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A strict budget is essential for a company to follow, even when experiencing phenomenal profits, for several reasons (Boyd & Pitre, 2020):
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Sustainability: Following a budget ensures that the company has a plan for allocating resources, and it helps to avoid overspending during a period of high profits. This helps to maintain stability and ensure the long-term sustainability of the company.
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Financial Planning: A budget provides a framework for the company to plan for future expenses, investments, and growth. This helps to ensure that the company is prepared for unexpected events and changes in the market.
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Risk Management: Having a strict budget helps minimize financial risk by ensuring that the company has a clear understanding of its financial situation and is prepared for unexpected costs. This can help to protect the company from potential financial problems in the future.
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Increased Transparency: By following a budget, a company can provide greater transparency to stakeholders, including investors, employees, and customers, about its financial situation and the allocation of resources.
It is important to note that biases can significantly impact decision-making and lead to unethical or problematic outcomes. In budgeting, a bias towards greed can result in decisions that prioritize personal or organizational financial gain over other important considerations, such as ethical or social responsibility. This can lead to allocating resources in a way that benefits those in power or prioritizes short-term profits over long-term sustainability. Therefore, companies must have systems in place to minimize the influence of biases, such as implementing a transparent and accountable budgeting process with clear guidelines and objective criteria (Brewer et al., 2019). This helps ensure that the budget is fair and aligned with the companys values and goals and reduces the likelihood of greed influencing the allocation of resources.
Management greed can influence budget decisions by leading management to prioritize personal or organizational financial gain over the well-being and long-term success of the company. This can lead to decisions that prioritize short-term profits at the expense of investment in research and development, employee training and development, and other essential expenses. Additionally, greed can lead to budget decisions that overlook potential risks or ignore ethical considerations, leading to actions that may harm the companys reputation and long-term viability (Brewer et al., 2019). Companies must have a culture of transparency, accountability, and ethics in financial decision-making to prevent greed from influencing budget decisions.
References
Boyd, J., & Pitre, R. (2020). Creating relevance in managerial accounting. Journal of education for business, 95(5), 331-334. Web.
Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2019). Introduction to managerial accounting (9th ed.). McGraw-Hill Education.
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