The Limitations of Kaizen Budgeting

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There seem to be as many practices and philosophies as there are companies to implement them. One such practice, kaizen budgeting, recommends that companies incrementally pare down the costs of their operations over time. Like any business method, kaizen budgeting has had its fair share of successes. But it also has some limitations.

Identification

Kaizen budgeting cuts business costs that focus on incremental changes to a budget or practice. The thinking goes that with small changes, not only will costs steadily decrease, but these changes will have a ripple effect, decreasing costs in other areas as well.

Limitation 1: Dependence on Communication and Analysis

A key component of kaizen budgeting is the identification of flaws in a system or areas in which a system can be improved. Because kaizen budgeting relies on frequent small tweaks to cut costs, managers must micro-manage processes. Managers must also identify each and every problem with a process. That requires a total breakdown of communication barriers between managers and employees. Kaizen budgeting also requires managers to consistently identify flaws and improve employee actions. Both of these requirements can be difficult to reproduce quarter after quarter, and make no allowance for outside factors that affect businesses.

Limitation 2: Diminishing Returns

While kaizen budgeting may help consistently cut costs for several quarters, a barrier will be reached eventually. All costs of running a business can only be cut so much, but kaizen budgeting focuses on many small changes. Like whittling a piece of wood, there are only so many ways to pare down day-to-day operations using kaizen budgeting.

Advantages

Kaizen budgeting does have its advantages. The process can be especially useful for manufacturing companies, or businesses that rely on regular daily processes to produce a product. Kaizen budgeting can put managers' heads in the right place; instead of focusing on a silver bullet budget cut, managers can become intimately knowledgeable about their company's processes and consistently budget responsibly quarter to quarter.

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