Advantages and disadvantages of budgeting

Last updated: 24.03.2016

Benefits of planning/budgeting

  • increases the probability that the company goals and objectives will be achieved
  • helps in defining strengths and weaknesses on which the entity can concentrate
  • problems can be anticipated and avoided by possible remedial action (doing so after the problem crystalizes would be too late)
  • compels forward-looking process within the organization
  • better allocation and understanding of the responsibilities and objectives by the staff
  • link with the personal targets can improve staff motivation
  • better coordination of activities and different parts of the company


Drawbacks of planning/budgeting

  • staff may be demotivated, if the targets set are too difficult or too easy to achieve, if they are made responsible for something outside their competence or does not identify themselves with the targets
  • planning is often seen as unnecessary additional work and thus receive the lower priority
  • lack of cooperation between departments or functions, which may result into operational plans being in conflict
  • staff usually aims to achieve the target, not exceed it
  • lower flexibility
  • variance analysis and reports are presented to management too late to have any influence
  • fulfillment of one objective, while other meaningful metrics are worsened
  • typical spending the budget at the end of the year not to be cut in the forthcoming period

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