Problems with budgeting usually fall into following groups:
- Figures in budget are not actual figures, they are plans based on historical data, forecasts or human judgement. Accuracy of data could be responsibility of another business function.
- Preparation is managerial process requiring great deal of co-ordination. Information comes from different parts of organisation.
- Preparation can be time consuming and resource intensive. Possible delays as master budget requires smaller budgets to be completed first. Approval process can cause delays too. Conflict over budget focus between departments can arise.
Budgets are not behaviour neutral. They directly impact managers and staff but also the budgets are subject to managers influence.
Although budgets have targets designed to influence people, they may not react in expected manner.
Budgets are political within the organisation – conflicting resource demands need to be resolved.
Success of a budget depends on factors such as employee eduction & training, participation, communication and review/monitoring.
Some budget “games” that are played:
- Leaving slack in budget increasing likelihood of hitting targets. Reluctance to over perform to reduce chance of tighter budget next year.
- Short-termism – concentrate of getting immediate success instead of long-term performance improvements.
- Focussing on financial performance and measurables at expense of intangibles such as staff morale.
In uncertain times, not too much time should be spent preparing budgets as they can quickly become outdated. If budgets and variances are not reviewed then managers may see the process as ritualistic and a waste of time.