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10 basic budgeting errors

  1. Budgeting without having clear business goals for the next year. The budget becomes purely a formality without generating any benefit to the company.
  2. Budgeting based on last year's indicators. This type of budgeting is very popular and may seem attractive but is also very dangerous. Instead of thinking about what might change next year old trends are brought into in the future. It may be good during a stable situation and for consistent growth, but certainly not in these changing times.
  3. Budgeting becomes only the profit (loss) statement. A very popular method. Budgeting using this method makes it entirely ambiguous if the budget is realistic and balanced with the company’s resources. These errors can be avoided by using integrated systems (unit budgets are integrated with other budgets and the company’s financial plan).
  4. Budgets are only made at department-level. If they are not combined enterprise-level, company’s goals may not be achieved.
  5. Budget creation and budget changing procedures are not setup. It does not have to be a separate complex budget manual; however, disagreement on the main steps may lead to budgeting becoming very expensive or ruined altogether.
  6. The budget being directly bound to the remuneration system. Everyone’s focus shifts to the possible bonuses, rather than the company's goals.
  7. When standard budgeting programs are not used, or vice versa – when very expensive and complex systems are used. For the majority of companies, a budget system which is based in Excel is fully sufficient. It is a good quality-price ratio.
  8. Trying to establish the budget in great detail. At first glance wishful thinking becomes a burden. A highly detailed budget takes a very long time to prepare, the budget becomes very expensive and the fast changing environment makes it worthless.
  9. Failure to incorporate the fact that the people tasked with budgeting may have interests that do not necessarily align with the goals of the company. Therefore, prepared budgets must be reviewed.
  10. The dominance of financial indicators in the budgeting process. Financial indicators are important; however, in practice financial indicators should be used along with indicators that accurately reflect the company's specifics.

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