Page 5: The benefits and drawbacks of budgeting
There are many advantages to using budgets. They:
- provide a method of allocating and using resources within the organisation
- help to monitor and control operations
- promote forward thinking
- show employees an overall picture of the direction of the organisation which can motivate staff
- help to co-ordinate different departments and align them towards shared objectives
- provide a framework for delegation.
Most importantly, budgets are an early warning system. They highlight where investigation and appropriate corrective action is necessary.
For example, Davis recognised as early as 2008 that the recession was affecting its UK linen operation. It took action to ensure the impact was managed for the second half of 2008. It then assessed the implications of recession right across the business management was put on 'full alert'.
These benefits do not come problem-free:
- Staff time devoted to budgets carries a real opportunity cost. At Davis, 750 people are involved with budgeting. The time these workers give to the budgeting process means they are not available to carry out other responsibilities.
- Errors and inaccuracies will always remain since it is impossible to predict the future. Major external events such as rising energy prices or the global recession may distort the whole process.
- Budgets involve and affect people, they may cause conflict. There may be difficult choices over where limited funds are spent. Some departments with tight budgets could feel constrained. This carries the risk of frustrating initiative and enterprise.