Essay about Budgeting -Evaluate Advantages and Disadvantages

1276 Words Oct 1st, 2011 6 Pages
Evaluate the advantages and diadvantages of budgets

A budget is a comprehensive, formal plan that estimates the probable expenditures and income for an organization over a specific period. Budgeting describes the overall process of preparing and using a budget. Since budgets are such valuable tools for planning and control of finances, budgeting affects nearly every type of organization from governments and large corporations to small businesses. A small business generally engages in budgeting to determine the most efficient and effective strategies for making money and expanding its asset base. Budgeting can help a company use its limited financial and human resources in a manner which best exploits existing business opportunities
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However, budgets can also create problems. 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. They report can also drag and be time consuming and expensive if consultants are engaged.

Only considers financial outcomes.

Budgets are primarily concerned with the allocation of cash to specific activities, and the expected outcome of business transactions - they do not deal with more subjective issues, such as the quality of products or services provided to customers. These other issues can be stated as part of the budget, but this is not typically done.

Budgets provide a feasibility analysis. They can help develop a business model, review your key assumptions, and identify resource and capital needs. Budgets and forecasts can be used to find funding. They demonstrate the potential of your business to investors and lenders. Budgets and forecasts can also be used as a

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