The advantages of using a budgetary technique are unquestionably impressive. However, the limitations and pitfalls of budgeting should also be mentioned. Budgeting is not an exact science; a certain amount of estimation is present in all budgetary plans. A revision or modification of estimates should be made when variations from the estimates warrant a change of plans. The success of budgetary control depends on the active cooperation of all relevant members of the department. Budgets are prepared in advance and based on estimates. Later on, some changes may be desired but the budget estimate may remain the same. Thus, flexibility can sometimes be lacking. The use of budgetary control techniques is expensive. Most small organizations cannot afford the cost.Limitations of Budgetary Control
1. Budgeting Control Based on Estimates
2. Requires Cooperation and Participation of All
3. Lack of Flexibility
4. Expensive Tool
5. Continuous Checking
The success of budgetary control depends upon constant checks. These checks need to be performed to control diverse activities.
6. Depends on Determination of Responsibilities
The success of budgetary control depends upon a well-defined organizational system. Here, the responsibilities that are needed for control are fixed.
7. Depends on Accounting Information
The success of budgetary control depends upon accounting data. For this reason, adequate accounting records should be maintained based on the needs of budget centers.
8. Budgetary Control is Time-Consuming
The installation of a budget takes substantial time.
Due to this, management sometimes becomes impatient and loses interest, expecting too much too soon.
The budgeted plan must be explained to the responsible persons, who must be guided, trained, and educated regarding the fundamental steps, methods, and purpose of budgetary control.
This all goes to show that in order to achieve good budgetary control, extensive knowledge, time, and expertise is required.
Limitations of Budgetary Control FAQs
Budgetary control has a number of advantages. Firstly, it requires full cooperation from all people who work in an organization. Secondly, it provides information to managers for decision making and plans taking. Thirdly, this method ensures that budgets will be used properly by everyone leading to a more efficient working culture within an organization.
Budgetary control is a process of planning, executing and reviewing the financial resources allocated for an enterprise. This helps in measuring each department's activities as per set standards and norms so as to achieve both long-term and short-term organizational goals. There are many definitions given to budgetary control, but it can be defined as "management by reference to budgets."
Budgetary control is based on some fundamental principles which help in achieving the desired objectives. One of the most important principles of budgetary control is that a comparison should be made between actual and planned results. Thus it is necessary to make sure that budgets are prepared properly without any flaws.
Financial control refers to the monitoring of financial activities and information, analyzing performance and reporting it for management. The financial controller ensures that the company is run smoothly and efficiently by proper utilization of finance available.
There are many advantages and disadvantages of any system. We can follow this analogy for understanding the advantages and disadvantages of budgetary control. When we drive a car, we have pedals to increase or decrease speed, but sometimes we need to apply brakes to stop the car. Similarly, budgetary control has both advantages and disadvantages. If the budget is overspent (increased speed), then it will lead to increased costs or wastage of resources; but if there is underutilization of resources (brakes applied), then it will create idle capacity and decrease productivity.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
