Here in, some behavioural implications of budgeting have been discussed:
(1) Dysfunctional Behaviour:
Budgets can bring positive behaviour among the people when the goals of individual managers are found in conformity with the goals of the organisation. The perfect matching (or near perfect matching) between the organisational and managerial goals is often referred to as goal congruence. The managers who participate in the budget making process may feel happy in producing a fair budget in terms of organisational goals and objectives.
Such a budget may induce and motivate others to bring excellence in their performance. But sometimes, due to improper implementation of the budget and unrealistic management expectations, the reaction of subordinate managers are found to be negative, which in turn has adverse impact on achieving the organisational goals. Such a negative behaviour is known as dysfunctional behaviour which is defined as an individual behaviour that is in basic conflict with the goals of the organisation.
Anderson and Sollenberger comment:
“Management can create negative budgeting attitudes in several ways. One of these is using budgets or giving the impression they are being used, to squeeze every ounce of productivity out of employees, or solely to identify poor performers or as a means of restricting an employee’s ability to perform If budget variances are always viewed as “bad news”, subordinates will quickly adjust their behaviour to avoid negative evaluations. Necessary managerial actions may not be taken because of fear of penalties. Unless top management is willing to recognise the need for flexibility, reality and positive change, lower management support quickly dissipates.”
In order to create and promote a reasonable degree of positive behaviour among the people in an organisation, a budgeting system should possess the following important features or elements:
1. Frequent feedback on performance.
2. Flexible budgeting capabilities.
3. Monetary and non-monetary incentives.
5. Realistic standards.
6. Controllability of costs (Non-controllable costs, if included in a budget, should be separated from controllable costs and labelled as non-controllable).
(2) Participative Budgeting:
Budgeting processes are either top down or bottom up. In a top-down budgeting process, top management prepares budgets for the entire organisation, including those for lower-level operations. This process often is referred to as authoritative budgeting. A participative budgeting process, on the other hand, is a bottom-up approach that involves the people affected by the budget, including lower-level employees, in the budget preparation process.
Participation by employees in the budget preparation can provide them the feeling that “this is our budget,” rather than the feeling generally noticed among employees that “this is the budget imposed by the top on us.”
Participation by the subordinate managers in preparing the budget is considered to increase employee motivation and reduce organisational conflict. One indication that an organisation encourages active employee participation is the existence of good superior-subordinate relationships fostered by (i) frequent person-to-person contact (ii) the use of results in performance appraisal (iii) the use of departmental meetings to review actual results and (iv) the creation of a “game” spirit (margin for error, tolerance and slack).
Participative budgeting increases employee initiative, performance and morale. This budgeting communicates a sense of responsibility to subordinate managers and fosters creativity. Such budgeting process often gives top management a better grasp of the problems their employees face and provides the employees a better understanding of the dilemmas that the top management deals with. Since the subordinate manager creates the budget, it is more likely that the budget’s goals will become the manager’s personal goals, resulting in a higher degree of goal congruence.
The increased responsibility and challenge inherent in the (participative budgeting) process provide non-monetary incentives that lead to a higher level of performance. Individuals involved in setting their own standards will work harder to achieve them. In addition to the behavioural benefits, participative budgeting has the advantage of involving individuals whose knowledge of local conditions may enhance the entire planning process.
Participative budgeting has some problems and negative consequences which should be avoided. Firstly, when top management has total control of the budgeting process and simultaneously seeks superficial participation from lower level managers, pseudo participation exists in the budgeting process. Pseudo participation, which pretends to be participation but is not is a form of deceit. The result can be a decrease in motivation. In such a situation, top management is only seeking formal acceptance of the budget from subordinate managers and is not seeking their real input.
Secondly, too much participation and discussion can lead to delay in budget making and can result into significant and irreconcilable differences among the members involved in the budgeting process. Thirdly, participative budgeting can lead to easy budget targets or targets which do not match with the organization’s strategy and goals.
(3) Excessive Pressure Created by Budgets:
Budgets are used in to direct control and coordinate all activities in the organisation. In this task, budgets should not generate excessive pressure and stress on the subordinate managers, supervisors and the people working in the organisation. In order to eliminate undesirable pressure, the budget goals and standards should be set which are neither too high (tight) nor too low (loose). If the standards and the budgeted goals are too high, motivation becomes poor and failing to achieve them may frustrate the managers and in turn, this frustration can result into poorer performance.
Similarly, if the goals and standards are too easily achieved, a manager may lose interest and his performance may decline. As goals and standards are tightened (but not made too tight), motivation will increase. In fact, the objective should be to get subordinate managers in a participative setting to set high but achievable goals and standards. This is one that is tight enough to motivate, yet still realistic. Supervisors and upper level managers must make careful judgments about how tight the budget goals and standards should be for each manager. Further, direct, clear feedback allows the employee to adjust aspiration levels and strive to achieve desired rewards.
It can be concluded that no budget can be successful as long as people are unwilling to accept it. The problem of motivating a company’s personnel, however, is difficult to solve.
Motivational requirements that have been suggested include the following:
1. A compensation system that builds and maintains a clearly understood relationship between results and rewards.
2. A system for performance appraisal that employees understand with regard to their individual effectiveness and key results, their tasks and their responsibilities, their degree and span of influence in decision-making, as well as the time allowed to judge their results.
3. A system of communication that allows employees to query their superiors with trust and honest communication.
4. A system of promotion that generates and sustains employee faith in its validity and judgment.
5. A system of employee support through coaching, counseling, and career planning.
6. A system that not only considers company objectives, but also employees skills and capacities.
7. A system that will not settle for mediocrity, but which reaches for realistic and attainable standards, stressing improvement and providing an environment in which the concept of excellence can grow.
(4) Budgetary Slack (Cushion):
Budgetary slack, also known as padding the budget, takes place when a manager deliberately underestimates revenues, overestimates costs and requests more funds than needed to support the budgeted level of activities. The difference between the revenue or cost projections that a person provides and a realistic estimate of the revenue or cost is called budgetary slack.
In all organisations, there is a tendency to introduce slack or a cushion in the budget. For instance, subordinate managers can know on the basis of past experiences that their budget proposals will be cut by senior managers and therefore will be tempted to pad certain expenses or make low-revenue estimates. On the contrary, the senior managers knowing the padding habits of their subordinate managers may be tempted to increase the level of expected revenues and reduce the budgeted expenses.
Similarly, the sales managers underestimate their sales projections; the controller introduces slack by maintaining excessive cash balances, etc. The degree of slack tends to grow in good years, when satisfactory profits are easily attainable, in bad years slack is voluntarily decreased throughout the organisation.
According to Hilton, there are three primary reasons for padding the budget or budgetary slack. First, people often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget.”
Second, budgetary stack often is used to cope with uncertainty. A departmental supervisor may feel confident in the cost projections for 10 cost items. However, the supervisor also may feel that some unforeseen event during the budgetary period could result in unanticipated costs. For example, an unexpected machine breakdown could occur. One way of dealing with that unforeseen event is to pad the budget. If nothing goes wrong, the supervisor can beat the cost budget. If some negative event does occur, the supervisor can use the budgetary slack to absorb the impact of the event and still meet the cost budget.
The third reason why cost budgets are padded is that budgetary cost projections are often cut in the resource-allocation process. Thus, we have a vicious circle. Budgetary projections are padded because they will likely be cut, and they are cut because they are likely to have been padded.
In order to reduce excessive slack, top management may introduce strenuous cost-cutting measures and put too much pressure to decrease the slack. However, in reality, their attempts may create conflict in the organisation, may widen differences among managers, and top management can be looked upon as being arbitrary, and ignorant and insensitive of the needs of lower-level managers in their achieving budgetary goals.
The solution lies in finding a level of slack that maintains efficiency and avoids the conflict caused by excessive pressure to reduce the slack. Further, top management should carefully review budgets proposed by subordinate managers and provide input, where needed, in order to decrease the effects of building slack into the budget.
Also, managers can be given incentives not only to achieve budgetary projections but also to provide accurate projections. This can be done by asking managers to justify all or some of their projections and by rewarding managers who consistently provide accurate estimates.
(5) Top Management Support:
The attainment of budget goals and standards at the lower and middle level management depends to a large extent on the support, participation and cooperation extended by top management in the preparation and execution of budgets. Top managers by their actions should create an environment and give impression to the subordinate managers about their commitment and support to the budget goals and objectives. Otherwise, the planning and control function will be damaged in case subordinate managers think that their top managers are not sincere while preparing and using the budgets.
Anderson and Sollenberger list the following four important ingredients to demonstrate the existence of top management support:
(i) Top management must establish clearly delineated lines of authority and responsibility.
(ii) Appropriate goals and objectives that other management levels can easily translate into activities must be developed.
(iii) Top management must actively review and approve budgets and follow-up on budget variances. This conveys the importance they attach to budgeting.
(iv) Top management must exhibit a positive attitude toward involving lower management levels in the process.
Morse, Davis and Hartgraves observe:
“It is important for management to understand that budgets are not perfect. Mistakes in prediction and judgment are made and unforeseen circumstances often develop, necessitating modification of the budget. Unless top management is willing to recognise when changes in the budget are needed, support for the budget at lower levels will quickly erode. If an organisation is to receive maximum benefit from the budget process, support for the budget at the top management level, as well as at lower levels, must be maintained. Achieving this support may be the most difficult challenge facing an organisation undertaking budget for the first time. Lower-level managers are not likely to respect the budget and the related performance reports if they perceive a lack of commitment by top management. Disregard for the budget by top management can quickly destroy the effectiveness of the budget throughout the organisation.”
(6) Inter-Departmental Conflict:
The budgeting process is rightly considered a technical and formal one. However, in reality, the budgeting process becomes most often an informal bargaining process or wherein managers of different departments compete for organisation scarce resources. According to Hopwood this can lead to a dilution of original goals, as managers try (and fight) for power and recognition. Departmental conflict or conflict between the managers are also due to the fact that different departments are found blaming each other when they fail to achieve their targets.
Further, a feeling of ‘them’ and ‘us’ exists between the budget staff, i.e., accounts departments (them). And the other departments (us). This is because the budget staff’s success is the other’s failure, e.g., the accountant’s success in finding an adverse variance identifies another employee’s failure to achieve his budget.
To solve the problem of departmental conflict and to reduce resentment and distrust among subordinate managers, Argyris has suggested the following two measures:
(i) Real participation and not pseudo-participation in the preparation of budgets by employees should be encouraged. Real participation involves people in the decision-making process whereas pseudo-participation pressurises people into budget acceptance. Real participation gives more responsibility to people, boosts their morale and has a motivational impact.
(ii) There should be training in human relations and improvements in communication systems. To conclude, management should know and be concerned about the influence of the budgeting process on the people within the organisation and also how people in an organisation influence the budgeting process through their behaviour and perception. It can be rightly said that an ideal budgeting system is one which achieves complete goal congruence and simultaneously creates a drive in managers to achieve the organisational goals and objectives.
James L. Piera has made the following remarkable observations on behavioural function of budgeting.
“In the field of cost control, use the budget as tool to be placed in the foreman’s hands-not as a club to be held over their heads. To implement this rule, it may be a good ideal to design an educational programme. Cost reduction must be placed on the basis of mutual effort toward a common aim. The creation of this atmosphere is an essential, definite step in budget practice.”
“We are beginning to learn that no tool can be used effectively unless the hand that guides it is rightly motivated. Like all other techniques of business, the budget should be a door open to more satisfying and profitable work—-not an instrument of torture.
Then it will be known that what you can do without a budget you can do better with one. It will be seen that entire planning and control procedure is a device for freeing men to do their best work—not a machine of restriction and condemnation.
Planning is but another word for vision that sees a creative achievement before it is manifest. Control is but a name for direction. The genius of management cannot fail to turn the budget idea finally into positive channels, so that people individually as well as business leadership generally will reap the harvest that it promises.”