Guidelines for Making Effective Budgets

1.    Budgets should be flexible.

The most common error in making budgets is to view them as an inflexible model of performance. This mistake may arise because budgets like other plans, are expressed in money, time periods, or other numbers, not only in words. Numbers are specific and mean the same thing to everyone. If the environmental changes indicate that it is wise to spend more or less in a given time period budgets should be modified accordingly.


2.    Budgets should not be viewed as ends in themselves.

Managers may tend to view budgets in terms of laws instead of tools to help achieve organizational goals. When this mistake is made, managers may fail to take advantage of opportunities to purchase equipment, supplies and materials at attractive prices or take other action that conditions suggest are needed. Managers should realise that budgets should not serve as a substitute for good judgement.

3.    Those affected by budgets should help set them up.

That budgets should not be imposed on lower-level managers. Rather the lower level managers should participate in budget preparation because managers are more willing to support and execute plans if they have a hand in their development. Lower-level managers are closer to actual operations which give them a better understanding of the problem.

4.    Budget requests should be justified.

Managers should be required to think through each budget request. A common mistake is to use one year's budget as a precedent for the next year's. This practice is not only lazy, but it also stifles incentives to think creatively about how to make use of resources more effectively.