Whilst budgets are widely used to in business, you should appreciate that they have some important limitations.
In particular:
- Budgets are only as good as the data being used to create them. Inaccurate or unreasonable assumptions can quickly make a budget unrealistic
- Budgets can lead to inflexibility in decision-making
- Budgets need to be changed as circ*mstances change
- Budgeting is a time consuming process – in large businesses, whole departments are sometimes dedicated to budget setting and control
- Budgets can result in short term decisions to keep within the budget rather than the right long term decision which exceeds the budget
- Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers
Budgets can also create some behavioural challenges in a business
- Budgeting has behavioural implications for the motivation employees
- Budgets are de-motivating if they are imposed rather than negotiated
- Setting unrealistic targets adds to de-motivation
- Budgets contribute to departmental rivalry - battles over budget allocation
- Spending up to budget: it can result in a “use it or lose it” mentality - spend up to the budget to preserve it for next year
- Budgetary slack occurs if targets are set too low
- A “name, blame and shame” culture can develop - but managers should be answerable only for variations that were under their control
