Budget Setting Styles

1 Imposed style of budgeting

In this style, senior managers prepare budgets with little or no input from operating personnel or operational managers. The budget is then imposed on the employees who have to work with the budgeted figures.

Imposed budgets are effective in the following circumstances.

• In newly formed organizations
• In very small businesses
• During periods of economic hardship
• When operational managers lack budgeting skills
• When organization’s different units require very precise co-ordination

Advantages of imposed budgets

• They increase the probability of incorporating organization’s strategic plans.
• They utilize senior management’s awareness of total resource availability
• They decrease the period of time taken to prepare budgets
• They decrease the possibility of undesirable input from inexperienced lower level employees.

Disadvantages of imposed budgets

• Morale of other employees is reduced since they are not involved in the preparation of budgets.
• Hamper creativity of lower level management
• May not be fully accepted by the employees
• May kill team spirit

2 Participatory style of budgeting

Budgets are prepared by lower level managers and then submitted to senior managers for approval, usually without significant adjustments These budgets are based on the lower level manager’s perceptions of what is achievable and the associated resource requirements. Participatory budgets are effective in the following circumstances:

• In well established organizations
• In very large businesses
• During periods of economic affluence
• When operational managers have strong budgeting skills
• When organization’s departments are allowed to operate independently.

Advantages of participative budgets

• Information from employees most familiar with their departmental needs and constraints is included.
• Morale and motivation of employees is improved.
• Leads to acceptance and commitment to organizational goals
• They are more realistic than imposed budgets
• Specific resource requirements are included.

Disadvantages

• They are time consuming
• Managers may introduce budgetary slacks i.e none challenging or easy to achieve targets.
• They can support empire building by department heads.

3 Negotiated style of Budgeting

• Different levels of management often agree on budgets through negotiations.
• Operational managers may negotiate with senior managers on what they consider to be unreasonable or unrealistic in the imposed budgets.
• Likewise, senior managers usually review and revise budgets presented to them under the participative approach through a process of negotiation with lower level managers.
• The result is a negotiated budget.