Question

Critically discuss the benefits and limitations of using budgets for strategic management purposes, with exploring some potentially adverse consequences of the budget process (Hint: some research is required here). (300 words)

Answer 1

Advantages of Budgets for Strategic management purpose

• Efficiency: The use of budgetary control system helps the management to conduct its business in an efficient manner
• Control on expenditure: Budgetary control is a powerful tool for controlling expenditure in an organization. It is used as a yardstick for measuring performance of the individuals and departments at the end of the year. Incentive systems are linked to performance based on control of expenditure
• Finding Deviations: It helps the management in understanding the deviations and taking remedial actions to control the same
• Effective utilization of resources: Budgetary control system helps the organisation in effective utilization of its limited resources like money, material, labor, machine hours etc. Budgets are developed after considering all constraints
• Revision of plan: Budgets helps in revision of plans if needed based on current developments and trends in the business
• Implementation of standard costing system: Budgets helps in developing standard costs for products and services. It creates suitable conditions for implementation of standard costing system.
• Cost Control and Cost Reduction: Budgets helps in controlling cost and implementing cost reduction programs in the organisation

Limitations of Budgets

• Based on estimates – Budgets are based on estimates and depends on the condition on which it was developed. The conditions and situations keeps changing and thereby necessitating budget revision
• Time factor: Budgets need a lot of time of management and hence it is a time consuming process.
• Expensive process: Budgets need a lot of resources to develop it. It needs a different organisational set up and consumes a lot of efforts.
• Not a substitute for management: Budget is only a managerial tool and not a substitute for management
• Co-operation: Budget needs a lot of co-operation between inter department and intra department also. It needs a lot of team work to get things done
• Rigid document: Budgets are considered as rigid document. In reality management is exposed to various factors of Volatility, Uncertainty, and complexity.