budget and its advantages and disadvantages


A budget is a financial document used to project future income and expenses. The budgeting process may be carried out by individuals or by companies to estimate whether the person/company can continue to operate with its projected income and expenses. A budget may be prepared simply using paper and pencil, or on computer using a spreadsheet program like Excel, or with a financial application like Quicken or QuickBooks.

The process for preparing a monthly budget includes:

  • Listing of all sources of monthly income Listing of all required, fixed expenses, like rent/mortgage, utilities, phone
  • Listing of other possible and variable expenses

Advantages: Using budgeting, you can plan what money you have and where it will be spent. You can moderate where money can be spent and can provide bonuses if things go particularly. Also budgeting can motivate staff as it can be used for assessing performance in a department and measuring there success. Define goals and objectives Align corporate goals with regards to markets, sales levels, margins, manning, cost levels and capital investment with your budgets.

Think about and plan for the future. Compels management to think about the future. Management should look ahead and set out plans for each business unit, anticipating change and giving the organisation clear direction. It encourages management to be forward-looking and working within the framework of a budget encourages good decision-making. Means of Allocating Resources During the budgeting process many resource allocation decisions are made. Different segments may require resources for capital expenditure that the organisation can’t fully meet. The organisation will make decisions based on the various rates of return.

Uncover Potential Bottlenecks Have I the resources to meet my revenue projections in terms of manpower, material resources and capital equipment? Coordinate Activities The budgeting process brings together the plans and financial budgets of each business unit. It encourages communication up the organisation from subordinates to superiors. It also encourages communication across business units, for example, between marketing and production about sales plans. Performance Criteria Provide a basis for variance analysis and enable remedial action to be taken as variances occur.

The budget is a yardstick against which actual performance is assessed. Disadvantages: Maintenance — Disadvantage •One downside of having a budget is that once you establish it you now have to maintain it on an ongoing basis. If you miss a month, week or even a day of maintaining your budget it could throw you off track of your entire plan. You may find yourself spending a lot of time monitoring your budget details, making updates, identifying issues and solving them. Be prepared for the time required to properly maintain a budget. Lifestyle Change — Disadvantage Another disadvantage of a budget is that it requires you to make a lifestyle change. You have to make changes that could significantly disrupt your routine. For example, if your budget demands, you must start making your own coffee in the morning and packing it in a thermos instead of visiting your favorite coffee shop for an expensive latte. You may also have to relinquish a few of your favorite cable channels to stay on track. In some cases the lifestyle change is temporary as you build up your savings accounts or seek better paying employment.

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