The Advantages and Disadvantages of Budgeting as a System of Organisational Control

The Advantages and Disadvantages of Budgeting as a System of Organisational Control

A budget is a short-term financial plan of income and expenses expected over a certain period of time (usually one year) used to achieve a businesses objective. Budgeting can be useful for exercising control over a business because of its nature as a representation of a plan. Control is generally viewed as making events conform to a plan. As a budget is represented as a plan, allowing events to conform to it seems to be an obvious way to try and control the business.

One of the main reasons why plans fail is because they are simply unachievable in the first place. In order to achieve and implement control over an organisation, the reasons why something did not go according to plan must be discovered. Furthermore it is essential for budgets in the future to consist of achievable targets and should be adaptable to unpredictable changes.

As most businesses primary target is to maximise the returns for their shareholders, it is fair to assume that the most important budget target to meet is the profit target. This essay will therefore focus on the benefits and drawbacks of using budgeting as a system of organisational control in terms of how well it enhances or impedes the generation of profit.

In order to answer this question, one must firstly look at the reasons why budgets are used as a form of organisational control in the first place. The role of a budget is to put long-term plans into exercise for the immediate future. Being used as a plan it enables managers to analyse the difference between planned and actual outcomes and with this information carry out the precise procedures to correct any negative variances to steer...

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...ime efficient as it means they will not have to search through general-purpose documents that are not specifically aimed at them. Finally it is essential to take positive action on reports that reveal adverse variances so they do not occur in future.

One must also recognise how using a system of budgetary control can be limited. For example unrealistic standards that are set are arguably useless and can have an adverse effect on performance. The assessment of a manager’s performance and their variance calculation could also be negative due to factors that are outside their control. This limitation however, can be overcome by differentiating controllable factors to ones that are not. Some also argue that creating a clear distinction between the responsibility of various managers may be difficult and this may eliminate one of the effective uses if budgetary control.