Budgeting, once a routine annual event, has fallen out of favor in recent years. In view of the the fast pace of business today, should you develop a practice of crafting a budget? This article will look at three advantages and disadvantages of budgeting.
Assessment of Profitability – A budget can be very instrumental in evaluating the profitability of the different business segments or product lines of a business. The evaluation is an important tool for determining whether a segment or product line should be discontinued or expanded.
Evaluation of Performance – If the organization has set performance goals for business units, evaluation of the unit’s success in meeting those goals is important for tying bonuses and incentives to the successful achievement of the goals.
Forecasting Cash Flows – Inadequate or unpredictable cash flow can be very extremely frustrating and ulcer producing for a business owner. A accurate and timely cash flow budget for determining cash availability, particularly where there is rapid growth and seasonal sales fluctuations.
Time Consuming – No question about it, crafting a detailed budget requires a lot of time and energy. Companies that establish a well designed procedure and take time to familiarize employees with the process will reap the rewards of a more efficient and effective product.
Flawed & Inaccurate results – Inattention to changes in the business environment or faulty assumptions can lead to a budget forecast that bears no resemblance to the operating climate that the budget is to model. Changes in interest rates, or materials pricing are examples of areas that can be easily overlooked and cause projection of costs and profitability to be grossly inaccurate.
Budget Gaming – It is not unusual for those experienced in the budget process to provide revenue and expense estimates the they can easily meet in order that they are seen in a favorable light. Those responsible for pulling together the budget need to be vigilant in oder to prevent the gaming of the budget process.
This article has reviewed three advantages and disadvantages of budgeting. Advantages include its usefulness as a tool for evaluating profitability, performance and cash flows. Disadvantages include it’s time consuming, can be inaccurate and is often gamed.