Budgeting (2)

Budgeting Advantages & Limitations

Budgeting A budget can be defined as “a financial and/or quantitative statement, prepared and approved prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective. It may include income, expenditure and the employment of capital.”

Advantages Budgeting plays an important role in the effective use of resources and achieving overall organizational goals. 1- Budgeting compels and motivates management to make an early and timely study of its problems. 2- It provides a valuable means of controlling income and expenditure of a business as it is a ‘plan for spending’ continued…

3- It provides a tool through which managerial policies and goals are periodically evaluated, tested and established as guidelines for the organization. 4- It helps in directing capital and other resources into most profitable channels. 5- It co-ordinates and co-relates all business activities, reveals weaknesses, inefficiencies, deviations in the organization which can be checked to achieve desired goal. 6- Budgeting develops an attitude of ‘cost consciousness.’ stimulates the effective use of resources and creates an environment of profit mindedness. Continued…

7- It provides a basis or yardstick for measuring performance. 8- Budgeting encourages productive competition and gives a sense of purpose to each individual. 9- It provides a systematic and disciplined approach to the solution of problems in the organization. 10- Budgeting if implemented helps the total national economy by providing stability of employment, economic use of resources and effective prevention of waste.

Limitations 1- Budgeting is not an exact science, it uses approximations and judgment which may not be accurate. 2- Its success depends on the co-operation and participation of all member of management. 3- A budget is only a tool and does not eliminate nor take over the place of management. Continued…

4- The establishment of a budgeting process takes time moreover some times too much is expected from the budget and in case expectation are not fulfilled the blame is put on budget. 5- Excessive emphasis on budgeting may result in attempts by lower level management and employees to resist the system by providing inaccurate estimates of future cost and revenues.

Thank you.