LIMITATIONS OF BUDGETING

INACCURACY
Budgeting is based on a lot of assumptions in estimating the expenses and
revenues. These are generally based on trends and the market scenario prevailing
at the time of making the budget. Budgets can also be based on the predictions
made for the coming year considering the data available at the time of budgeting.
Any shift in the macroeconomic conditions, like an economic downturn or changes in
currency exchange rates, changes in interest rates etc., can lead the actual costs
that vary significantly from the budgeted expenses.

TIME-CONSUMING & COSTLY

Budgeting exercise can be at times a very time-consuming exercise. It involves extra
manpower to get the estimates as accurate as possible. Especially for a big company with
various departments, budgeting exercise takes a huge effort. The time consumed may be
low in cases where the company uses budgeting software and the employees are well-
trained. If the company uses zero-based budgeting technique, the time, cost and effort
involved can be considerably large.

RIGIDITY
Budgeted numbers are considered sacrosanct by all the departments and there is
usually very less flexibility after budgeting exercise finishes. The entire focus of
senior management is on the budget and all the strategies revolve around the
budgeted numbers. Any change in the market situations does not generally evoke
the attention of the management to make any drastic change in the strategy due to
budget constraint. The company should rather shift as per the market and book more
profit rather than stick to the budget.

EXCESSIVE SPENDING
Some managers believe that all the funds that are allocated to their department need
to be spent. It is believed that if they do not use as much as they are authorized to in
the current budget, the funds budgeted for them in the next budget would be
reduced. This leads to unnecessary wastage of funds and proves harmful to the
company as a whole affecting its profits.

SCOPE FOR MANIPULATION

At times, an experienced manager may deliberately inflate his expenses and try to
reduce the revenue targets to be set in the budget. This way he can easily get an
opportunity to get the favorable variances against the budgeted numbers, that is, by
incurring lower costs than budgeted cost and achieving higher revenue than the
budgeted revenue. This misleads the stakeholders and demotivates the employees.

ALLOCATION OF EXPENSES
The allocation of expenditure between the departments is generally the call taken by
senior management. Managers of some departments may raise issues in the method
used for allocation of these expenses and this may create controversies. It is not
possible to take into considering suggestions from all the departments regarding
budgeting methods and allocation of expenses.
FINANCIAL OUTCOME ORIENTED
Budgeting exercise is argued to be numbers driven. It focuses on the quantitative
aspect of the business or improving the profitability of the company and does not
consider the subjective or qualitative aspect. The fact that the stakeholders including
the customers of the company care about the quality of services along with the cost
of it is totally side-tracked. These are taken for granted as a part of the budget but
not really seen in the budget. So budgeting exercise does not always look into the
needs of the customers.