Managers Participation In Budget Setting: Downside Effects & Mitigating Strategies

Conflict of Interest

Managers may prioritize their department’s interests over the organization’s overall goals. Oftentimes, managers may want to maximize the resources of their departments to avoid shortages and may not fully understand or be aware of the company overall financial constraints. This can cause resource hoarding, inter-departmental conflict, and misalignment with the strategic objectives. Due to conflict of interest, some departments may be overfunded while others may be underfunded or scrambling for funds.

Excessive Time and Effort

Budgeting activities can be cumbersome and time-consuming, shifting attention of people from the principal operational tasks. Too much of managerial time is expended on budget meetings, resulting in low productivity. So, when too many managers are involved in the budgeting process, organizational politics, as well as long debates and disagreements, can slow down decision making, giving rise to delay in budget approvals.

Resistance to Change

Managers that are already accustomed to traditional budgeting methods may resist innovative or strategic budgeting approaches such as zero-based budgeting (ZBB) or activity-based budgeting (ABB) during participation. This can limit the ability of the company to adapt to changing circumstances or implement improvements. Resistance to change arises due to lack of understanding of the new budgeting techniques, including lack of trust, fear of uncertainty, perceived loss of control over budgets. This has the potential to stifle innovation, create inefficiencies, and can lead to conflict between senior management and operational managers.

Budgetary Slack Creation

Managers may deliberately understate or overstate budget estimates of receipts and payments to make budget targets easier to achieve. This can impair organizational performance, leading to suboptimal allocation of resources, including money, time, materials, and labour. Inefficient resource allocation can adversely impact the quality of jobs, products, or service, delay in project completion, leading to increased costs. Managers are incentivized to create budget slack, especially where performance evaluation is based on budget variances, or where bonuses are attached to budget performance.

The creation of budgetary slack can be avoided or minimised by ensuring that incentives or any performance measure is consistent with the organizational goals. In addition, companies can implement a transparent budgeting process and ensure budget estimates are realistic. Actual spend and budget estimates, including forecast, should be closely monitored and any resulting variance should be promptly addressed.

Lack of Competence in Budget Setting

Financial, analytical, and strategic skills are essential to making a good budget. If managers lack the requisite skills, knowledge, or experience to contribute effectively to the budgeting process, they may set unrealistic or suboptimal budget targets. This can lead to overspending, financial instability, inefficiencies, poor financial control, or missed opportunities. Some managers may have operational knowledge of the business but lack the financial expertise to fully understand the cost structures, cash flow projections, and or risk factors.

Managers’ lack of competence may affect budget performance, resulting in frequent budget revision due to poor planning, misallocation of resources, and setting unrealistic budget targets.

Opportunistic Behaviour

This involves the action taken by some individuals or groups, when setting budget, to maximize their own self-interest at the expense of the organizational goal. This happens when managers manipulate the budget estimates to secure personal benefits or incentives, especially those tied to budget performance. This undermines organizational goals and reduces overall accountability. Managers can deliberately overestimate expenses or underestimate revenues to create a buffer for future spending or to make it easier to achieve budget targets.

To minimize or avoid opportunistic tendency, company can develop mitigating strategies, by providing strong leadership, ensuring transparency in budget process, set clear budget performance metrics, and ensuring goal congruence among departmental managers.

Unrealistic Expectations

Setting unrealistic budget expectations can lead to disappointment, financial strain, and even failure to achieve goals. If managers set aggressive  revenue or cost-cutting targets that are unattainable, it may lead to overly optimistic budgets. This can then lead to missed targets, create undue pressure for employees, erode credibility and morale, and frequently adjusting budget estimates to align with the prevailing market conditions.