Participative BudgetingA budgeting approach that involves employees from the lower-levels of management

Patrick Louie

Budgeting is a demanding yet satisfying process if done properly.

With a proper budget, a business will have a guide for its operations.

It’ll be easier to assess whether it’s performing well or not.

Did it hit the target amount of revenue?

Is it able to not overspend on costs and expenses?

Is the budget reasonable and attainable considering the current standing and performance of the business?

These are just some of the questions that a proper budget can answer.

Usually, budgeting only involves those who are in upper management.

They set the goals for revenue and expenses for all the concerned departments.

When the budget is complete, they then communicate it to the lower-level managers and employees.

This type of budgeting can and still works if the members of the budgeting team are well versed in the financial situation of the business.

However, it could also lead to overestimating revenue projection and/or underestimating expected costs.

When that happens, the budget will most likely be unachievable.

Fortunately, there’s another type of budgeting that addresses this potential downside: participative budgeting.

As its name implies, participative budgeting involves more participants than usual.

Aside from the usual members of upper management, participative budgeting also involves members from lower levels of management.

In this way, both the upper and lower levels of management jointly create the budget.

This is unlike top-down budgeting wherein only the upper management of the business has input on the budget.

In this article, we will be discussing what participative budgeting is.

What benefits does participative budgeting provide?

What are its potential drawbacks? How does a business set up participative budgeting?

We’ll try to answer these questions as we go along with the article.

What is Participative Budgeting?

Participative budgeting is a participative process wherein people from lower levels of management, particularly those that implement the budget, actively participate in its preparation.

Unlike the usual top-down budgeting approach, participative budgeting requires input from both upper and lower levels of management.

The approach gives people from lower levels of management a sense of ownership of the business as well as the budget.

Due to the involvement of people from lower levels of management, participative budgeting tends to produce achievable budgets.

This is because lower-level employees are more familiar with the costs of running their department.

They can better communicate the funding needs of their department.

But of course, it is the upper management that is more familiar with the strategic direction of the business.

Participative budgeting that only involves lower management will have no direction.

This is why participative budgeting requires input from both upper and lower levels of management.

Upper management provides guidance, while lower management takes care of the details of the budget.

Participative budgeting inspires confidence in the business’s staff – it means that upper management trusts them enough to involve them in the budget preparation process.

With their active participation in the preparation of the budget, employees will be more inclined to do what they can to achieve it.

More often than not, participative budgeting increases the morale of a business’s employees.

How Does Participative Budgeting Work?

Participative Budgeting

The participative budgeting process typically starts with establishing targets.

The responsibility for doing this step belongs to the upper management.

They need to identify the overall desired goal of the business and find a way to incorporate such a goal into the budget.

This is also the step where upper management identifies its expectations in relation to the involvement of employees from the lower levels of management.

The next step is to communicate these targets to the participants.

From there, the participants will fill in the details and then submit their proposals to the middle or upper management.

Either middle or upper management will review the proposals and make suggestions that the participants will consider.

This drafting and reviewing of proposals will repeat until such time that upper management approves of them.

The proposal will then be assembled together to create the master budget.

To make participative budgeting more effective, it is recommended that the business implements a system of checks and balances.

This is to prevent unruly employees (especially managers) from sabotaging the integrity of the budgeting process.

It also becomes more effective when the different levels of management (upper, middle, and lower) have a good relationship with each other.

Pros and Cons of Participative Budgeting

Participative Budgeting

The Pros of Participative Budgeting

Participative budgeting provides several benefits. Here are some of them:

Employee Motivation (Increased Employee Morale)

Participating in the budget creation process inspires confidence in the employee.

It makes them feel the business’s top management trusts them enough to involve them in the process.

This confidence can then cascade to better performance. The employee will be more inclined to do well for the business.

Participating in the budget creation process also grants the employee part ownership of the budget.

Thus, they will more likely want the budget to be achieved since they helped in its creation.

Better Information Flow

Another benefit that participative budgeting provides is that it allows better communication between the lower-level management and top management.

With it, lower-level managers are given the opportunity to relay their opinions/views on the state of the business and other certain issues.

The upper management also has the opportunity to better communicate the strategic direction of the business.

Together, both upper and lower management brainstorm ways to approach the difficulties of the budgeting process.

Greater Budget Accuracy

While the upper management typically has greater knowledge of how to run the business, they usually aren’t too informed about the costs of running each of its departments.

This may result in the overestimation of projected revenues and/or underestimation of expected costs, which makes the resulting budget inaccurate to the actual performance of the business.

However, with the involvement of the lower-level managers, this possible inaccuracy can be addressed.

Lower-level managers, those who run their respective departments, are more familiar with the costs and revenue potential of their departments.

As such, their input is very helpful in creating a more accurate budget.

Plus, since they are involved in the budgeting process, they become accountable for it.

This results in them giving more accurate and achievable inputs.

Goal Congruence

There is goal congruence when there is an agreement between the employee’s goals and the overall goals of the business.

Since participative budgeting also involves employees from the lower level of management, it’s easier to match their goals with the overall goals of the business.

All levels of management will ensure that the budget is achievable and desirable.

Overall, it helps the entire business and its employees set goals that move in the same direction.

Less Workload for Upper Management

With the involvement of people from the lower levels of management, they now have a share of the workload of preparing the budget.

This results in less workload for upper management compared to other budgeting approaches.

This gives them more time to do other tasks for the betterment of the business.

The Cons of Participative Budgeting

While participative budgeting does provide several benefits, it has its drawbacks too:

Time-Consuming (Resource-consuming too)

The most prominent drawback of participative budgeting is that it’s time-consuming.

This becomes more obvious the larger the business is.

With the involvement of more people in the budget preparation process, more heads get to decide on how it goes.

It starts at the departmental level, which might include every employee of the department.

This may take more time due to disagreements and negotiations.

As such, participative budgeting may be more suitable for businesses that have employees who are highly experienced.

These types of employees tend to assess the needs of their department in a timely manner.

Budgetary Slack

Another potential drawback of participative budgeting is budgetary slack.

This occurs when the employees themselves manipulate the budget to make it easier to achieve.

They overestimate the expected costs and/or underestimate the projected revenues.

This results in a dishonest budget, one that deliberately underestimates the performance of the business.

Budgetary slack is more prone to occur when the basis for the measurement of an employee’s performance is the attainment of the budget.

Making the budget easier to achieve also means that it’s easy for employees to exceed them.

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