Participative Budgeting

What is Participative Budgeting?

Participative budgeting is a method of budgeting wherein both the people who implement the budget and who will be affected by the budget are involved in the process of budget creation.

In this type of budgeting, the Top-level managers share the responsibility of making budgetary decisions with the bottom-level managers.  As a result, it gives them a sense of a better stake in the firm.

Budgeting is an important tool for controlling.  It is a financial statement showing estimates of incomes & expenses for a particular unit. The unit can be a project, department, organization, or country as a whole. The budget is prepared for a certain period of time in the future. It can be a day, a month,  a quarter, or a year.  The budget acts as a blueprint for the management plans. There are various methods of budgeting use as per the organization’s needs.

Two Ways to Adopt Participative Budgeting

  1. A pure participative budget is where there is total decentralization of power to make budgets. They have the freedom to make decisions. The management will not come in the way. Therefore, sometimes there can be no consideration for top-level strategies. Practically, it is not relevant.
  2. In a second way, we may call it a top-down cum participative budget, the management provides subordinates with guidelines or the objectives of the company. They tell them how their own goals should be subordinated to organizational goals.

Further information will be given by keeping in mind the second approach because it is more practical. For such a budget to be effective and efficient, the top management needs to have an open-minded approach. That is to say; it should support new ideas & suggestions by stakeholders. In other words, they should not criticize the budget directly. However, they can give advice or suggest the required changes.

In Top-Down Budgeting, managers give resources to the different departments. However, participative budgeting follows the bottom-up approach. The departments tell their needs to the management by deciding their own standards. In short, it is to permit the people who actually “Do” the work to upgrade the planning procedure.

Participatory Budgeting Examples

Portugal Participatory Budget (PPB)

For example, the Portugal participatory budget (PPB ) allows residents to present investment projects. They choose the projects that are to be funded and followed. They use the transparent and open voting scheme for this. Traditionally, the policymakers did not hear the country residents. Participative gatherings gave them an open way to directly engage in the policy-making process.

Uganda Participatory Budget (UPB)

For instance, the finance director for budget, Kenneth Mugambe of the Uganda government ( East African country ), has been globally praised for having a great participative furthermore transparent budgeting process. On  October 19, 2018, the secretary to the treasury Keith Muhakanizi invited some key ministries. They analyzed the main priorities for their sectors.

The Government is considering budget suggestions from various stakeholders. It prepares to form the final draft of the budget framework paper for the 2019/2020 financial year.

Participatory Budget Process

Management Outline

Management provides an outline of what should the budget targets be.

Design the Process

A group of people who represent the mass design the process of budgeting.

Brainstorm the Ideas

Meetings, gatherings, and online communication tools help stakeholders to exchange ideas.

Develop Proposals

The volunteers collect ideas from various groups of people. Also, they make the proposals in a guided format.

Caste a Vote

The Stakeholders vote to select the best ideas.

Submitted to Management

The preliminary budget works its way up to the Management.

Management Review

The budget is reviewed & modified if required: The intermediaries such as middle-level officials do this task if required. Once it reaches the top level, there are three possibilities.

Approval

The management integrates submitted budgets into the master budget.

Modified Approval

This happens when submitted budgets do not seem in line with the organizational goals. Consequently, the management sends it back to the makers for the second iteration with remarks.

Disapproval

In this case, the management disapproves budget because it seems to be unrealistic or inappropriate. Management has to give valid reasons for doing it.

Participative Budgeting

Advantages of Participative Budgeting

Such budgets are more achievable. The bottom-level employees are more closely attached to the day-to-day operations, so they have an in-depth idea about the working needs of their respective departments.

  1. It is better for motivation because it boosts the morale of employees.
  2. Participation puts the responsibility on the employees. The ones who are responsible for a particular task, later on, become answerable for the same. As a result, it increases the accuracy of the budget and makes employees more accountable.
  3. It increases employee’s job satisfaction. Because they feel that the management gave them an important task.
  4. Employees put more effort into achieving the standards they have set for themselves. Therefore, it increases their productivity.
  5. It saves the time of the strategic managers at the top level. Further, they can focus on key issues more.
  6. It increases creativity among stakeholders and consequently prepares future managers.
  7. This budget is more realistic. The reason is that it is prepared by the people who have sound technical knowledge of the relative departments.

Disadvantages of Participative Budgeting

  1. It is time-consuming for lower management.
  2. Participative budgeting involves a large number of people. Hence, resulting in high labor costs.
  3. Focus on individual department growth is more.
  4. Conservative Budget: Easily achieved targets decrease the potential performance levels of the employees. On the contrary, too tight budgets lay tough targets. It may demotivate employees. It Increases stress levels & pressure. Managers have to assume that the employees acted in good faith. For instance, bad faith is over-allocation or under-allocation of resources.
  5. Budgetary Slack: Padding the budget is another name for budgetary slack. It exists when a manager deliberately underestimates income & profits or overestimates expenses and losses. The budget creators keep an extra expense while preparing the budget. There are more chances of this to happen when the performance appraisal is based on the performance against budget. The issue of budgetary slack can be resolved if there is a review committee to cross-check the budgets prepared by key employees. Such employees know when the budgets are cushioned, further who are involved in the modification process.
  6. “Pseudo participation”: This is an arrangement where top management assumes total control of the budgeting process. As a result, asking for only superficial participation from lower-level managers. Top managers simply obtain formal approval of the budget from subordinate managers, not seeking real input.

When to go for Participative Budgeting?

  1. When the employees are old, experienced, and skilled in their tasks, participative budgeting gives excellent results.
  2. A participative budget can be really helpful in a diversified business, where there are various needs of different departments.
  3. When the top managers have other important tasks to give attention to, they implement this style.
  4. In the case of a new manager who is new to the business. Due to less experience in the ground-level scenario, he has to take suggestions from the bottom-level people.


Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

1 thought on “Participative Budgeting”

Leave a Comment