Human Factors in Budgeting

06/04/2011 14:42


Human Factors in Budgeting:

The success of a budget program also depends on:

  1. The degree to which top management accepts the budget program as a vital part of the company's activities.
  2. The way in which top management uses budgeted data.

If a budget program is to be successful, it must have the complete acceptance and support of the persons who occupy key management positions. If lower or middle management personnel sense that top management is lukewarm about budgeting, or if they sense that top management simply tolerates budgeting as a necessary evil, then their own attitude will reflect a similar lack of enthusiasm. Budgeting is hard work, and if top management is not enthusiastic about and committed to the budget program, then it is unlikely that anyone else in the organization will be either.

In administering the budget program, it is particularly important that top management not use budget as a club to pressure employees or as a way to find someone to blame if something goes wrong. Using budgets in such negative ways will breed hostility, tension, and mistrust rather than greater cooperation and productivity. Unfortunately, the budget is too often used as a pressure device and great emphasis is placed on "meeting the budget" under all circumstances.

Rather than being used a weapon, the budget should be used as a positive instrument to assist in establishing goals, in measuring operating results, and in isolating areas that are indeed of extra effort or attention. Any misgivings that employees have about a budget program can be overcome by meaningful involvement at all levels and by proper use of the program over time. Administration of a budget program requires a great deal of insight and sensitivity on the part of management. The budget program should be designed to be a positive aid in achieving both individual and company goals.

Management must keep clearly in mind that the human aspect of budgeting is of key importance. It is easy to become preoccupied with the technical aspect of the budget to the exclusion of the human aspects. Indeed, the use of budget data in a rigid and inflexible manner is often the greatest single complaint of persons whose performance is evaluated  using budgets. Management should remember that the purposes of the budget are to motivate employees and to coordinate efforts. Preoccupation with the dollars and cents in the budget, or being rigid and inflexible, can only lead to frustration of these purposes.

In Business | Who Cares About Budgets?

Towers Perrin, a consulting firm, reports that the bonuses of more than two out of three corporate managers are based on meeting targets set in annual budgets." Under this arrangement, managers at the beginning of a year all too often argue that their targets should be lowered because of tough business conditions, when in fact conditions are are better than projected. If their arguments are successful, they can easily surpass the targets."

Source: Ronald Fink and Towers Perrin, "Riding the Bull: The 2000 compensation survey, " CFO, June 2000, pp. 45-60.

In establishing a budget, how challenging should budget targets be? In practice, companies typically set their budgets either at a "stretch" level or a "highly achievable" level.

A stretch level budget is one that has only a small chance of being met and in fact may be met less than half the time by even the most capable managers. A highly achievable budget is one that is challenging, but which can be met through hard work. Managers usually prefer highly achievable budgets. Such budgets are generally coupled with bonuses that are given when budget targets are met, along with added bonuses when these targets are exceeded. Highly achievable budgets are believed to build a manager's confidence and to generate commitment to the budget program.