Limitations of Budgeting
(1). Budgeting is not an end in itself. Budgets are merely tools to make management more effective though they cannot take the place of management.
(2). The success or failure of budgeting is largely determined by how well the human aspects of the process are handled. Managers at all levels must be educated in this area of activity and must feel that they are important links in the effective budgeting system.
(3). In the development of budgets, one is dealing with projections and estimates and hence deviations can be expected. So it is important that the budget be checked and corrected whenever necessary.
(4). Budgets must be adapted to new and changing conditions.
In the real world, it is extremely difficult to anticipate at budget time, all the things that may happen in the forthcoming year. Changes in the economic or industry conditions can pose serious problems for managers trying to make predictions about their own companies. Also, many future events almost defy accurate prediction and unforeseen circumstances often develop, which makes it quite useless to compare actual results with the budgeted one.
Hence, management must recognize that the budget is not unalterable, but It may require modifications if conditions change.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, 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.