Advantages And Disadvantages Of Budget Control
Like other control methods, budgets have the potential to help organizations and their members reach their goals. Budget control offers several advantages to managers. Some of these are:
- The major strength of budgeting is that it coordinates activities across departments.
- Budgets translate strategic plans into action. They specify the resources, revenues, and activities required to carry out the strategic plan for the coming year.
- Budgets provide an excellent record of organizational activities.
- Budgets improve communication with employees.
- Budgets improve resources allocation, because all requests are clarified and justified.
- Budgets provide a tool for corrective action through reallocations.
However, budgets control can also create problems. The disadvantages of budgets are:
- The major problem occurs when budgets are applied mechanically and rigidly.
- Budgets can demotivate employees because of lack of participation. If the budgets are arbitrarily imposed top down, employees will not understand the reason for budgeted expenditures, and will not be committed to them.
- Budgets can cause perceptions of unfairness.
- Budgets can create competition for resources and politics.
- A rigid budget structure reduces initiative and innovation at lower levels, making it impossible to obtain money for new ideas.
These dysfunctional aspects of budgets systems may interfere with the attainment of the organization's goals. One generally accepted guideline for effective budgeting is to establish goals that are difficult but attainable.
Therefore, skilled managers who understand budgets and how to use them have a powerful control tool with which to attain departmental and organizational goals.