Imposed Budgeting
A method of budgeting created by the upper management level to achieve established company goals.
What Is Imposed Budgeting?
Simultaneously known as Top-Down Budgeting, it is a budget created by the upper management level, which might be the senior level executives. These budgets are then imposed on mid or low-level management for implementation.
Since the top management creates it, the budget usually resonates with the company’s vision and growth strategy for the upcoming year. Therefore, lower-level management usually has little say in the budget creation process.
The executives can decide whether they want to take the suggestions or not. As a result, such budgets are tightly set by upper management and lower management is expected to follow them and ensure that the budget's goals are reached.
Key Takeaways
- Imposed budgeting is top-down budgeting, where the upper management will form a budget based on the company’s goal and mission, and the lower management will handle the execution.
- There are many phases and steps that the company has to go through before the proposed budget can be implemented into the company.
- This type of budgeting is more efficient and accessible, cheaper and faster, and gives more control to the upper management. However, it is also known to take away the motivation of the employees and could be more efficient for the company generally.
The Imposed Budgeting Process
This budgeting significantly impacts the company’s overall performance, so they must go through a process to get to it.
1. Deciding on the company’s objectives and the target of the budget
Before getting to the budgeting, the company’s management must decide on the objectives or targets they want to achieve.
They are set out to determine goals for revenues, profits, and expenses for the upcoming year. They can get the specific number by analyzing the company’s overall performance and the market’s trend.
The management decides what to strive for based on historical patterns, past results, economic situations, wage increases or decreases, changes in the law, etc.
The department managers may be asked for their opinion by management. However, the proposals made there may or may not be considered when creating the budget.
2. The approval process of the finance department
Like any other budget, the imposed budget has to go through the finance department so that the money can be allocated to different departments.
Based on how the budget was distributed in the past, the finance department goes through the same procedures to allocate different departments.
If, in the past few years, the manufacturing and the logistics department each gets 10% of the budget, the money will be allocated accordingly this time.
3. How will the company be allocated to different departments, and how will they handle it?
The departmental managers must create comprehensive budgets that stay within the allocation parameters after the finance department has approved allocations to the departments.
- The lower-level managers must outline how their divisions will achieve the forecasted income and the costs they will expend.
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The costs should be within the budget that the finance department has set out for that particular department.
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The predicted expenditures, such as those for equipment purchases, wages, and office supplies, will be included in the department-level budget and the anticipated sales in quantities and personnel requirements.
4. The finance department reviews the departmental budgets
After the departmental managers have completed preparing their budgets, they submit them to the finance department for review.
The finance manager is interested in knowing if the departmental budgets align with the company's overall objective. If a department includes unnecessary operating expenses, the finance manager will return the budget for revision.
Sometimes, a department’s budget exceeds its allocation. If it has a good case for doing so, the finance manager may increase the budget allocation for that department while decreasing other departments’ budgets to balance the overall budget.
5. The actual allocation of the budget
The budget is entered into the company's financial system for simple tracking whenever the finance manager is satisfied that it is ready for implementation. Then, each department's actual monthly income and costs are compared to the projected revenues and costs.
Reports are then produced highlighting any disagreements or agreements with the budget. The senior management uses these reports to identify which departments are working quickly to meet their goals and which are taking longer.
Benefits of Imposed Budgeting
Imposed budgeting has the characteristics of providing directions to middle and lower management. Top-Down budgeting can work wonders if the organization's size is small and measurable.
If the organization's size is considered, the smaller and more measurable the size is, the better the chances of the top management’s communication.
There are many ways that this type of budgeting can benefit the organization as a whole for its nature.
1. It is a more efficient way to work as a team
A company's efficiency due to mandated budgeting is one of its advantages.
When a department receives an allocation from the finance department, it must determine how it will utilize that money to meet its established aims and objectives.
The departmental leaders will spend the funds responsibly. The conservative approach will lessen wastage and allocations for pointless expenses.
2. It is easier, cheaper, and faster
The time required for processing and approval will decrease when the objective is established by upper management. In addition, it will reduce the time needed to make revisions to meet management requirements.
All departments must raise their budgets under the bottom-up approach, which results in inconsistencies and requires much work.
3. More control for the upper management
Budgeting mandated by law offers management more financial control over the business. The management team begins by assessing the budgeted expenses needed to satisfy the company's needs and produce revenues.
They may allocate the overall budget more effectively to other departments based on expected income and prior performance.
Limitations of Imposed Budgeting
Owing to its strict nature of being a top-down type of budgeting, it has many drawbacks.
1. Lack of Motivation
Since they have yet to add any ideas to the budget, the middle management and staff may feel demotivated. So instead, they follow the top management, which is focused on high-level plans and the bottom line.
2. Not efficient for individual departments
Departments must create their budgets under the constraints of the funds allotted to them due to imposed budgeting.
This means that a department will have to use the money that senior management has allotted if it needs more money to pay for its operations.
Even lower-level managers could use it as a justification for missing the revenue goals set by the management.
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