Question

Budgets are developed months before the end of the current year and are best guess estimates of future performance. What do you think might be some pitfalls of budgeting, and how can they be avoided?

Answer 1

Budgeting in business is very important to make higher profits and reduce costs. Budgets in business are created using the past business data and predicting the future outcome of any business. They are created/developed months before the end of the current year and are best guess estimates of future performance.

But budgeting is not always helpful. It do have some pitfalls. These are as follows :

• Budgeting is not always profitable, it might sometimes lead to huge losses as budgeting is based on predictions. So predictions might go wrong.
• Unrealistic budget may be created if data is not accurate and reasonable.
• It is very complex and can sometimes lead to complexity in decision making.
• It requires a lot of research and is a time consuming process.
• Budgeting cannot be done for long term projects, as it may exceed the budget.
• It can distract the focus of the company on serious issues.

The above mentioned are some of the pitfalls of budgeting and can usually be avoided if :

• Budgeting is done keeping the real focus of business in mind.
• Budget is made for short term goals.
• Proper present and past data is used to create budget.