Page 5: Advantages and disadvantages of expense budgeting
Budgeting provides organisations with detailed analysis of future and current proposed spending patterns, enabling much better control (by responding to variances). Performance can be analysed quantitatively (in numbers), making it possible to measure financial success. Measurement of results can serve as a motivational tool for many employees.
Budget analysis also makes it possible to identify unnecessary costs that can be removed so as to focus funds on value adding activities. Kraft uses budgetary control to remain focused on the hard (quantitative) and soft (qualitative) benefits of re-distributing spend.
However, it is important to keep sight of the organisation's long term goals to avoid the risk that budgeting might lead to short-term focus on financial results. This could foster cost cutting exercises at the expense of strategy. In the worst case, individual managers may pursue exclusively their own narrow goals rather than business wide ones.
If individual managers are not happy with the budget they may co-operate poorly, so it is important to have detailed discussions to achieve collective agreement. This is why Kraft as an organisation retains a consultative approach to constructing budgets.