Advantages And Disadvantages Of Budgeting

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A “budget” is a “financial plan reflecting the business strategy and represents a more structured way of communicating it to the team”. The process by which a budget is built and agreed within an organisation is called “budgeting process” or “budgeting cycle”, that represents one of the most important financial planning tools. “This cycle always starts with a vision or a goal, based on which the approach to be used is chosen. The next step is the elaboration of the budget itself by allocating the right resources in the right place. It is very important to keep track of it (the sooner a variance is spotted, the better, as more time is available to understand it). The last stage is the evaluation process which should lead to future improvements”. …show more content…

The second step is to decide what budgeting method to use between “Incremental budgeting” & “Zero Based Budgeting”, considering that both have advantages and disadvantages.
An “Incremental budget” is a “budget prepared using the previous year’s budget as a basis with incremental amounts added for the new one. These adjustments will be due to pay rises, inflation or changes in business activity. Its advantage is that it is a system relatively simple to operate, easy to understand, stable and change is gradual. The disadvantage is that it does not consider the changes in the economic environment. Also, it does not incentive the development of new ideas and cost reduction”.
A “zero based budget” is “a method of budgeting that starts from a “zero-base” and all expenses must be justified for each new period. Its advantage is that pushes team members to analyse the past and future performances, making sure that inefficiencies are not carried forward. Its disadvantages are that it is time-consuming and requires deep …show more content…

Walther, the above steps require a debate to determine the direction of the business. Reason why a budgeting committee is created that includes senior level personnel of each unit of the organisation. The members of this committee are involved throughout the budgeting process. They provide the information relative to their own unit. The information is then compiled together and passed through the organisation till an overall budget is obtained. The budgeting construction and agreement normally follows the organisational chart. However, different organisations use different approaches. The two basic ones are: Top-down (Mandated budgets) or Bottom-up (Participative

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