Budgeting is useful in short term decision making but there will be some limitation that the company may face while making long term decision making. This is because the figures uses in the budgeting is only an assumption or the expectation of the directors wish to achieve a set of goal. Preparation of budget plan is based on the data which is come from the previous years or months data which has already occurred and compared with the prediction budget data. In brief, this is not advisable for long term decision making as the future is difficult to foresee. The following is the possible problems of budgeting that could happen in Fraser & Neave Holdings Bhd. (Wikipedia, 2018)
Firstly, implementation of budgeting may give an inaccurate or unreasonable presumption for the shareholders and the directors of the company. This may affect the financial decision that made by the directors and let the company have difficulties in achieving the purpose and objective of the company which is profits maximisation. Inaccuracy may happen because budgeting is an existence of well-document plans prepared by human being, it can easily contain fraud and error. In other word, if the financial controller or every department manager of the company make ‘little’ adjustment of the budget either in the way of intention or coincidentally, it will leads to the inaccuracy of the budget plan and eventually this will mislead the financial opinion of the internal and external users. Although the manager didn’t make any mistake but the reality will always different from what the manager predicted. When the internal users such as directors based on the budget to decide whether to develop the company or not. If the budget plan shows positive result, directors will make investment and expand the business field of the company, vice versa. When the external users such as bank overview the cash budget provide by the company show negative figures, they will not give loan to the company. The company will face insufficient of cash flow to sustain the company. For example, the purchase department manager overestimates the expenses of the cost of goods sold causes the underestimate of revenue. This indicate the occurrence of budgetary slack which is overestimate expenses and or underestimate of revenues during budget is generate to produce a safe budget. This will result to a serious condition in budget plan and the matter of favourable variances where the actual cost less than the standard cost. Consequently, the budget plan is not reliable anymore in the example written due to the budget plan become an inaccuracy and unreasonable presumption unless the manager make amendment on it. According to the news on 11 November 2017, Fraser & Neave Holdings Bhd announced they will implementing a few strategic initiatives so that they can increase their expected product demand by exports business in the competitive local market. Nonetheless, the company unable to achieve their expected target as they facing various factors including inability to secure funding required for acquisitions or new store openings, price increase on sugar and oil, inability to expand or develop their factories and others factors. In fact, this may shows a possibility of overestimate expenses or underestimate of revenue and lead to inaccuracy or unreasonable presumption budget plan. (TheStar, 2017)
On the other hand, establish of budgeting is too rigid or inflexible in adapting to ever-changing business environment today. The budgeting department or budgeting team use same budget calculation method for every business cycle, there is no new method to calculate the budget. Thus, when there is some unexpected circumstances such as the happen of recession, adjustment of the currency or the exchange rate, establish of new government, inflation and others circumstances. This make the budgeting that had been plan will no longer accurate for the company to rely on it to make decision making as the forecasted figure is different from the reality. Take an example, when recession hits in, it will cause a common situation which is unemployment. This is because the company wants to cut down the expenses costs which makes sales revenues and profits decreasing. Subsequently, there will be some amendment on the budget and cause inaccuracy. Research shown that on 3 May 2018, Fraser & Neave Holdings Bhd face an unpredicted wings in the raw materials price. The net profit of F&N has declined about 13.6% that was caused by the external environment such as rising prices of commodities and inflation. Nevertheless,the company may have to increase the price of their product due to external environment and hence affect the revenue where the demand of their product is decreasing. The company will make loss and have obsolete stock in the end. The situation eventually result to an adversely effect on the company operations and financial conditions and profits earning. In short, budgeting shows rigid or inflexible when there is an unpredictable situation where the company has no control over it. (TheStar, 2018)
On the other hand, the process of budgeting is time consuming and expensive. For public listed manufacturing company like Fraser & Neave Holdings Bhd., it will take more time to complete the budgeting. As the company is big and with many department not to mention budgeting need to gather information like expenses and revenue from all departments to form a budget. There will be more input and details to bring into the budgeting and forecasting. Sometimes, a company may form a budgeting department or budgeting team, and the member will be the manager and director from different department of the company participating and involving in the budgeting process but each department may come out with their own budget and the leader will have to take time to integrate all the budget and negotiate with them together to get the number that they agree with. Furthermore, budgeting is expensive because it will need a lot of manpower to compute the budgeting as a result the company need to hire more staff and provide training for the staff to learn budgeting. By hiring more staff and give training to them the expenses such as labour cost and training cost will increase as well. From the research, Fraser & Neave Holdings Bhd sales is likely related to seasonal changes. They plan their sales budget based on seasonal merchandise trends which manage the products and stocks based on the trends in market. When the seasonal merchandise trends change suddenly, the employee may not be able to prepare a new budget plan as they need to recalculate within a limit time given by their superior. Therefore, to complete the budget plan, the company will hire more people or give additional benefits such as overtime paid so that the budget plan can finish on time. The company personnel-related expenses will increasing this few years due to changeable issues such as prospective labour law that government implement in the year 2018, increases in premium rates for employee pension insurance, minimum wage of RM 950 and others issues. In general, budgeting will give a result of high cost and more time consumption to the company. (TheStar, 2018)