The debate concerning the usefulness of budgets continues to rage on. Many consider them fundamental to an organisations success, while others feel that they are obstructive in an organisations quest to optimise their success and they should therefore be abolished. This report is concerned with the advantages and disadvantages of budgeting and whether not it is still relevant in today’s environment. It will also look at the alternatives to budgeting such as “better budgeting” which is improvements on the current approach and “beyond budgeting” which is a radical new idea that totally disregards the concept of budgeting.
Budgeting '' Pros & Cons
A budget is a plan of action for the coming year expressed in financial terms. (www.ci.berkeley.ca.us)
Even though budgeting is criticised and businesses are being told to adopt new methods, it still remains popular among many businesses as it has many uses.
Planning - A budget provides a detailed plan for the coming year of a company’s resources and enables them to allocate them adequately in order to achieve its objectives. For example, it enables a company answer certain questions such as; How much cash will be required? When it’ll be required? How long it’ll be required for? Whether cash will be available for investing? Also, “If cash-flow problems are likely to occur, a good budget can anticipate them and allow you to prepare necessary adjustments, either by postponing expenditures, obtaining sooner (if possible), or using credit to smooth out the cycle” (www.personalmoneymanagementexpert.com).
Communication -Budgets encourage different levels of an organisation to communicate with each other. This is essential as different departments have different goals and for the organisations overall goals to be achieved it is necessary that they communicate with each other in order to strike a balance. (Drury) Motivation - A budget is used to motivate managers as what is expected of them is outlined in the budget. Managers know that if they achieve the targets that are set out for them they will get bonuses and therefore will put more effort into their work. It’s important though that “difficult yet attainable” targets are set otherwise if the targets are too hard managers will lack motivation lack the desire to work or they will cut corners to achieve the targets. This has a knock-on affect throughout all employee levels within the organisation, as when low-level employees see top executives working hard they will too and this is nothing but good for the organisation.
Evaluation -A budget is used as tool to evaluate a business’ overall performance in achieving their goals by comparing actual results with budgeted results. The analysis of these variances will show managers where they went wrong in their estimates (or similarly where they went right) and where they should pay greater attention to in the future thus creating a learning effect (Clarke). Control - Again like evaluation variance analysis plays a part. By measuring actual performance against planned performance it can help you control your finances as the negative variances will help show where a company has gone off track and the required actions to fix the problem can be put in place before the situation gets any worse. The variances show “areas of weakness that need attention, opportunities to save money not foreseen in the initial budgeting process, or unrealistic planning in the original budget” (www.personalmoneymanagementexpert.com).
Budgeting though does have its “knockers” ands it’s hard to argue against their arguments against the budgeting approach. There are a number of problems with budgets that are highlighted below.
Encourages Perverse Behaviour - For example management feel its necessary to spend the entire current years budget just to get full allocation for the coming year. Also managers may do whatever it takes to achieve targets where bonuses are involved even if this...