Budgeting and Financial statement Analysis
In most organizations in the world today, the budget making process is a participatory one. This is where the management and employees are jointly involved in the making of the budget. Of course participatory budget making is not the only way of making a budget. The company’s management could decide to make the budget themselves alone (non-participatory) but this style has many drawbacks.
The following text discusses the positives and negatives of participatory budget making to the employers and employees. It also discusses the effectiveness of this style of making budget and the reasons why it is effective.
Advantages to the management
Participative budget making process enables the management to know the exact estimates that the different department in the organization need. The employee’s participation in the budget making process ensures that they provide their estimated expenditures and projected incomes.
This type of budget making process also enhances employee-management communication. The employees are able to state and present their needs to the management. Good communication enhances the organizational bonding and bridges the gap between the management and the employees. Enhanced communication is important in any organization in that it ensures that if any problem arises- personal or otherwise, the employees are free to approach
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The management can set reasonable targets to the employees based on their estimates. In a non-participatory budget making process, the management can set unattainable targets to the employees because the employee input was not sought.
Disadvantages to the employee
The drawback of this budgeting style is that it is a time consuming process. The involvement of employees from every department in the organization delays the whole process. A lot of time is wasted which could have otherwise been used productively to earn the company more profits.
Some employees may not accept budget cuts if funds are insufficient. They may take negatively the budget cuts i.e. assume that their contribution into budgeting process and to the organization is less important. This could be avoided by the management explaining the intended budget cuts.
Participatory budget making process may lead to unrealistic demands by the employees, which the management may not be in a position to meet. To avoid this from happening, the management should explain to the employees that the final budgetary allocation decision lies with them (management)
Advantages to the employees
The employees are able to state exactly what their needs are concerning their expected revenues and expenditures. This ensures that the management factors in their requirements into the budget.
Employee morale is also improved through participative budget making process. The employees feel that their input into the budget making process is a sign of recognition and this makes them work extra hard. The participatory budget making process brings a sense of belonging and value to the employees. The employee’s participation helps them feel valued in the organization.
The budgeting process is complex and time consuming. With the inclusion of the employees, it will take a long time to make it. Moreover, the employees may not be able to understand the whole process because of its complex nature. This complexity may bring confusion in the organization.
Since the employees participate in the budget making process, any failure by them to meet the targets they themselves took part in setting may lead to a lot of pressure from the management. Pressure does always equate to higher productivity by the employees.
Effectiveness of participatory budgeting process
Participative budgeting is an effective management tool as compared to the non-participative budgeting process because of the following reasons.
Participatory budgeting brings together the management and the employees of the organization, which leads to improved communication. Better communication between the management and employees leads to quicker problem identification and resolution. Improved communication also encourages the “free space” and freedom, which enables the employees perform to their best, which in essence is a good thing to the organization.
The discussions held during the budget making process leads to the management getting exact budgetary needs of each department in the organization. These needs enable the management to make better decisions and forecasts. Accurate forecasts and better decisions are all necessary for the prosperity of the company.
Participative budgeting process ensures that there is an efficient and effective utilization of the available resources by allocating the exact revenues and expenditures. The company should ensure that it utilizes the available resources fully in order to avoid costly wastages.
Participative budgeting also ensures that the exact required resources are allocated and hence no resources are left unutilized at the year-end. This ensures optimal utilization of the company’s resources to create wealth.
Employee satisfaction is guaranteed in that their needs are factored in when making the budget estimates. Satisfied employees produce more and hence improved profitability for the company.
Participatory budgeting process ensures that reasonable targets are set. It is important to note that the targets set to the employers should be attainable i.e. should not be too low or too high. Too high targets may lead to a lot of pressure on the employees, which in turn demoralize them. Demoralized employees do not perform to their optimum.
Although participative budget making process has its disadvantages, it is the most appropriate and should be adopted by firms in making their budgets.
It is itself not a panacea for the myriad and complex problems faced the company in making the budget, but its benefits far outweigh the disadvantages.
The organization should ensure that it does not take a lot of time making the budget in order to minimize time wastages that could have been used in production. The management can select a representative sample in all the departments of the organization.
Budget cut in any department should be explained in advance so as to avoid the negative perception brought by those budget cuts.
Before including the employees in the budget making process, they should be trained. The company can hold seminars and workshops on the budget making process.