Participative and Non-participative Budgeting

Introduction

The main discussion of the paper will be about participative and non-participative budgeting. The two types of budgeting procedures will be critically examined, and a comparative study will be made in-between them. Participative budgeting requires the involvement of people who are eventually impacted by the created budget. Non-participative budgeting, on the other hand, is an authoritative process of budgeting where the budget holder does not get the chance to be involved in the process of budget creation. Taking into account the advantages and limitations of the two types of budgeting procedures, the paper would delve into the importance of budget holders’ participation in settlement of a budget.

Discussion

Participative Budgeting

Participative budgeting can be regarded as the procedure in which people are actively involved in the process of budget preparation. In this context, two types of approaches are relevant, that is, a bottom-up approach and a top-down approach. Out of these two approaches, the former one is considered to be more advantageous. This is because, in a bottom-up approach, a large-scale of employees participate in the budget creation process (Bergmann et al. 2020). On the other hand, the top-down approach tends to be authoritative with the supreme control of the senior management and less participation of the employees. Participative budgeting is useful in boosting up the morale and confidence of the employees as they try to achieve the budgetary figures, which are predicted by them. However, in the participatory budgeting process, the employees tend to behave on their own without any guidelines. Therefore, the management must set up regulations for budget preparation such that each employee adheres to the overall objectives of the organization.

One way of using participative budgeting is to apply it throughout the entire organization. In such cases, the participative budget acts as the master budget of the organization. The preliminary budgets, which are prepared by the people of the organization, travel up to the corporate hierarchy. In this process, the mid-level and senior-level managers review or amend the budgets according to the requirement of the organization, and finally, a master budget is set up through the compilation of the preliminary budgets (Brown et al. 2017). In situations, when the budget does not adhere to the guidelines of the management, the managers might send it back for another iteration. The process of participative budgeting is a time-consuming one due to the involvement of a large number of people. As a result of this, the labor charges also tend to escalate in the process of participative budgeting. Sometimes, the employees tend to create a conservative budget such that it becomes easy for them to achieve the predicted figures of the budget.

The issue of preparation of a conservative budget by the employees is referred to as budgetary slack. The problem can be solved through proper review of the budgets by the experts of the senior management (Clinton and Hunton 2016). These experts should understand the areas where the expenses are padded by the employees, such that suitable adjustments can be made accordingly. Taking into account all these factors, a participative budget can be prepared successfully and integrated into the strategic approach of the organization.

Non-participative budgeting

Non-participative budgeting is also known as authoritative budgeting, where the ultimate budget holder does not get any opportunity to be a part of the budget-making process. This type of budgeting is also known as a top-down approach of budgeting where the top-level functions as a whole in the preparation of the budget with less participation from the lower level management. This kind of approach can be regarded as a dictatorial approach as most of the critical decisions regarding budgets are taken by the senior level management (Crisan and Nistor 2016).  It has been studied and observed by researchers that this kind of approach works only in certain specific situations. The newly formed organizations, which are currently witnessing growth in their businesses, can employ a top-down approach of budget preparation. In other cases, when the employees have no interest in getting involved in the budget-making process, such methods can be relevant (Shanthosh et al. 2018).  Sometimes, the employees are not technically sound enough to provide their insights into the budget-making process. Under such conditions, the top-down approach works effectively in achieving the goals and objectives of the organization.

The non-participative budgets or the imposed budgets also have certain limitations, which might pose challenges to the organizations. In this kind of process, the upper level sets up parameters or protocols for the preparation of the budgets, and the entire process is conducted according to the stipulated guidelines (Kamau et al. 2017). In non-participative budgets, the lower-level personnel has minimal contribution in making important decisions regarding the goals and objectives of the organizations. Most of the time, this personnel are involved in calculating basic figures of the budget according to the stipulated directives of the senior level management.

As the lower-level management is less aware of the goals and objectives of the organization, they tend to think this budgeting process as a dictatorial standard, which is imposed on them. In most cases, the employees are reluctant to take responsibility for meeting the figures of the budget as they do not forecast them in the process of budget preparation. Only the senior level management has access to information required for budgeting purposes, and the information is not shared with the lower-level management (Lumbantoruan and Mulyani 2019).  Sometimes, the senior management might ignore the skills and capabilities of particular employees and set up unrealistic targets for them in the budget. This leads to a situation that is ethically challenging and pushes down the morale of the employees.

Importance of budget holders’ participation in a budget setting process

A budget is required in every organization to set up a plan for cash inflows or outflows over a specific period. A budget plays an active role in planning for new activities of the organization and raising sufficient funds for performing these activities. After the budget plan has been prepared, it is monitored and evaluated to ensure its effectiveness and adherence to the terms and conditions of the organizations (Matthies 2016). A budget holder plays a vital role in setting up a budget and its planning activities. In a participative budget, all the decisions taken concerning budgeting purposes are controlled and guided by the budget holders.

The budget holders concerning the program staff and the finance staff are responsible for preparing the plans and goals of the organization. Some of the critical factors, which are taken into account by the budget holders, are the objectives or purpose of the organization and the activities required for achieving these objectives (Miller 2018). The resources for performing these activities are also planned out suitably along with a forecasted cost structure of these resources. Finally, the sources of funds are decided by the budget holders, along with the practical implication of the expected result.

After the preparation of the final plan of the budget, the budget holder takes up necessary actions to implement the plan. A budget holder is also referred to as the program or project manager for the budget. Usually, a finance person is not chosen as a budget holder by the management. The budget holder is responsible for using the budget as a guide to its implementation and checking the budgeted items before spending money on them. The budget holder also allocates the expenditure to suitable budget lines, as stipulated in the budget plan (Onica 2017). In the implementation process, the budget holder should make sure that the process has focussed on delivering the objectives of the organization within the estimated cost. The budget holder should ensure the minimization of the over-spending of cash and encourage the under-spending of money as compared to money stipulated in the budget (Tjahjanulin 2016).  In some organizations, over-spending or underspending of payment is permitted as long as the budget holders can provide strong justifications in favor of the spending.

Once the budget has been implemented, the budget holder carried out the function of monitoring and evaluating the budget. This is done through a comparison of the actual outcome with the expected outcome given in the budget plan. In case there is a gap between the two issues, the budget holder may ask for an iteration of the process (Rokhman 2017).  The budget holder makes sure that the budget is clear and straightforward such that it can deliver clear language to the management. The estimates or assumptions made in the budget should be written down clearly and elaborately by making notes under separate headings. In this way, the budget can have useful implications at all corners of the organization.

Conclusion

From the above paper, it can be concluded that the participative budgeting process, as well as the non-participative budgeting process both, have their respective advantages and disadvantages. However, an organization can effectively take up the participative budgeting process as it is considered better than a non-participative process. A budget holder’s participation is always encouraged in the settlement of a budget as he performs a lot of functions in the procedure by aligning the budget with the goals and objectives of the organization.

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