What is Participative Budgeting?
Participative Budgeting is the kind of budgeting process which involve the lower level management in the process of decision-making and budget preparation along with taking all the responsibilities for the project undertaken so that the employees can also be associated with the budgeting process and they can get a sense of ownership and a better stake in the firm to openly share their ideas and participation into the budget creation.
Participative Budgeting is that method of budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time. wherein the top-level management shares the responsibility of the budget creation with the bottom level management as because lower-level managers are more capable of giving the real picture at the field level like availability of resources, the time needed to prepare the budget, hindrances related to different aspects, etc. than the top-level managers. Here both the parties are affected by which one who is preparing the budget and the one who will imply the budget. It involves the participation of all the employees so that a fair and reality-driven budget can be accomplished.
How does it Work?
Participative Budgeting works well when there is a perfect synergy between higher and lower-level management. It is needless to say that top-level managers are very less known about the departmental costs and expenses of the Organization. It is the lower-level managers who are well aware of the costs and deemed expenses of their respective departments. The delegation of duties should be realistic to achieve a perfect budget preparation, which can be effective for the future course of action.
The facts should be shared by the managers whomsoever is best concerned for the department, and it would be useful if the Organization adopts the system for the checks and balances method. This system allows the filtration of data at every level. Whenever any statement of expenses/cost is shared by the lower-level management and will be passed in a hierarchy, the data should be checked by the concerned departments and further passed on. In this way, all the irrelevant costsIrrelevant CostsIrrelevant costs are those that are not useful or are not considered when a company makes a business decision. However, this does not imply that such costs will be irrelevant for an extended period and may become relevant if the business environment or priorities change. can be avoided. The two famous ways to adopt Participative Budgeting are Pure Participative Budgeting and Top-Down cum Participative Budgeting.
#1 – Portugal Participative Budget (PPB)
This kind of Budgeting allows the residents of the country to make investment decisions and choose the project in which they want to invest their money. Initially, the policymakers did not allow the people to interfere in the decision-making process, but the public gathering and unity of people made the participation open to the market, and people started taking open voting schemes, and this transparency made PPB successful in the country.
#2 – Uganda Participative Budget (UPB)
This kind of Budgeting invites budget suggestions from all the stakeholders and looking upon the various priority sectors of the country. The system of the budget preparation is really very transparent as everyone is taken along to draft the final blueprint, and UPB has been praised for its budgeting technique globally.
Why is Participative Budgeting an Effective Management Tool?
- The top-level management gets to know the problems/issues faced by the lower/middle-level management.
- The transparency in the firm increases as the higher authorities show interest in the lower management, and in return, their faith in the firm gets restored, and lower/middle-level management gets motivated, and hence organizational goals can be achieved easily.
Participative Budgeting vs. Traditional Budgeting
- Participative Budgeting can be said as a very modern way approach and popularly implemented in the Organizations these days as because it is a very collaborative approach and it makes everyone around responsible and accountable for the work done so that every work can be well delegated and costs can be figured out from the concerned department.
- Traditional BudgetingTraditional BudgetingTraditional budgeting is one of the ways for preparing a company's budget for a specific time period in which the previous year's budget is used as the base for preparing the current year's budget., on the other hand, is now a backdated system of Budgeting, but still, many companies are using it. These budgeting constraints the participation, and only the top-level managers make decisions regarding the future costs/expenses and investments without looking into the reality check, which may sometimes lead to a faulty over or under budget preparation.
- Participative Budgeting allows the useful exchange of information from lower-level management to top-level management. There can be an easy flow of information and timely reports presented by the concerned department itself.
- As the concerned department is delivering the information, so there is very little chance of over/under budget preparation as the correct data have been shared.
- The subordinate level is also involved in the decision-making process, and everyone gets an open forum to give their inputs for the betterment of the budget. This leads to boosting the morale of the employees and, in return, achieving Organizational goals.
- The confidence in both superior and lower lever management gets reinstated as because both the parties have revalidated their work and shown interest in them.
- Through this participation, the efficient allocation of resources can be done, and there would be minimum wastage, and correct, realistic budget can be formed.
The only negative remark for this budgeting would be the thing that it is time-consuming because every level of management is involved in this, and hence the time is taken to deliver the cost statement, and expense chart can be a hindrance for making the budget is the short span of time.
Participative Budgeting is a new age budgeting technique, and it allows participation in every way so that whosoever has a stake in the Company can get involved and brainstorm their ideas so that the budget is more realistic and achievable in real life.
This has been a guide to What is Participative Budgeting & its Definition. Here we discuss how it works along with examples, advantages, and disadvantages. You can learn more about budgeting from the following articles –