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Budgets and Budgeting

payable, taxes payable, long-term liabilities, and equity does not consider the goals of the employees often fails.
accounts are recorded to assure that the two sides of the The finalization of the budget requires acceptance by the
equation balance; that is, assets = liabilities + equity. affected departments and approval and sign-off by top
management. If circumstances change due to factors such
as change in product mix, costs, selling prices, negotiated
THE BUDGETING PROCESS
labor rates, or engineering specifications, there may be a
Budgeting is, or should be, the result of teamwork. A top- need for budget revision.
down budget is a budget that is essentially imposed on the
organization by top management. This may be an efficient
way to prepare a budget but because of lack of participa- OTHER BUDGETING TECHNIQUES
tion by the employees, such budgets often bring with An incremental budget is a budget that is prepared based
them a level of employee resentment and resistance that on prior-year figures, allowing for factors such as inflation.
leads to problems in implementation of what is proposed. Although such an approach is used by some government
Employees do not feel a sense of ownership in a budget in entities, most people frown upon such a practice because
which they have not been participants. A participatory, or it is contrary to the whole notion of a budget, which is
bottom-up budget, on the other hand, starts with the supposed to be a calculated and wise anticipation of the
employees in each department determining their needs future course of events with due consideration of all
and requirements in order to achieve the company goals. potential factors. A zero-based budget, on the other hand,
Because employees feel a sense of ownership in such budg- is a budget that does not take anything for granted. It
ets, they attempt to meet or exceed those expectations. A starts from point zero for each budgetary element and
balance between the two extremes can often be achieved. department each year and attempts to justify every dollar
Top management should be involved in setting the tone of expenditure. Although some industries had imple-
and providing the guidelines and parameters within which mented such a method earlier, it was first used in prepar-
the budget will be set. Incentives should be put into place ing the state of Georgia’s budget in the early 1970s and
so that those who achieve or exceed the budgetary expec- was later used to prepare the federal budget in late 1970s
tations will receive suitable rewards for their efforts. during President Carter’s administration. However, it was
soon abandoned because the paperwork generated and
There must also be guidelines to discourage budget-
timeframe necessary to do this task proved to be too cum-
ary slacks and abuses whereby the requested budget
bersome for the federal government. Kaisen budgeting, a
amounts are in excess of anticipated needs in order for the
term borrowed from Japanese, is a budgeting approach
department to look better and reap some rewards. A very
that explicitly demands continuous improvement and
tight budget, on the other hand, may prove discouraging
and unattainable. No matter what approach is taken, it is incorporates all the expected improvements in the budget
important to realize that the budget should serve as a map that results from such a process. Activity-based budgeting
and guideline in anticipating the future. Top management is a technique that focuses on costs of activities or cost
must take it seriously in order for the employees to take it drivers necessary for production and sales. Such an
seriously as well. At the same time, the budget should not approach facilitates continuous improvement. An easily
be seen as a strict and unchangeable document. If oppor- attainable budget often fails to bring out the employees’
tunities arise, circumstances change, and unforeseen situ- best efforts. A budget target that is very difficult to achieve
ations develop, there is no reason why the budget should can discourage managers from even trying to attain it. So
be an impediment to exploring and taking advantage of budget targets should be challenging and at the same time
such opportunities. Many companies form a budget com- attainable.
mittee to oversee the preparation and execution of the
budget. The budget can also be seen as a tool that helps in MONITORING THE BUDGET
bridging the communications gap between various parts A flexible budget modifies the budget to the actual level of
of the organization. Sales, production, purchasing, receiv- performance. Obviously, if the original budget is prepared
ing, industrial relations, sales promotion, warehousing, for say, 1,000 units of a product, but 2,000 units are pro-
computing, treasury, quality control, and all other depart- duced, comparing the original budget to the actual vol-
ments see their roles and understand the roles of the other ume of output does not provide meaningful information.
players in achieving the goals of the organization. Such Accordingly, the budgeted costs per unit for all variable
participation also necessitates budget negotiation among costs can be used and multiplied by the actual volume of
the various parties to the budgetary process until the output to arrive at the flexible change proportionately to
budget is finalized. Goal congruence occurs when the the level of output for the former and to the level of sales
goals of the employees and the goals of the company for the latter cost. Fixed costs, such as rent, however, do
become intertwined and meshed together. A budget that not normally change with the level of production or sales.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 59