Participative Budgeting with their Meaning, Definition, Problems, Types, Advantages, and Disadvantages; It is a budgeting process that involves people at lower levels of government in the budgeting process. In contrast to the forced budgeting process, participatory budgeting shares the responsibility with subordinate managers to give them a sense of ownership of the company.
Here is the article to explain, Participative Budgeting with their important poots of Meaning, Definition, Problems, Types, Benefits, Advantages, Disadvantages, and also limitations!
Participatory budgeting also tends to result in more accessible budgets, as lower-level employees are better able to tell their managers when funds need to allocate. When an organization implements participatory budgeting, it shows the trust that management has in its employees. Employees’ sense of responsibility motivates them to work hard and achieve the goals they have set.
What does mean participative budgeting? It is a method of budgeting in which the people who run the budget; and, those who will affect by the budget participate in the budgeting process. With this type of budgeting, top managers share responsibility for budget decisions with managers at the lowest level. As a result, it gives them a greater sense of participation in the company.
Budgeting is an important control tool. This is an annual financial report that shows the estimated income and expenses for a unit. Units can be projects, departments, organizations, or entire countries. A budget is made for a certain period in the future. This could be a day, a month, a quarter, or a year. The budget serves as the plan for the management plan. Several budgeting methods can be used depending on the needs of the organization.
Meaning of Participative Budgeting;
It is a process in which the people affected by the household actively involved in the budgeting process. The bottom-up approach to budgeting results in a budget that is more accessible than the top-down budget imposed on the company by management, with far fewer employees involved. It’s also better for work ethic and tends to result in greater effort on the part of employees to get what they budgeted for. However, a purely participatory budget does not take into account comprehensive strategic considerations, so management must provide orientation assistance to employees for the overall direction of the company and the classification of individual departments.
When participatory budgeting use across the organization, tentative budgets collect through the corporate hierarchy, reviewed, and possibly amended by mid-level executives. After being collected in the general budget; it turned out that the proposed budget was not appropriate. In this case, they return to the creator for one more iteration, usually with guidelines specifying what senior management is looking for.
Definition of Participative Budgeting;
It is a situation where budgets design and set based on input from subordinate managers, not just imposed. Participation in budgeting aims to divide the responsibilities of subordinate managers and determine the form of personal accountability for the final budget. In the budgeting approach, where the subordinate involves in setting the budget, he provides his own information, based on which the superior formulates the self-determined budget or the participation budget. It expects that organizational performance will improve significantly by enabling managers to allocate resources more efficiently. According to information from subordinates, the right decisions are made for the allocation of resources, they improves organizational efficiency.
Participation in budgeting has the desired impact on the work of the organization, which includes conveying information from subordinates to superiors to increase the job satisfaction of subordinates. Benefits also include greater budgetary responsibility and motivation to achieve goals. In addition to the desired effect, they also have side effects, including time-consuming budgeting. The conditions that determine the success of an investment budget depend on various factors, such as job-related information, level of involvement, minor influencing factors, and budget complexity.
Types of Participative Budgeting;
It two ways to introduce participatory budgeting;
- Pure participatory budgeting is a place where budgetary power fully decentralize. You have the freedom to make choices. Management will not interfere. Therefore, sometimes top-level strategies cannot consider. Does not matter.
- In the second case, we can call it top-down together with the participation budget that management provides for the guidance or goals of the company’s subordinates. You tell them how to put their own goals under those of the company.
Additional information is provided considering the second approach as it is more practical. For the budget to be effective and efficient, management must take an open approach. That is, it must support new ideas and suggestions from stakeholders. In other words, they should not criticize the budget directly. However, they can offer suggestions or suggest necessary changes.
In top-down budgeting, managers make resources available to different departments. However, it takes a bottom-up approach. Departments communicate their needs to manage and set their own standards. In short, it’s to enable the people who actually “do” the work to improve the planning process.
What are the Problems with participative budgeting?
Because more people involve in participatory budgeting, budgets usually take longer to prepare than top-down budgets prepared by a much smaller number of people. The labor costs associated with setting such a budget are also relatively high. Another problem with participatory budgeting is that participants tend to use conservative budgets with additional reimbursement; because, the people who make the budgets are also the people whose results compare to be reasonably sure of achieving this budget.
This trend more pronounces when employees pay bonuses based on their performance relative to the budget. This budget allocation problem can reduce by requesting a budget review by a member of management; who is likely to know when the budget will disburse and who can correct it if necessary. This is the only way to integrate the stretched goals into the budget.
Benefits or Advantages of participative budgeting;
It certainly has several advantages, including conveying information from subordinates to greater satisfaction with subordinates’ work, budgetary responsibilities, and adherence to goals. Sharing information from subordinates to superiors is one of the benefits of budgeting. Subordinates have the opportunity to communicate directly with superiors and discuss organizational questions with superiors to exchange information and ideas, solve problems and incorporate future perspectives. Information sharing is very important when it is a very difficult task, the more difficult the task, the greater the need to consult with subordinates.
They also allow subordinates to discuss organizational issues with supervisors, where sharing information and ideas can help solve problems and coordinate future actions. Sharing this information is especially important when the problem is of high difficulty, because the more difficult the task, the greater the need to consult with subordinates. They have a higher rate of execution when dealing with more difficult and unstable household tasks without consultation. In addition, people involved in budgeting recognize as team members; they share budgetary responsibilities, and motivation is higher when they achieve their own goals together than goals impose. Here are some of the benefits of implementing a participatory budgeting approach:
Transfer of information to the top;
One of the advantages of participatory budgeting is the exchange of information between executives from the departmental level to senior management. This means that subordinate managers allow expressing their views on certain organizational issues. Managers also have the opportunity to discuss the difficulties involved in budgeting and consider ways to resolve issues. Both top and bottom managers can express their views on certain issues.
Employee motivation and encouragement;
When employees involve in the budgeting process; they own part of the budgeting process. This gives them a sense of ownership when their suggestions take into account by the management. They also feel valued by management when they allow to sit down with top managers and exchange views on particular interests. The participation of employees in the process improves their work ethic and gives them a greater desire to work harder to achieve the goals they have set for themselves.
Goal matching or congruence;
Goal Matching refers to the correspondence between employee goals and the company’s overall goals. To create a company with an achievable budget, management and employees need to set unidirectional goals. For example, if the company has a goal to double production capacity in the next year; this should share with employees as they will be responsible for implementing the proposal. Without a match between the goals of the company and the goals of subordinate managers, the goals set cannot achieve.
Disadvantages or limitations of Participative Budgeting (Lack of budget with participation);
In addition to the desired effect, they also has side effects for the organization. Wasting time is the biggest disadvantage of participating in budgeting. Indecision and procrastination can arise when you have too many meetings.
The downside of budget negotiations is that they can create over-participation, which can take a long time and lead to delays and delays. Failure to reach an agreement in negotiations where the boss has the final say can also be detrimental to the business as it only serves to lower the manager’s morale and confidence in the work he is trying to accomplish. Second, the attitude of the negotiator can significantly affect the outcome.
The most common budget constraint in attending is that it takes a lot of time compared to the budget charged. Since budgeting starts from the departmental level upwards, there may be too much involvement, which can derail the process. Involving everyone in every department means negotiations may take too long to reach an agreement. If an agreement cannot reach, management must make a final decision; which means that employees must make a forced decision.
Budgetary slack (budget allocation);
Another limitation is budget allocation. Employees may overestimate costs and/or underestimate revenue estimates to manipulate budgets to their advantage. This means that subordinate managers set goals that they are sure to achieve and even achieve in the next financial year. This mostly happens when the manager’s performance measures against the achievement of the budget. By making budgets achievable, managers assume to exceed their goals.