Budgeting has the following limitations which require careful consideration:
1. The success and utility of budgeting depends on the cooperation and participation of all members of management. All persons should direct their efforts according to the plan. The top management also should adhere to the budget and provide cooperation. Many a time budgeting has failed because executive management has paid only lip service to its execution.
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2. Planning, budgeting or forecasting is not an exact science. It uses approximations and judgement which may not be cent per cent accurate. At best, a budget is an estimate; no one knows precisely what will happen in the future. Budgets need to be revised from time to time for any change in plans, operating conditions, technology, etc.
3. A budget is only a tool and does not eliminate nor takes over the place of management. A budget cannot be substituted for management but should only be used by management for accomplishing managerial functions.
4. Excessive emphasis on budgeting may result in attempts by lower level management and employees to buck the system by providing inaccurate estimates of future costs and revenues, and by failing to take advantage of changes in the environment because to do so would result in a deviation from plan, they would be considered as operating contrary to the budget.
Under an imbalanced budget programme, employees will tend to overestimate costs and underestimate revenues, thus creating budget slack. As the end of budget period approaches and employees realise that actual expenses have not been as great as allowed by the budget, there may be a temptation to spend excessive amounts in order to “use up” the budget allowance. Such activities result in sub-optimal profit for the company.
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5. The establishment of a budgeting process takes time. Also, sometimes too much is expected from a budget and in case expectations are not fulfilled, the blame is put on the budget. An efficient budgeting programme requires that responsible persons should understand the philosophy, objectives and essentials of budgeting.