Participative Budgeting
Is a collaborative process involving employees in creating and managing budgets for organizational decision-making
What Is Participative Budgeting?
Participative budgeting, or collaborative budgeting is a distinctive approach to crafting budgets within an organization. Unlike traditional top-down budgeting methods, where management dictates all budgetary aspects, participative budgeting embraces a more inclusive and democratic process.
In participative budgeting, the top management doesn't impose budgetary decisions but instead fosters a culture of cooperation and consultation among different levels of the organization.
Here, the power to shape the budget is not concentrated solely at the top; rather, it's distributed across various departments and individuals who contribute their insights and recommendations.
This approach recognizes that human and capital resources are finite, and effective allocation is crucial for achieving organizational goals and objectives.
Participative budgeting promotes transparent communication and engagement, allowing employees and departments to have a say in budgeting.
While the top management retains the authority to accept or reject the final budgets, they do not wield the unilateral power to set the terms.
In essence, participative budgeting is a strategy that values collective input and collaboration in creating budgets, resulting in a more engaged and motivated workforce and a more agile and adaptable budgeting process.
Key Takeaways
- Participative budgeting, also known as collaborative is an approach that involves employees at various levels of an organization in the budget creation process. It encourages cooperation and consultation rather than top-down directives.
- Participative budgeting recognizes the finite nature of resources and emphasizes the importance of effectively allocating resources to achieve organizational goals.
- This approach promotes transparent communication and engagement, allowing employees and departments to contribute their insights and recommendations to the budgeting process.
- Participative budgeting boosts employee morale, makes employees more accountable, enhances job satisfaction, improves productivity, promotes creativity, and results in more realistic budgets.
undestanding Participative Budgeting
In participative budgeting (also known as a Self-imposed budget or bottom-up approach), managers at every level and the organization's key employees come together and cooperate in preparing budgets for their areas and departments.
Top management, as mentioned above, retains the power to decide on final approval.
In the bottom-up approach, the strategic goals do not receive the importance they should get. Since setting strategic goals and objectives provides the organization with a direction to move.
The corporation's budgets with a participative budgeting approach will have easy or abdicated budget approval. This can lead to loose budgets and budget slack.
In top-down budgeting (authoritative budgeting), the employees are resentful and unmotivated due to a lack of involvement. Here, in the bottom-up approach, the employees and department heads are involved in the budgeting.
The expertise and boost of employee morale lead to informed decision-making. In addition, the involvement of employees makes them feel more wanted and encouraged.
This empowers the employees and enhances their abilities, nurturing future leaders of the organization.
Effective and efficient communication at lower levels of management helps improve the understanding of the organizational needs from the lower-level perspective.
Participative budgeting is better for responsibility centers with highly variable situations where area managers have the best and perfect knowledge.
A hybrid form of budgeting exists that combines the authoritative and participatory approaches to budgeting to form a combination approach. Moreover, this combination approach is a part of the participatory approach.
Participative budgeting Process
Budgeting is the process of understanding the goals of the organization and all the resources to be utilized to achieve the budgeted goals and objectives.
The process under a participative budgeting will include more consulting and discussion between and among the employees at all levels.
1. Outlining by management
The management provides an outline of what the budgeting targets should be. This helps in the identification of the resources that will be required during the process of achieving these budgeted objectives.
An outline of the budget also provides a perspective on what the expenditures and revenue may look like.
2. Process designing
The budget participants design the budget.
The budget participant usually consists of the board of directors, the top management, and the budget committee. However, since the participatory approach is adopted, the budget participants may also include middle and lower levels of management.
3. Brainstorming
Congregations and meetings are held to discuss the required initiatives to achieve the budgeted targets. The meetings will include internal and external stakeholders.
4. Proposals
The budget, once prepared, is to be submitted to the next level of management for proposal. The budgets can be approved or rejected, but mostly it is up for negotiations.
5. Voting
Once the budget is prepared, voting is conducted to assess the consent and likability of the budget. The stakeholders can select the budget that is most consistent with their interests.
6. Submission to the management
The preliminary budgets are submitted to the management. Then this submission leads to a management review. The budgets prepared and submitted here are scrutinized for clarity and accuracy.
7. Management review
The budget is then reviewed and modified according to the stakeholders' requirements and interests. The middle-level and lower-level management execute the tasks necessary.
Once the budget reaches the top level. The budget can be:
- Approved accordingly
- Modified accordingly, then later approved
- Disapproved, or rejected
A participative budgeting technique can be adopted as a pure participative approach, where there is a complete decentralization of power. Moreover, the organization is divided into several responsibility centers and business units.
The managers in a purely participative budgeting approach have the freedom to make decisions that are in the best interest of the business unit. However, the only drawback is that it does not incorporate top-level strategy into the budgets.
Alternatively, the organization can adopt a top-down cum participative approach in which the top management will provide relevant guidelines to the middle and lower levels of the management on the operations and executions of activities.
In this way, the organization may function as a whole and may have considered the goals of the individual units and organization as a whole.
Advantages of participative budgeting
The advantages of the participative approach include some of the limitations that the Authoritative approach faces, like preparing budgets that are close to reality, job satisfaction of the employees since they are included in the budgeting process, and many more.
1. Boosts employee morale
Participation from employees at all levels, even from the lower and clerical levels, is essential to participative budgeting. The inclusion of employees in budgeting increases the chances of achieving budgets.
The inclusion makes the employees feel wanted and appreciated. In addition, it leads to better efficiency and execution of activities.
2. Accountable employee
Employee involvement has its benefits and responsibilities. Including the managers and employees of different units in the budgeting process and its implementation will make them accountable for the consequences. Favorable and unfavorable.
Their presence and participation are required in the planning as well as the execution part. A high level of participation in these activities makes them responsible for the outcomes.
3. Job satisfaction
Participation is the critical element of the participative approach to budgeting.
Appreciating the business units' suggestions and presence, making them feel wanted, and executing, along with correcting actions by employees, will give the workforce satisfaction.
Not just from a humane aspect but also from a professional aspect. An organization that acknowledges and accepts the efforts and talents of the employees is what most employees would want.
4. Improved productivity
Increased participation in the budgeting process will make the employees work for the numbers and qualitative factors attached to the set budgets.
Productivity naturally increases as the managers set targets—mostly achievable ones.
5. Time-saving for managers
Since the participative budgeting ignores the strategic goals and objectives of the top management, the managers of middle and lower levels can concentrate on their departmental objectives.
This saves a great time for the managers.
6. Promotes creativity
The participative budgeting accepts suggestions and participation from different levels of employees.
Pooling human resources in one place and utilizing their intellectual capacities to build budgets can help the corporation achieve goals in different and more efficient ways.
7. Realistic budgets
Budgets, when prepared with the consent and suggestions of managers and employees at different levels, will tend to make budgets more realistic than budgets prepared by top management alone, without any consultation from other managers.
Disadvantages of participative budgeting
The limitations of the participative approach come from the leniency it offers employees and the lack of control and coordinating directions from the top management.
1. Time-Consuming
Every decision to be taken, especially about the budgets, must be consulted with different levels of management.
Taking decisions from and building budgets with the middle and lower levels of management do stretch out the decision-making process since they are to be accepted before they are pushed to the top level for approval.
2. Labor Cost
The number of personnel involved in the decision-making and the budgetary process is a little too many. That increases the costs involved in the budgeting process.
These costs are high in the lower management levels since this level is responsible for executing the more detailed activities.
3. Individual Growth
Budgets are prepared with extensive focus on the larger organization's individual departments and business units.
When bestowed with the responsibility to prepare the budget, these departments consider mainly their resources to be procured and their utilization.
The strategic goals at the organizational levels are ignored.
4. Conservative approach
When the power and discretion to make budgets vest in the hands of managers at different levels, there is a high chance that the budgets prepared will be those that can be easily achieved.
There can also be a possibility of a budget that does not match the organization's capacity and is not realistic or consistent with the internal strengths and external opportunities.
This can be a reason that may make employees resentful, demotivated, and unwanted.
5. Budgetary Slack
The practice managers where deliberately underestimated income & profits or overestimated expenses and losses. The budget creators keep an extra expense while preparing the budget.
This is more common when bonuses and appraisals are based on the performance measured against the budget. This slack is not in the organization's best interest for obvious reasons.
This budgetary slack can be minimized or checked with regular previews of the budgets.
Top-Down Vs. Bottom-Up Approach
Let's understand the difference by taking a look at the table below:
| Topic | Authoritative Budgeting | Participative Budgeting |
|---|---|---|
| Approach | Authoritative approach to budgeting. AKA- Top-down Budgeting. | A participative approach to budgeting. AKA- Bottom-up Budgeting. |
| Strategic goals | incorporate strategic goals and planning into the budgeting. Places emphasis on the organizational strategy and the achievement of organizational goals since inception. | Has no consideration for the organizational strategy and strategic plans. The focus of the Bottom-up approach is the incorporation of different levels of management in the budgeting process. This leads to the concentration of business units on their performance and productivity. |
| Communication | The top-management dictates instead of communicating. | This approach helps capture the lower levels of management’s perspective in budgeting. |
| Employees | Employees at lower levels in the authoritative approach are uninvolved in the budgeting process. Making them resentful and unmotivated. | The middle and lower levels of management are heavily involved in the budgeting process. The employees here are motivated, appreciated, and happy. |
| Budgets | The budgets prepared under the top-down budgeting approach are strict. As a result, there is a possibility that they won’t be followed at lower levels. | The budgets prepared under participative budgets are by managers and employees themselves. Therefore, the numbers and the targets set are easily attainable. Chances of loose budgets being prepared. |
| Recommendation | Not a recommended approach for an organization with big sizes and many departments. The presence of large numbers of departments makes the communication of goals and objectives difficult. Also, the problem may arise in controlling departments at different levels—best for small organizations. | Usually recommended for organizations that have responsibility centers with highly variable situations and managers with perfect information and the best data available. |
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