Advantages of budgeting:
- Compels management to think about the future. Forces management to look ahead, to set out detailed plans for achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the organisation purpose and direction.
- Improve resources allocation, because all requests are clarified and justified.
- Improve internal communication with employees as departments need to communicate to get the information and estimate the budget.
- Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for the achievement of budget targets for the operations under their personal control.
- Provides a basis for performance appraisal (variance analysis).
Disadvantages of budgeting:
- Budgets can be seen as pressure devices imposed by management, thus resulting in bad labour relations and inaccurate record-keeping.
- Budgets can create competition for resources and politics.
- Managers may overestimate costs so that they will not be blamed in the future if they overspend. This may result in extra resources being wasted.
- A rigid budget structure reduces initiative and innovation at lower levels, making it impossible to obtain money for new ideas.
- Employees could be demotivated if the budget is not realistic.
What would happen if budges are not monitored?
- Waste of money and resources.
- Harder to indicate whether a business a doing better or worse, and no analysis can be done.
- Could result in debt or loss without knowing where it came from.
- No investors would be interested on investing a black hole.
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