Drawbacks of Making Decisions based on Budget Reports

Drawbacks of Making Decisions Based on Budget Reports

Budget reports are crucial in guiding an organization’s strategy; however, they have some weaknesses. Firstly, the budgeting process is based on assumptions that are distant from the conditions in which the business operates. The whole process is based on estimates about programs and tax sources that will affect the business. Notably, some of the estimates are inaccurate or may change with time. The exercise is also subject to other mistakes when inputting data, making calculations, or even proofreading. Failure to detect and correct these mistakes means the company will use incorrect data in decision-making.

Also, budgets introduce the element of rigidity in decision-making. Most organizations create their budget reports at the beginning of the financial year (Chen et al., 2015). These reports are guided by the company’s strategy. Therefore, even if there are market changes before the company fully implements the budget, it cannot adjust appropriately to factor in the changes. Besides, budgets tend to force expenditure allocations on some departments of the organization. That comes in the form of forced overhead costs that some departmental heads may be uncomfortable with (Chen et al., 2015). For instance, budget reports force departments to use internal services instead of getting them from alternative sources where they are cheaper.

Based on weaknesses, managers should look beyond revenue and expenses when making budgeting decisions. One of the external factors that may help is to look at how rival companies handle their business (Lidia, 2014). Analyzing competitors’ budgets will help a business discover its strengths and market weaknesses and how to overcome them. Consequently, the business should factor these potential obstacles into the budget-making process. Another important factor to consider is flexibility. Budgets ought to be flexible to allow business managers the opportunity to pursue risky ventures. Considering these factors will help an organization navigate the drawbacks of using budgets as a management tool.

References

Chen, G. G., Weikart, L. A., & Williams, D. W. (2015). Budget tools: financial methods in the public sector. Sage.

Lidia, T. G. (2014). Difficulties of the budgeting process and factors leading to the decision to implement this management tool. Procedia Economics and Finance, 15, 466-473.

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What are the drawbacks to making decisions based on budget reports?

Are there other types of information that a manager must take into consideration when making budgetary decisions beyond just current revenue and spending?