Difficulties of budgeting 2.2.4

Whilst budgets are widely used to in business, you should appreciate that they have some important limitations.

In particular:

1. Budgets are only as good as the data being used to create them. Inaccurate or unreasonable assumptions can quickly make a budget unrealistic
2. Budgets can lead to inflexibility in decision-making
3. Budgets need to be changed as circumstances change, for example sales figures can be affected by many variables in demand such as changes in tastes, the actions of a competitor and so on.
4. Budgeting is a time consuming process – in large businesses, whole departments are sometimes dedicated to budget setting and control. This has an associated OPPORTUNITY COST
5. Budgets can result in short term decisions to keep within the budget rather than the right long term decision which exceeds the budget
6. Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers
7. Costs covered in the budget may rise and fall, at the time of writing energy prices are falling but they can easily rise again in a short period of time.
8. The economy can affect both sales and costs, exchange rates change from day-to-day, inflation can increase costs and prices, the economy may move into recession and so on. 
9. Markets are dynamic, competitors are always trying to take market share and may affect sales
10. Managers may lack experience in setting budgets

Budgets can also create some behavioural challenges in a business

• Budgeting has behavioural implications for the motivation employees
• Budgets are de-motivating if they are imposed rather than negotiated
• Setting unrealistic targets adds to de-motivation
• Budgets contribute to departmental rivalry - battles over budget allocation
• Spending up to budget: it can result in a “use it or lose it” mentality - spend up to the budget to preserve it for next year
• Budgetary slack occurs if targets are set too low
• A “name, blame and shame” culture can develop - but managers should be answerable only for variations that were under their control