Disadvantages of Zero Based Budgets

Disadvantages of Zero Based Budgets

1.    Time Consuming

First disadvantage of zero based is that, it require a detail research by the relevant manager, therefore it require a lot of time of manager to prepare the budget.

2.    Too much Technical

Second advantages of zero based budgets are its data collection and analyses requirement. Data may noe be readily available to the manager, moreover, data analyses and drawing conclusion is very technical job.

3.    Pressure for accuracy

Third disadvantage of zero based budget is its un due pressure on manager for accuracy. Budget put extra pressure on manager for accuracy of estimates and then achievement of target set by themselves.

4.    Attempt of actual figures

Fourth disadvantage of zero based budgets is more focused on accuracy. Budget tries to prepare the budget with accuracy. The basic definition that budget is an estimate is ignored.

5.    Re inventing Wheel

Some people consider it to re invent the wheel every time. In many business the basic structure of the organization does not change for years, therefore zero based budgeting is not effective is such organization.

Zero Based Budget Characteristics

Zero Based Budget Characteristics

1.    Start from Scratch

Zero based budget start from the scratch. It means old information and justification for allocation of resources is no more relevant under zero based budget technique.

2.    Re-Justification for Allocation of Funds

Zero based budget technique requires justification for allocation of fund each time (each year). Incremental approach, where resources are allocated on the bases of old justification is no more relevant under zero budget technique.

3.    Re-Define Priorities

Zero budget technique requires re-defining of priorities for every year. Zero budget technique recognizes that priorities changes over the period of time and therefore every year before allocation of funds, those priorities need to be re-examined.

4.    Depth Analyses

Zero budgeting technique required in depth analyses of the activities and therefore more update and accurate than incremental budget.

Advantages of Zero Based Budgets

Advantages of Zero Based Budgets

Advantages of Zero based budgets include realistic estimate, accurate allocation of resources, and effective utilization of resources, improved communication between approving and preparation authorities, and improved understanding of budget.

1.    Realistic Estimates

First advantage of zero based budgets is realistic estimate for its peroration. It is based on realistic and updated information or estimates.

2.    Accurate Allocation of Resources

Second advantage of zero based budgets is accurate allocation of resources. Zero based budgets are based on more depth analyses of activities and therefore resources are accurately allocated to different activities.

3.    Effective Utilization of Resources

Third advantage of zero based budgets is effective utilization of resources. In zero based budgets resources are allocated accurately and this accurate allocation ensures effective utilization of resources.

4.    Improved Communication

Fourth advantage of zero based budgets is improved communication between planner and implementer of budgets. Zero based budgets requires a lot of discussion and communication for allocation of resources, therefore it eliminates the communication gap between budget approving and budget implementation authorities.

5.    Improve understanding

Zero based budget require detail justification for allocation of resource, therefore it require a details work and deep analyses. The details working improve the understanding of the managers responsible for budget preparation & implementation.

Disadvantages of imposed Budget

Disadvantages of imposed Budget

1.     Challenging Targets

First disadvantage of imposed budgeting is challenging target setting. Target set under this methods are too challenging and difficult to achieve. This situation may create resentment in junior management. This situation will also create UN necessary pressure on junior management to achieve un realistic target set by budget.

2.     Demoralization

Second disadvantage of imposed budget is demoralization of junior management. The moral of management will be low moral over non consultation. The junior management will feel powerless and this will adversely affect the performance.

3.     Poor Communication

Third disadvantage of imposed budget is communication gap between lower and higher management. Due to little communication between top management and the lower management many operational aspect will remain un incporated in the budget. There will be over focused on strategic objective and importance of operation in achieving the overall objective is ignored.

4.    Talent is not explored

Fourth disadvantages of imposed budget are limited exploration of operational management. In this technique due to little interaction between management and operational management, the talent of operation management does not exposed to top management.

5.    Operational aspect are ignored

Fifth disadvantage of imposed budget is ignorance of operational aspect of the organization. It means many operational aspects are not incorporated in budget. Therefore budget may be less accurate.

Advantages of Imposed Budget

Advantages of Imposed Budget

The budgets are prepared by the senior Management and junior management is informed to achieve the targets. There is no effective involvement of junior management in decision making process.

1.    Time Saved

Because the decision making is in few hands therefore immediate decision can be made.

2.     Overall Direction

This technique helpful to achieve the overall direction of the organization as senior management set the overall direction and they prepare the budget keeping in mind the strategic objective.

3.    Lower Management Biased

Third advantage of imposed budget is that it can avoid the lower management biased toward budget preparation. When lower management is engaged budget preparation, they can influence the budget for self interest.

4.    More Control on resources

The fourth advantage of imposed budget is that it brings more control in the organization. Top management takes decision about the utilization of resources in the best interest of organization.

5.    Experience is important

The fifth advantage of imposed budget is preparation by the experienced managers. Budget preparation required a lot of depth knowledge and understating of business.

Advantages of Participative Budget

Advantages of Participative Budget

Under this technique the lower management effectively participates in the budget preparation process and mainly their recommendation is incorporated in the budget. The participative technique of budget preparation is suitable in relatively medium scale organization.

1.    Commitment

The first advantage of participative budget is improvement in management commitment. Managers will shoe more commitment to achieve the target set by them. The participation will act as motivating factor for the junior management and it will have a positive impact on the performance of the junior management.

2.     Improved Communication

The second advantage of participative budget is improved communication within organization. This method will improve bottom to up communication.

3.    Problem Identification

The third advantage of participative budget is problem identification to top management. This will help top management to understand the problem at lower level.

4.    Potential Identification

The fourth advantages of participative budget are potential identification of lower management to top management. Such identification will play important role in the career development of the lower management. Such identification will also help organization for effective utilization of talent.

5.    Confidence Improvement

The fifth advantage of participative budget is confidence improvement of lower management. This method will improve the confidence of the lower management and give him a motivation to work harder for achieving the organization objective. This technique will also have positive psychological effects on the junior management.

6.     Accurate Budgeting

The sixth advantage of participative budget is to bring more accuracy in budget preparation. Lower manager can project the figures more accurately because they are more related to operations and they have more detail knowledge of operations. They will prepare a budget after considering all the relevant facts and figures. Therefore the budget would be more appropriate.

Stages of budget Preparation

Stages of budget Preparation

1.     Identification of key Factor

 First stage in budget preparation is to identify the key factor for budget. Identification of key factor depends on the nature of business, however, normally for majority of businesses sales is key factor. It is important to remember that key factor provides bases for budget preparation.

2.     Key Factor Budget

The second stage in budget preparation is to prepare the budget of key factor (sales budget). The key factor budget provides bases for other functional budgets. Therefore a great care must be exercised while preparing the key factor budget. If budgets of key factor are not accurately prepared the whole process of budget will be at stake.

3.     Functional Budgets

Third stage in budget preparation is to prepare functional budgets; the other functional budget will be prepared in logical sequence. The typical sequence would be budget for production, and then budget for inventories, labor.

4.     Review of Budget

Fourth stage in budget preparation is to submit to the budget approving authority for review. The budget is reviewed by the budget committee and budget is explained to budget committee. The committee may require the further explanation and May also recommends the changes in the proposed budgets

5.    Incorporate Changes

Fifth stage of budget preparation is to incorporate changes recommended by the review committee. The budget is amended in accordance with recommendation of the budget committee.

6.    Master Budget

In sixth stage of budget preparation, functional budgets are incorporated into master budget. The master budget is overall budget for whole organization. Master budget is final product and used for different purposes i.e. directing activities, controlling cost etc.

7.    Budget Approval

In this stage of budget preparation, budget is placed to board of director for approval. The key objective is explained to board of directors and board of director approves the budget in principal. The budget may be approved by board of director without any change or may approve the budget after some changes and amendments.

8.     Communicate the budget

In this stage of budget preparation, budget is communicated to the relevant manager for implementation. The manager has a formal approved document in their hands and this document provides a basic guideline for activities to be carried out and range of those activities especially in financial terms.

9.     Monitor the budget

The budget may be divided into shorter budget.  example monthly and quarterly budget. It is necessary to sub divide the budget for control purpose. The management keeps a close eye on periodical budget. The variance is calculated and required adjustment is made to achieve the overall objective.

Advantages of Budget

Advantages of Budget

1. Communicate the plans

The budgets may be a source of communication plans to the relevant manager. Because the budgets are formal documents of the organization and prepared in a formal and structure way. Therefore it is not possible for manager to ignore the budgets.

2. Budget Set Targets

Budget can set performance targets for the organization and budget can be used as source document to evaluate performance of the manager. The performance evolution is critical for the employees because usually it is linked with the reward announcement for the employee. Therefore budget can play important role for improving the performance of manager and employees.

3. Budget set Limits

When the budgets are formally approved then it becomes an authorized expenditure limits and any expenditure which does not fall under these limit require special approval. Furthermore any expenditure which is not mentioned in the budget will also go to management for approval. Therefore budget put an effective control over expenditure.

4. Set a Direction

Budget is basically linking different department in formal way. Budget is prepared in a structured way and it takes into account the every department and therefore budget set a direction of moving forward. The budget is a linkage between different departments. Each department can get an idea about other department direction and activities from the budget.

5. Budget is Medium Term

The budget is normally considered to be a medium term plan and it provides a linkage between short term and long term planning. The budget is normally prepared for one year keeping in view the long term objective of the organization. The budget gives a direction to short term plan for achieving the long term plan.