Senior management cannot take corrective steps in time unless a budget is available. This is how an elaborate budgeting process keeps an organization on track.
Coordination is the second gain of detailed budgeting because organizations consist of departments and functions which are dependant on each other. The outputs and deliverables of staff functions are especially important and direct inputs on which line functions rely. The expectations and predictions of line functions, in turn, affect capacity planning by staff functions. A budget serves as a forum for coordination so that all parts of an organization work in unison towards shared goals. External stakeholders such as suppliers may also be involved in a budgeting process (Dickey, 1992).
The third advantage of elaborate budgeting systems is that of feedback, and perhaps the most important. Budgeting allows top management to appreciate the ground realities at the periphery of its structure and gives an opportunity for people who are in direct and routine touch with market and environment realities to contribute their perspectives to their employers. Budgeting, in this sense, is not a procedure to be carried out in isolation but is an instrument of great social interaction within an organization (Dickey, 1992).
There are variations within the standard template of a detailed and formal budgeting system. Some management teams prefer a top-down process in which they specify minimal goals which are to be achieved. These refer to growth, profitability, and image in organizations which work for a profit. Other organizations prefer to allow the lowest levels of hierarchy to propose opportunities around which a budget can be made.
This approach relies heavily on scanning the environment by people who are in touch with customers, the distribution chain, and with competitive moves. It is difficult in real life to have an elaborate budgeting process which is entirely top-down or developed from the bottom to the higher echelons of structure. The budgeting process tends to be iterative in nature, with various levels and branches of the organization in negotiating dialogue with each other, before consensus on targets can be obtained.
This iterative process of budgeting leads to one of its main criticisms about drawbacks. Budgeting can be an expensive and time-consuming process, which can take a substantial part of personal capacities. An excess of deliberations about the future can also distract attention and focus from short-term operational pressures.
A second important limitation of formal budgeting relates to the uncertainties of a dynamic environment (Hope and Fraser, 2003). Conditions in which a budget has been prepared can change to such an extent that the accepted targets become irrelevant. The budget then loses its sanctity as a navigational tool, because it can no longer provide meaningful leads on how an organization fares.
Budgets become invariably linked with individual performance appraisal matters. It is but natural to reward people who achieve or exceed accepted targets, and the reverse also applies, though in a lesser degree in case targets are not met. Target achievement generates high expectations in terms of the people involved (Hope and Fraser, 2003). There are 2 consequences of this: firstly, people tend to build as much slack as they can in to target definitions, and resist taking on ambitious challenges in the interest of the enterprise.