Advantage and Limitation of Budgeting

Submitted By :Akanksha Singh Reg no : 102601089

Introduction Budgeting is the most important management concepts in business. It is widely used by profit and non-profit organizations. Budgeting is time consuming and costly job. The development of budget includes many repetitive before budget is finally approved. As an example, participative budgeting involves managers at all levels developing their own initial estimates for sales, costs, etc. This process requires a lot of negotiations between managers at different levels until a budget evolves which is acceptable to all level.

The success of a budget program will be determined in large part by the way in which the budget is developed. In the most successful budget programs, managers with cost control responsibilities actively participate in preparing their own budgets. This is in contrast to the approach in which budgets are imposed from above. The participative approach to preparing budgets is particularly important if the budget is to be used to control and evaluate a manager s performance. If a budget is imposed on a manager from above, it will probably generate resentment and ill will rather than cooperation and commitment.

Budgeting

The initial flow of budget data in a participative system is from lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost control will prepare his or her own budget estimates and submit them to the next higher level of management. These estimates are reviewed and consolidated as they move upward in the organization.

Once self imposed budgets are prepared, are they subject to any kind of review? The answer is yes. Budget estimates prepared by lower-level managers should be scrutinized by higher levels of management. Without such a review, self imposed budgets may be too loose and allow much "budgetary slack." The result will be inefficiency and waste. Therefore before budgets are accepted, they must be carefully reviewed by immediate superiors. If changes from the original budget seem desirable, the items in question are discussed and modified as necessary. All level of an organization should work together to produce the budget. Since top management is generally unfamiliar with detailed, day to day operations, it should rely on subordinates to provide detailed budget data. On the other hand, top management has an overall strategic perspective that is also vital. Each level of responsibility in an organization should contribute in the way that it best can in a cooperative effort to develop an integrated budget.

Characteristics of a budget A good budget is characterized by the following: y y y y y y Participation: involve as many people as possible in drawing up a budget. Comprehensiveness: embrace the whole organisation. Standards: base it on established standards of performance. Flexibility: allow for changing circumstances. Feedback: constantly monitor performance. Analysis of costs and revenues: this can be done on the basis of product lines, departments or cost centres.

Benefits of Budget y 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. y 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) y 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. y Aid in resource planning and allocation, key or scarce resources or capital expenditure are carefully review during the establishment of the budgets; y Promote continuous improvement. In the budgeting stage, non-value adding activities shall be eliminated, new or enhanced processes are designed to increase productivity, etc.; y 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. y 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 y De-motivation of employees as they feel that the budgeted figures are way too high to achieve; y Budgetary slack or padding the budgets as managers will intentionally blow up their budget figures for fear of top management s reprimanding them; y A budget tends to emphasize on results and the real reasons are being ignored; y 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.;

y No matter how well prepared a budget might be, it will never be able to reflect truly the reality/complexities faced by the company; y There is a need to revise/update the budget which at the time was based on a certain set of circumstances/best information. y 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

Conclusion Budgets are instruments of planning and control. Budgets specify the expenses an employee or an organizational unit in an establishment is authorized or permitted to incur for different types of activities or assets. The biggest benefit of a budgeting system is that it allows managers the freedom of decision making as long as they do not exceed the budgets. The biggest limitation of traditional budgeting system is that it focuses primarily on expenses, paying little attention to the results obtained as a result of the expenses incurred.