Participative budgeting is a situation in which budgets are designed and set with input from subordinate managers rather than being imposed. Participation in a budget setting is intended to delegate responsibility to subordinate managers and to establish a sense of personal ownership over the final budget. The budgeting approach in which the subordinate participates in the budget setting by providing their own information that the supervisors use to formulate the self-imposed budget or participative budget. Organizational performance is expected to improve significantly as a result of allowing the supervisor to allocate resources more efficiently. According to the information provided by the subordinate, the right resource-allocation decisions are being made, and participative budgeting will improve the organization’s performance.
Advantages of Participative Budgeting
Participative budgeting has numerous advantages, including the transfer of information from subordinate to superior, increased job satisfaction for the subordinate, budgetary responsibility, and goal congruence.
(a) One of the advantages of participatory budgeting is the transfer of information from subordinate to superior. Subordinates have the opportunity to contact the superior directly and discuss organizational issues with the superior so that they can exchange information and ideas to solve problems and unite future points of view. The transfer of information is especially important when dealing with difficult tasks; the more difficult the task, the greater the need for subordinate consultation.
(b) Participative Budgeting also provides subordinates with the opportunity to discuss organizational issues with superiors, where an exchange of information and ideas can aid in the resolution of problems and the agreement of future actions. This information transfer is especially important when dealing with a task of high difficulty because the more difficult a task, the greater the need for consultation with subordinates.
(c) When dealing with more difficult and volatile tasks, participative budgeting outperforms non consultative budgeting. Furthermore, when people participate in budget creation, they are recognized as members of a team, they share budgetary responsibility, and motivation is higher when they work together to achieve their own goals rather than goals imposed on them.
Disadvantages of Participative Budgeting
Aside from the positive effects, participative budgeting has some negative consequences for an organization. The most significant disadvantage of budget-setting participation is the time commitment. When too many meetings are held, vacillation and delay can occur.
(a) The disadvantage of budgetary negotiation is that it can lead to over-participation, resulting in negotiations that drag on and cause vacillation and delay. If negotiation does not result in an agreement, in which the superior may have the final say, this can also be detrimental to the business because it lowers the manager’s morale and confidence in the work he or she is attempting to accomplish. Second, the attitudes of the negotiators can have a significant impact on the outcome.
(b) Another unfavorable effect is budgetary slack, which occurs as a result of the overestimation of expenses and can promote budgetary “gaming” through budgetary slack. Budget padding can be severe unless incentives to complete accurate projects are provided.
Finally, participation in the budget setting has positive effects on an organization’s performance, such as the transfer of information from subordinate to superior, which can increase subordinate job satisfaction. Furthermore, its benefits include increased budgetary responsibility and motivation to achieve goals. Aside from the positive effects, there are some drawbacks to participatory budgeting. These drawbacks include time consumption and budget padding. However, the condition that determines the success of a participative budget is dependent on a variety of factors such as job-related information, level of participation, level of subordinate influence, and budget complexity.