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
o Why are we doing this?
o Should we change the way we do it?
• Cash allocation
o What areas/departments need a cash infusion
o What areas/departments need to cut spending
Some of the disadvantages of having a budget are:
• Time investment
o Someone has to take the time to prepare a budget and do
the proper research for it to be a valid budget
• “Gaming the system”
o Deliberately misallocating funds to either make one
department look better or set another one up for failure
o Looking after “pet projects”
o “Robbing Peter to pay Paul”
• Blame game
o Pointing the finger at other departments
• “Spend or Lose”
o Fear 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.
o Products 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. a 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. a 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/article/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/b
udgets-dont-work-heres-how-businesses-can-do-it-
differently/?sh=6066a24a46b8
