Having dealt with budgets over the years, I have observed the
advantages and disadvantages. A business has to start somewhere
and plan how to allocate its money. Without knowledge of company
finances and some expertise in preparing a budget, it can become a
worthless piece of paper.
Some of the advantages of having a budget are:
Long-term thinking –get managers looking ahead and setting
goals
Shows where the money goes
o“Who spends it and who makes it”
Review of assumptions
oWhy are we doing this?
oShould we change the way we do it?
Cash allocation
oWhat areas/departments need a cash infusion
oWhat areas/departments need to cut spending
Some of the disadvantages of having a budget are:
Time investment
oSomeone has to take the time to prepare a budget and do
the proper research for it to be a valid budget
“Gaming the system”
oDeliberately misallocating funds to either make one
department look better or set another one up for failure
oLooking after “pet projects”
o“Robbing Peter to pay Paul”
Blame game
oPointing the finger at other departments
“Spend or Lose”
oFear that if the budgeted amount is not consumed that
allocations will be lower in the future which can cost the
company money
Budgets don’t measure quality.
oProducts and services may be below par because corners
are being cut in an effort to come in under budget
It may be prudent to create a master budget that incorporates
strategic planning. The next step would be to create a “mini” budget
for a shorter time period, for example, one quarter. Once the
quarterly budget is evaluated, the master budget can be reviewed
and tweaked. The article suggests a shorter time period. A budget is
necessary for success but needs to be looked at in a different way
that brings in not only financial aspects but other important
considerations for the success of the business in the future.
Wendy
References:
The advantages and disadvantages of budgeting. MJO bookkeeping
services. (2020, January 20). Retrieved May 27, 2022,
from https://www.mjobookkeeper.com/business-management/articl
e/the-advantages-and-disadvantages-of-budgeting/
Rajan, M. V., & Datar, S. M. (2017). Horngrens Cost Accounting: A
managerial emphasis, global edition. Retrieved May 27, 2022.
Rygelski, M. (2018, January 5). Council post: Budgets don't work: Here's
how businesses can do it differently. Forbes. Retrieved May 27, 2022,
from https://www.forbes.com/sites/forbesfinancecouncil/2018/01/
05/budgets-dont-work-heres-how-businesses-can-do-it-
differently/?sh=6066a24a46b8
