally.
  5. Use or lose it problem:
  6. Has problems with capacity budgeting
  7. Command and Control problems:

 

 

 

  1. “Expense allocations: The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those departments may take issue with the allocation method used.” S&OIS employs NO such allocations.
  2. “Command and Control System:  “The single most fundamental problem underlying the entire concept of a budget is that it is designed to control a company from the center.  The basic under pinning of the system is that senior management forces managers throughout the company to agree to a specific outcome.”   Examples include targets for revenue, expenses, profit, cash flow or metrics. While senior management can certainly over-ride the S&OIS’s results, it seems very unlikely it would do so since it has gone to the expense and time commitment of implementing S&OIS.
  3. “Bureaucratic support: Once the budget and bonus plan system takes root within a company, a bureaucracy develops around it that has a natural tendency to support the status quo.”  S&OIS is a model; it has no “status quo.” Further, a “status quo” is irrelevant to S&OIS as it is always being updated.

 

 

 

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