THE LIMITATIONS OF BUDGETS AS CONTROL TOOLS:
i. Rigidity and inflexibility:
Most managers see budgets as static and inflexible. For budgets to be useful in the organizational environment which is dynamic, the budgets must be accommodative of the changes. Budgets must never be seen as rigid since price change, sources of raw materials change, labour skills change, etc and these changes must be reflected in our budgets.
ii. Reluctance to involve subordinates:
Managers are often reluctant to involve subordinates in budget formulation yet the efforts and commitment of the subordinates is the cornerstone of the budget success.
iii. Forecasting problems:
Budgeting like any other plan requires forecasting e.g. sales budget will depend on the projected demand patterns over time. Forecasts are never 100% accurate and therefore a problem we face in budgeting.
iv. Goal quantification difficulties:
Budgets include only items that can be expressed in numerical terms. However, certain objectives of the organization are non-quantifiable and therefore budgets may not cater for them. For example improvement in product quality.
v. Unrealistic objectives:
Sometimes budgets are formulated based on unrealistic objectives. These objectives may be non-attainable and therefore may demotivate staff.