Behavioral issues that relate to budgetary control: A budget is an essential tool for controlling. It may help in the planning, implementation, execution, and management of the organization’s strategic plan. Budget-related behavioral issues include dysfunctional manager behaviors and budgetary slack. When actual performance is compared to and evaluated against budget performance, these behavioral issues become more apparent.
The result of the comparison and review can be directly related to the amount of benefits (both monetary and non-monetary) that they can receive. The article discusses behavioral issues that relate to budgetary control, the purposes of budgets, budget approaches, and budget behavior.
Introduction to behavioral issues that relate to budgetary control
Every company has a mission and a vision. A mission statement explains why an organization exists. It describes the organization, its activities, and its overall goal. A vision statement describes the organization’s future goals and is typically inspirational and aspirational.
Organizations must develop their strategic planning to achieve their mission and vision. It is a synthesis of long-term and short-term strategies. Its budget can accommodate short-term strategies. When the budget is met, it indicates that the short-term strategies were successful. It helps to contribute to the success of long-term strategies when short-term strategies succeed. When long-term strategies are implemented, the organization will be on its way to fulfilling its mission and vision.
The budget is the most widely used, necessary, and significant tool for controlling and planning. Budgets are used by many organizations to aid in the execution and implementation of their short-term strategies. Short-term goals can be developed from the organization’s short-term strategies, which are included in the budget. When the budget is met, the targets are met, and the short-term strategies are successful.
Types of budgeting process:
Top-Down Budgeting:
Upper-level management establishes budget parameters and goals, with little input from lower-level workers. It promotes straightforward communication and efficiency, but it can also breed animosity and ethical quandaries.
Bottom-Up Budgeting:
This strategy improves employee morale and ownership while also promoting accurate and adaptive budgeting by involving lower-level employees in budget formulation. However, it is time-consuming and prone to budget padding.
Data Flow and Organizational Structure:
Effective decision-making in the organization is ensured by efficient data flow. Organizational charts can be flattened to improve communication between management levels.
Budget Estimation and Ethical Considerations:
Budget forecasts must be founded on strong reasoning, and ethical behavior is required. Budget slack and unachievable goals must be avoided.
Zero-Based Budgeting:
This method justifies each expenditure item from the ground up, which aids in combating budgetary slack and identifying necessary costs.
Some behavioral implications of budgeting:
Some behavioral issues that relate to budgetary control implications of budgeting have been discussed here:
Dysfunctional Behaviour:
Goal congruence refers to the perfect (or nearly perfect) alignment of organizational and managerial objectives. Managers who are involved in the budget-making process may feel happy when they create a fair budget in terms of organizational goals and objectives. Budgets may promote positive behavior in people when individual managers’ goals match with the organization’s goals.
A budget like this could inspire and motivate others to perform at the highest level possible. But occasionally, due to improper budget implementation and excessive management expectations, subordinate managers react negatively, which harms achieving organizational goals. Such inappropriate behavior is referred to as dysfunctional behavior, which is defined as personal conduct that fundamentally runs counter to organizational objectives.
A budgeting system should have the following important features or elements to create and promote a reasonable level of positive behavior among the people in an organization:
- Feedback on performance is given regularly.
- Capabilities for flexible budgeting.
- Incentives, both monetary and non-monetary.
- Participation.
- Realistic standards.
- Controllability of costs (Non-controllable costs should be separated from controllable costs and labeled as such if included in a budget).
Participative Budgeting
Budgets are typically created from the top down or from the bottom up. Top management prepares the budget and communicates to employees what they need to do in the budget using the top-down budget method. Other employees are not involved or communicating. Employees become more involved in the budgeting process when they participate. They are included in the budget. It gives them a sense of commitment, as well as a sense of belonging to the budget.
When they feel dedicated, they will be motivated to achieve their goals. Encourage employee participation to increase motivation and reduce budget resistance, as well as to reduce potential conflict within the organization. It also improves employee initiative, performance, and morale on the job. Allowing employee participation increases the likelihood that the budget’s targets will become the employee’s goals. They contribute to the budget’s development. This type of budgeting allows top management and its employees to have a better understanding of each other’s roles and budgetary concerns.
For example, when top management hears from employees, they will know whether the targets set are reasonable and realistic, and employees will know the dilemma the management must consider when deciding between two or more options.
Performance Measurement
Because budgets are regarded as targets set by the company, actual performance must be evaluated. A simple form of evaluation is comparing actual performance to budget performance. There are numerous challenges in comparing actual performance to budget performance. The following are some of the difficulties:
- There is a chance that the budget was set incorrectly from the start, making it unattainable for the employee.
- As the period progresses, the budget may become unattainable.
- There may be performance opposes between departments. When one department performs well, another performs poorly. The evaluation results will be negative for both the department and the employee. They will suffer if actual performance falls short of expectations. They will not receive any incentives for meeting the budget. In the worst-case scenario, they may face penalties for failing to meet the budget.
Behavioral Aspects in Budgeting
The budget’s management will have an impact on its effectiveness and efficiency in achieving the organization’s goals. Aside from planning the organization’s performance for the coming year, budgeting serves another purpose. It can be used to assess managers’ actual performance in comparison to budgeted performance.
The organization is attempting to use a budget as a tool for control in this manner. When performance evaluation is linked to any type of rewards and penalty system, there is a risk that managers will alter any information and data passed to the highest levels (i.e. their superiors). Managers may underestimate revenue and overestimate required costs. It may have an impact on their job performance, which will be shown in their annual performance reviews.
All of this will have an impact on their salary increase, annual bonus, chances of promotion, and so on. The manager’s attitude toward the budget will be influenced because the actual performance of the budget will have an impact on his job evaluation, either positively or negatively.
What are the purpose of Budgeting?
Budgeting is a fundamental and necessary process in a business that enables companies to achieve multiple objectives in a single course of action. Individuals or businesses can use budgeting to determine whether they will be able to continue operating with their projected income and expenses. Control and evaluation, planning, communication, and motivation are all reasons for creating and implementing a budget.
Control and Evaluation
After a budget has been finalized, the most important thing is to provide suitable control and evaluate its performance. If performance falls short of expectations, actions can be taken right away to adjust activities. Budgeting gives a company some cost control, such as reducing many types of unnecessary expenses or assigning responsibility for these expenses. A budget also provides a framework for evaluating business units, departments, and even individual managers. Unfortunately, this goal of budgeting may cause employees to have negative thoughts about the budgeting process because their compensation and, in some cases, even their jobs are dependent on meeting certain budgeting targets.
Planning
The initial goal of budgeting is planning. It is also designed through decisions, and numerous questions must be addressed. Aside from that, budgeting allows a company to look at its revenue and expenses from the previous period and forecast where it will be in the future. It also enables the organization to add and remove products and services from its plan.
Communication and Motivation
Communication and motivation are two less obvious goals that an organization may use its budget to achieve. It is important to make correlations based on the chain of command, such as from management to supervisor level, to gain the mental satisfaction of the staff. When an employee participates in the creation of his or her department’s budget, that person is more likely to strive to meet that budget. Budgets also enable a company to motivate its employees by including them in the budgeting process.
What are the benefits of Budgets?
A company can reap the benefits of budgets in a variety of ways with careful planning and execution, including:
Communication of Corporate Goals
Departments of various important functions comprise modern corporations. It is difficult for the CEO to effectively communicate the corporate goals to each employee. However, for a corporation to achieve its peak performance, employees in various positions within the corporation must understand the corporate goals. Budget preparation bridges this communication gap constructively because it involves everyone from managers to front-line staff.
In practice, a CEO will frequently hold a budget discussion meeting at which managers from various departments will gather to discuss the company’s overall budgets and make adjustments based on next year’s goals. Budgeting becomes a communication tool in this way because it allows different departments to participate in future planning and talk about their goals for where the money and resources should be spent and allocated most appropriately. More importantly, estimating future economic conditions and the company’s ability to respond to them forces managers to integrate the external economic environment with their internal goals and objectives.
Given the increasing complexity of business in recent years, this entire “communication process” is important.
Warning of Potential Problems
Keeping budgets and constantly comparing them to the actual running of the business acts as an early warning system of potential problems, allowing management to make changes before things spiral out of control, causing the company to suffer greatly in terms of money and resources. When a flag is raised in this manner, managers in charge can revise their immediate plans, such as changing a product mix, updating an advertising campaign, or borrowing money to cover cash shortages.
Coordination of Different Segments
Having different departments within the corporation collaborate to create budgets is the key to resolving differences and disagreements between various departments when it comes to money and resources. In practice, the chief executive officer frequently requests that departments of various functions create their department budgets first, based on their needs and specific goals for the coming year. Throughout this process, each department compares the goals of each segment to the corporate objectives. The inclusion and coordination of the tasks of the various segments within a business are assumed when preparing a budget. The budgeting process shows managers how their activities are interconnected and provide them with directions to follow.
Evaluation of Actual Performance
The budget specifies specific goals for evaluating performance at each level of responsibility. Managers in charge can conduct quick and easy assessments of performance using previously established criteria. Managers can increase activities in a particular field where results exceed their exceptions as economic conditions change rapidly. Budgeting, in this situation, maximizes objectivity to a large extent and assists managers in making sound decisions with some indicators to compare. In other cases, managers may need to refer to some measurement to reorganize activities whose outcomes show a consistent pattern of ineffectiveness, so that they can make timely adjustments to minimize the loss that would otherwise occur.
Frequently Asked Questions
What Workplace Behaviors Are Required?
It is critical to have behaviors that encourage teamwork, mutual respect, and open communication to create an effective and positive work environment. Furthermore, managers must be supportive and provide employees with the resources they require to succeed. Finally, workplace policies that protect employees from bullying or harassment should be in place. Employers can create a productive and enjoyable environment for all employees by promoting these behaviors in the workplace.
Why Is Workplace Behavior Important?
Workplace behavior is important because it has a significant impact on employee performance and morale. Poor communication, micromanagement, bullying, and gossiping can all lead to decreased productivity and job satisfaction. Furthermore, poor management can foster an unhealthy work environment, negatively impacting employees’ mental health. You can create a positive and productive workplace environment by understanding how behaviors affect it.
What Factors Impact Work Quality?
Poor communication, micromanagement, and a lack of support from superiors can all contribute to poor work quality. Bullying and gossiping can also create an environment of fear and distrust, making it difficult for employees to focus on their work. ssIt is also important to note that poor management can lead to increased stress, which can negatively impact work quality.
How Does Employee Behavior Impact the Workplace?
A coworker and manager’s behavior can have a significant impact on the workplace. Employee efficiency and morale can be harmed by gossip, bullying, and poor management practices. These behaviors can also result in physical and mental health issues such as low self-esteem and post-traumatic stress disorder.
