Participative Budget
Participative Budget (Bottom up Budget)
A participative budget⇒ is developed from the bottom up. All the people affected by the budget are involved in the budget development process, even lower-level employees. This type of budget development involves negotiation between lower-level managers and senior managers.
Benefits of Participative Budget Development
- A participative budget is a good communication device. The process of preparing the budget participatively gives senior managers a better grasp of the problems their employees face. The employees’ knowledge is more specialized, and they have the hands-on experience of running the business on a day-to-day basis. At the same time, employees gain a better understanding of the problems experienced by top management.
- A participative budget is more likely to gain employee commitment to fulfill budgetary goals. People are more willing to devote extra effort to attain goals they perceive as their own.
- A participative budget is more likely to be achievable because it was developed with input from the people responsible for achieving it.
Limitations of Participative Budget Development
- Unless senior management controls the budget process properly, a participative budget can lead to budget targets that are too easy to achieve, called budgetary slack. Budgetary slack, which will be discussed later in more depth, is the practice of underestimating planned revenues and overestimating planned costs to make the overall budgeted profit more achievable. It is the difference between the amount budgeted and the amount the manager actually expects.
- Integrating corporate strategic plans into the budget can be more difficult when it has a bottom-up process.
- Participative budgeting is more time-consuming than authoritative budgeting because lower-level managers and employees need to meet and negotiate their budgets.