Benefits Of Budgets And Understanding Its Limitations

Earlier article describe the objectives of having budget, here this article describes the benefits that may accrue from budgeting and then what can be its limitations.

Benefits Of Budgeting:

Reinforce the management process of planning ahead. In fact, budget compel the managers to think and anticipate of future challenges, formulate strategies ,etc so as to achieve the desired company’s goals;

A budget is in reality a set of plan. This plan is created by all the relevant managers to create a course of action for future action(s)

Create a basis for Performance Evaluation of Managers’ performance. Incentives are based on how much have been achieved against the budgeted figures. Hence, if budgets are set up realistically will assist to motive manager and employees positively.

Aid in resource planning and allocation, key or scarce resources or capital expenditure are carefully review during the establishment of the budgets;

Promote continuous improvement. In the budgeting stage, non-value adding activities shall be eliminated, new or enhanced processes are designed to increase productivity, etc.;

Budgeting is the best time for all level of manager to co-ordinate together so as to plan ahead, promotes teamwork, process improvement and goal congruency between the company and the employees.

Delegation of duties, authority limit and responsibility are more properly segregated as budgets are set up. With budgets, top management feels that they are in control of the various business activities of the company.

Limitation Of Budgeting:

De-motivation of employees as they feel that the budgeted figures are way too high to achieve;

Budgetary slack or padding the budgets as managers will intentionally blow up their budget figures for fear of top management’s reprimanding them;

A budget tends to emphasize on results and the real reasons are being ignored;

Unrealistic budgets can lead managers to make decisions that might be detrimental to the company. A good example of over-ambitious sales budget will lead to disastrous impact like giving steep discount to increase volume,etc.;

No matter how well prepared a budget might be, it will never be able to reflect truly the reality/complexities faced by the company;

There is a need to revise/update the budget which at the time was based on a certain set of circumstances/best information.

Budgets if not properly buy in by all relevant parties will not get the full cooperation hence it might lead to the motto:Planning to fail