Budgeting has many benefits, but managers have to weigh these against the costs of budgeting. And by costs, this doesn’t mean just the monetary out-of-pocket costs. The costs of budgeting are in several dimensions.
Budgeting is not without several serious problems on the practical level. Budgeting looks good in theory, but in actual practice things aren’t so rosy. Here are some concerns to consider:
- Budgeting takes time, and the one thing all business managers will tell you is that they never have enough time for all the things they should do. The question always is “What else could managers do with their time if budgeting were eliminated or scaled down?”
- Budgeting done from the top down (from headquarters down to the lower levels of managers) can stifle innovation and discourage managers from taking the initiative when they should.
- Unrealistic budget goals can demotivate managers rather than motivate them.
- Managers may game the budget, which means they play the budget as a game in which they worry first and foremost about how they’ll be affected by the budget rather than what’s best for the business.
- There have been cases in which managers resorted to accounting fraud to make their budget numbers.
A recent article makes a strongly worded case against budgeting. See “Freed from the Budget,” by Russ Banham, which was posted on the CFO.com website and taken from the September 1, 2012 issue of CFO magazine. This article offers several reasons for not budgeting, including the following:
- Budgeting prevents rapid response to unpredictable events.
- Budgeting stifles initiative and innovation.
- Budgeting protects costs that aren’t value-adding.
- Budgeting demotivates people.