Limitations and Advantages of Budget
Advantages of Budget
Some of the advantages of budget are:
1) Maximisation of Profit: The budgets aim at the maximisation of the profits of the enterprise. To achieve this aim, proper planning and coordination of various functions are undertaken. There is proper control over different capital and revenue expenditures. The resources are put to the best possible use.
2) Economy: The planning of expenditure will be systematic and there will be an economy in spending. The finances will be put to optimum use. The benefits derived from the concern will eventually extend to industry and then to the national economy. The national resources will be used economically & wastage will be eliminated.
3) Specific Aims: The policies, plans, and goals are decided by the top management. All efforts are put together to reach the common objective of the organisation. A target is given to every unit to be achieved. The efforts are directed towards achieving some specific objectives. If there is no definite aim then the efforts will be wasted on pursuing other aims.
4) Measuring Performance: By providing targets to various departments, budgets provide a tool for measuring managerial performance. The budgeted targets are compared to actual results & deviations and then determined. The performance of every department is reported to the top management. This system enables the introduction of management by exception.
5) Coordination: The working of different departments and sectors is properly coordinated. The budget of various departments has a bearing on one another. The coordination of various executives and subordinates is required for achieving budgeted targets.
6) Determining Weaknesses: The deviations in actual performance and budget will enable the determination of weak sports. Efforts are concentrated on those factors where performance is less than the stipulated.
7) Corrective Action: The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that required action is taken at the earliest. In the absence of a budget system, the deviations can be determined only at the end of the financial period.
8) Reduces Costs: In the present-day competitive world, budgetary control has a significant role to play. Every businessman tries to decrease the cost of production for increasing sales. He tries to have those combinations of products where profitability is better.
9) Consciousness: It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what they are expected to do and they continue with their work uninterruptedly.
10) Incentive Schemes: The budget system also enables the introduction of incentive schemes of remuneration. The comparison of actual performance and budget will enable the use of such schemes.
Limitations of Budget
The following are the limitations of budgetary control:
1) Uncertain Future: The budgets are prepared for the future period. Despite the best estimations made for the future, the predictions may not always come true. The future is always uncertain and the situation which is supposed to prevail in future may change. The change in future situations may upset the budgets which have to be prepared based on some assumptions. Future uncertainties decrease the utility of the budgetary control system.
2) Budgetary Revisions Required: Budgets are prepared on the assumption that certain conditions will prevail. Because of future uncertainties, assumed conditions may not prevail necessitating the revision of budgetary targets. The frequent revision of targets will reduce the value of budgets and revisions involve huge expenditures too.
3) Discourages Efficient Persons: Under the budgetary system, the targets are given to every person in the formal organisation and informal organisations. The common tendency of people is to achieve the targets only. There may be some efficient persons who can exceed the targets but they will also feel content by reaching the targets. So budgets may serve as constraints on managerial initiatives.
4) Problem of Coordination: The success of budgetary control depends upon the coordination among different departments. The performance of one department affects the results of other departments. To overcome the problem of coordination a budgetary officer is needed. Every concern cannot afford to appoint a budgetary officer. The lack of coordination among different departments results in poor performance.
5) Conflict among Different Departments: Budgets may lead to conflicts among functional departments. Every departmental head worries about his department’s goals without thinking of the business goal. Every department tries to get maximum allocations of funds and this raises a conflict among different departments.
6) Depends upon the support of Top Management: Budgetary system depends upon the support of top management. The management should be enthusiastic about the success of this system and should give full support for it. If at any time there is a lack of support from top management then this system will collapse.
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