Self-Imposed Budgeting

Learning Outcomes

  • Identify the benefits of self-imposed budgeting

Why in the world would someone self-impose the work of a budget on themselves? Well, we do it personally, creating a budget so that we don’t spend more than we make. Businesses need to do the same thing. A business won’t be in business long if they continually spend more than they have in revenue, causing late or missed payments to vendors!

If a budget is imposed from higher levels of management, with little contribution from lower-level managers and staff can cause resentment. This can happen particularly when a manager is reprimanded or penalized for a budget issue they had no part in preparing.  The most effective budgets are prepared with input from the managers who are actively involved in the work. Taking ownership is an important aspect of a successful budgeting process.

Self-imposed budgets can also be called participatory budgets. These types of budgets assume that there was cooperation and participation from managers at all levels of the organization. It creates a much more harmonious work environment when everyone gets to have a say in the operation of the business. Plus, who knows better the needs of a department than the people working in it?

The advantages of a self-imposed or participatory budget can include:

  1. The creation of a team environment where everyone knows their views and judgements are valued by company management.
  2. When a front-line manager assists in the preparation of their own budget, they have working knowledge and are able to more accurately estimate expenses for their area.
  3. When you, as a manager, get to prepare your own budget, you are more motivated to set goals that are attainable, yet challenging. There is a higher level of commitment when participation is involved.
  4. If you as a manager try to attain a goal set by someone else, especially if that someone does not know the intricate workings of your department, it can be easy to just say that the goals were unattainable. When you set your own goals, you can’t make that claim!

Many companies still do not use this type of budgeting, but instead impose profit targets and encourage department managers to work within those parameters. This can cause lots of motivation issues. The takeaway here is that it is important for employees and lower level managers to have some responsibility in setting goals. It helps everyone take ownership and feel like they are part of the team!

Practice Questions