Limitations of Budgeting

Written by True Tamplin, BSc, CEPF®

Updated on December 20, 2022

There are four main limitations to budgeting.

1. Budgeting is not an end in itself. Budgets are merely tools to make management more effective, though they cannot replace management.

2. The success or failure of budgeting is largely determined by how well the human aspects of the process are handled. Managers at all levels must be educated in this area and must feel that they are important links in an effective budgeting system.

3. To develop budgets, projections and estimates are necessary; this means that deviations can be expected. Therefore, it is important to check and correct the budget whenever necessary.

4. Budgets must be continuously adapted to new and changing conditions. In the real world, it is extremely difficult to anticipate future conditions when preparing a budget. Anything could happen next year, after all.

Further to the last limitation of budgeting mentioned above, it is worth highlighting that changes in economic or industry conditions can create serious problems for managers seeking to make predictions about their companies.

Also, many future events almost defy accurate prediction, and unforeseen circumstances often develop. This often makes it quite useless to compare actual results with the budgeted ones.

Hence, management must recognize that budgets are not set in stone; when conditions change, the budget will require modifications.

Limitations of Budgeting FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.