Advantages and disadvantages

• Benefits of budgeting

  • Budgets can be motivating-they give employees targets to work towards
  • Budgets help control income and expenditure
  • Budgeting helps managers to review their activities and make decisions
  • Budgeting helps focus on the priorities
  • Budgets can be used as a communication tool to share information, e.g. about how money is being spent
  • Budgets let departments coordinate spending
  • Budgets help persuade investors that the business will be successful
• Drawbacks of budgeting

  • Budgeting can cause resentment and rivalry if departments have to compete for money
  • Budgets can be restrictive. Fixed budgets stop firms responding to changing market conditions
  • Budgeting is time-consuming. Managers can be preoccupied with setting and reviewing budgets and forget to focus on the real issues of winning business and understanding the customer
  • Inflation is hard to predict-some prices can change by levels much greater than average
  • Start-up businesses may struggle to get data from other firms, so the budget may be inaccurate