Understanding Accounting Ethics Academic Essay
Backward budgeting is widely thought of as a better strategy than conventional budgeting (Lee, Johnson & Joyce, 2012). Management may use this budgeting model to justify layoff or event plant closures. In backward budgeting, the management will suppose a certain future financial position of the company and use that as the basis of their budget decisions. Well, this could have advantages; but it can also work against many stakeholders.
One advantage of backward budgeting is that it has the potential of avoiding a financial crisis. By working backwards from a prospective future position, a company can better distribute its financial resources. This is unlike spending what you have and when it is exhausted, you look for more. It could be more logical to budget backwards, especially if a company can accurately estimate its future financial position. In such a case, the company is able to exploit its financial power to its maximum possible without overrunning it. It is normal for companies to set aside budgetary allocations only to realize at the end of the financial year that it has not exhaustively used some of these allocations.
However, the disadvantage with this model of budgeting is that it might be very unreliable. The estimations used as expected future positions might not be scientific. That is, they may be a result of speculation as is very common in forecasting (Guerard & Lahiri, 2015). If speculation is used to predict a tough financial future, employees may get suffer layoffs under unwarranted tighter financial control mechanisms. Similarly, closures may be initiated even where there might have been the chances of recovery and return to profitability.