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

BUDGET- it is a financial plan which is written for a period on the basis of past experiences and provide some estimation.There are different kinds of budgets from short-term to long-term.it is generally made to minimise risk of future and make it as a opportunity for present.Budgets are not only use by companies but also utilized by households,governments and individuals.

SOME PITFALLS OF BUDGETING AND WAYS TO AVOID THEM

- Not keeping a check on budget prepared- The main pitfalls of budgeting is not keeping regular check or track on the budget prepared for a time period.The budget should be properly planned and executed and supported by the records of reciepts of expenses and how the whole plan is working out.It should also check if it is matching to the changes coming in the environment.A regular check leads to take corrective actions which will help in attainment of ultimate goal of the company.

- Dependency on only one plan- it is a pitfall of budgeting where majority depends on only one plan and when some changes come across it becomes difficult to construct a new plan of budget in a short run.It can be avoided by making plan -B with the budget in case one fails you will be having another plan ready to execute.

- Not considering all expenses- While making budget it happens that one takes consideration of only mainstream and pay less or no attention to other expenses that may affect the budgeting.To avoid such pitfalls one should do certain research before and find out all the expenses with help of bank statements,most recent financial statements,study of past budget , take into consideration to petty expenses.

- Rigidity - The budget is rigid sometimes which is not able to accept the changes and opportunities that can lead to overall performance appraisal.The budget should be flexible which can be molded according to the business environment and be understandable and based on some objectives.budget is just an estimation it may require alteration time to time so,therefore there should be scope for alteration.

- Wrong selection of tools- The right budgeting tool can make managing money more effective and efficient.It is not necessary the tools useful for one will be useful for another also.Before making any budget the company should be wise in selection of tools that they are going to use,selction can be make on the basis of proper research and consultancy.

- Construction of unrealistic budget- The budget is sometime made which is not in reality possible to execute,which leads to failure of budget,leads to frustration and wastage of resources.To avoid such act the company should prepare budget based on the past experiences,should construct objectives of the budget on the organization potential and should discuss the various aspects which makes the budget easy to achieve.

- Roles and responsibilities not properly allocated- This pitfall come across when the budget is prepared but the roles and responsibilities are not properly allocated which results in conflicts and fails of the budget prepared.It can be avoid by communicating everyone's roles and responsibilities and proper delegation of athourity which minimises conflicts and confusions and all resources can be utilise at best.

I HOPE THIS WILL HELP YOU!!!