Uses, advantages and disadvantages of budgets

• Facilitate coordination between departments within the organisation
• Helps to assign and clarify responsibilities e.g. the production department must produce and the marketing department sell produced units
• Help to translate strategic plans into actionable departmental goals
• Improves communication
• Help to control income and expenditure
• Aids the business when it comes to allocating scarce resources by allocating them in the most efficient profitable manner
• Actual performance can be measured against a quantitative target i.e. variance analysis and budgetary control can be carried out
• Makes management by exception possible
• Employees can be motivated if they are allowed to take part in the budgeting process
• Provide a sense of direction to business/organisation
• Helps the business to identify priorities and establish guidelines
• Can be used to create corrective action and evaluate this corrective action

Disadvantages/Drawbacks of budgeting and budgets

• The process uses up resources including valuable time and money
• Their value depends on the quality of information provided
• Can encourage and result in rigidity and failure to adapt to changes e.g. during hyperinflation
• Can lead to demotivation for those not included in the budgeting process
• Can lead to dependence on budgets rather than other sources of information
• Managers can introduce budgetary slack and therefore hide non performance e.g. underestimating sales
• Can lead to overspending as managers who either rush to spent all money allocated for fear of being given less in future and under-spending as managers are afraid to go over the budget

To access more topics go to the O Level Business Notes