The Budgeting Process

The Budgeting Process
The budgeting process usually begins when managers receive top management’s economic forecasts and sales and profit objectives for the coming year, along with a timetable stating when budgets must be completed. The forecasts and objectives provided by top management represent guidelines within which other managers’ budgets will be developed.

In a few organizations, the preference is for “top-down” budgeting. Budgets are imposed by top managers with little or no consultation with lower level managers. Most companies, however, prefer the process of ‘bottom up” budgeting: Budgets are prepared, at least initially, by those who must implement them. The budgets are then sent up for approval to higher level managers.

Bottom up budgeting has a number of advantages for many organizations. First, supervisors and lower level department heads have a more intimate view of their needs than do managers at the top, and they can provide more realistic details to support their proposals. They are also less likely to overlook some vital ingredient or hidden flaw that might subsequently impede implementation. Managers are also more strongly motivated to accept and meet budgets they have had a hand in shaping. Finally, morale and satisfaction are usually higher when individuals participate actively in making decisions that affect them.

The process by which lower-level managers participate in developing budgets is similar to the multilevel planning process described. Supervisors prepare their budget proposals using the guidelines drawn up by upper management. Department heads then review the lower level budgets and resolve any inconsistencies before compiling them into department budgets. These budgets are then submitted to higher level managers for approval. The process continues until all budgets are completed, assembled by the controller or budget director, and submitted to the budget committee for further review. Finally, the master budget is sent to top management (the president, chief executive officer, or board of directors) for approval.

The role of budget personnel:

Although developing budgets is the responsibility of managers, they may receive information and technical assistance from the staff of a planning group or formal budget department or committee. These groups are likely to exist in large, division organizations in which the division budget plays a key role in planning, coordinating and controlling activities.

The budget department, which generally reports to the corporate controller, provides budget information and assistance to organizational units, designs budget systems and forms, integrates the various departmental proposals into a master budget for the organization as a whole, and reports on actual performance relative to the budget.

The budget committee, made up of senior executives from all functional areas, reviews the individual budgets, reconciles divergent views, alerts or approves the budget proposals, and then refers the integrated package to the board of directors. Later, when the plans have been put into practice, the committee reviews the control reports that monitor progress. In most cases, the budget committee must approve any revisions made during the budget period.

Some problems in budget development:

During the budget development process, when the organization’s limited resources are allocated, managers could fear that they will not be given their fair share. Tension can grow as competition with other managers increase. Anxieties might also arise because managers know they will be judged by their ability to meet or beat budgeted standards. Hence, they are concerned about what those standards will be and may over state their needs to create some slack. Conversely, their senior managers are concerned with establishing aggressive budget objectives As a result, the senior managers will often try to trim their mangers’ expenditure requests or raise their revenue targets. The result can be an ever widening web of distrust and anxiety, especially if employees begin to suspect the budgets will not meet their needs. Organization wide participation in the budgeting process often minimizes these types of anxiety reactions. When all managers are involved in budget development, they are more likely to be satisfied with resources allocations.