Budgeting is a systemic approach to the solution of problems. But it is not fool-proof; it suffers from certain problems and limitations. The major problems in developing a budgeting system are:
- Seeking the support and involvement of all levels of management.
- Developing meaningful forecast and plans, specially the sales plan.
- Educating all individuals to be involved in the budgeting process and gaining their full participation.
- Establishing realistic objectives, policies, procedures and standards of desired performance.
- Maintaining effective follow-up procedures and adapting the budgeting system whenever the
- Applying the budgeting system in a flexible manner.
circumstances change.
Management must consider the following limitations in using the budgeting system as a device to solve managerial problems:’ - Management judgement Budgeting is not an exact science; its success hinges upon the precision of estimates. Estimates are based on facts and managerial judgement. Managerial judgement can suffer from subjectivism and personal biases. The adequacy of budgeting, thus, depends upon the adequacy of managerial judgement.
- Continuous adaptation The installation of a perfect system of budgeting is not possible in a short period. Business conditions change rapidly; therefore, budgeting programme should be continuously adapted. Budgeting has to be a continuous exercise; it is a dynamic process.
Management should not lose patience; they should go on trying various techniques and procedures in developing and using the budgeting system. Ultimately, they will achieve the success and reap the benefits of budgeting. - Implementation A skilfully prepared budgetary programme will not itself improve the management of an enterprise unless it is properly implemented. For the success of the budgetary programme it is essential that it is understood by all, and that the managers and subordinates put concerted effort for accomplishing the budget goals. All persons in the enterprise must have full involvement in the preparation and exécution of budgets, otherwise budgeting will not be effective.
- Management complaiscency Budgeting is a management tool—a way of managing; not the management. The presence of a budgetary system should not make management complaiscent.
To get the best results of managing, management should use budgeting with intelligence and foresight, along with other managerial techniques. Budgeting assists management; it cannot replace management. - Unnecessary details Budgeting will be ineffective and expensive if it is unnecessarily detailed and complicated. A budget should be precise in format and simple to understand; it should be flexible, not rigid in application.
- Goal conflict The purpose of budgeting will be defeated if carelessly set budget goals conflict with enterprise objectives. This confuses means with the end results. Budget goals are the definite targets to achieve the overall enterprise objectives. They must be in harmony with enterprise aims.
- Evaluation deficiencies Budgeting will hide inefficiencies instead of revealing them, if a proper evaluation system is lacking. There should be continuous evaluation of the actual perform-ance. Standards also should be re-examined regularly.
- Unrealistic targets Budgeting will lower morale and productivity if unrealistic targets are set and if it is used as a pressure tactic. To some extent budgeting may be used as a pressure device, but its extent must be carefully determined.