ZIMSEC O Level Business Studies Notes: Business Finance and Accounting: Ratio Analysis: Budgets: 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

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