Like other management control methods, budgets have the potential to help management reach their goal. How useful budgets are, in practice depends on how they are conceived and implemented. It is also important that the, process is clear and acceptable to the people whose activities it controls.
Potentially Functional Aspects of Budgets
Some of the potentially functional aspects of budgets as follows :
- Motivation. Budgets can have a positive impact on motivation and morale. Most individuals in an organization desire to achieve things and recognition by groups to which they belong. Budgets can activate these motivational factors by creating common goals and the feeling that everyone is working towards them.
- Coordination. Budgets make it possible to coordinate the work of the organization. A comprehensive budget is a blueprint of an organization’s plans for the future and the top management can, therefore, use it to together the activities of every unit.
- A warning device. Budgets can be used as a warning device for making corrective action. As a control mechanism it alerts the appropriate organization members when a standard has been violated. For example, if actual cost exceeds the budget significantly, then managers know that some corrective action should be taken.
- Learning source. The budget system helps people learn from experience. As the budget period is over, managers can analyze the actual and identify variances and their causes and take necessary corrective actions in the next budget period.
- Rational resource allocation. Budgets can improve resource allocation. In the budgeting process all requests for resources should be clarified and logically supported. The need to quantify their plans compels the managers to examine the available resources more carefully and allocate them rationally. Further more, it encourages the, department or section head to closely watch the utilization of resources and thereby eliminate the waste and pilferage.
- Communication. Budgets improve communication. To put the plan into action, effective communication is essential. In the process of developing the budget with those responsible for its implementation, managers can communicate their own objectives and plans more effectively.
- Help lower-level managers. Budgets help lower-level managers see where they fit in the organization. The budget gives these managers goals around which to organize their activities. In addition, it indicates what organizational resources will be made available to them.
- Means of evaluation. Budgets provide measures of evaluation. Performance can more easily be measured against previously established budgetary standards.
- Show the direction. Budgets let new people see where the organization is going. This aspect of budgets can enhance the morale of junior managers because it helps them become acclimated to the organization goals and priorities.
Potentially Dysfunctional Aspects of Budgets
Sometimes the budget system may create unintended and unanticipated results. These dysfunctional aspects may, interfere with the attainment of organization’s goals. Some of the dysfunctional aspects of budget are as follows:
- Differing perceptions of budgets by organization members. Supervisors may view budgets as unfair because they are used to evaluate results without investigating the reasons for a success or failure. Budgets would be, considered fair if reasons for budget deviation and mitigating circumstances were taken into account. Sometimes, performance reports are difficult to understand and therefore they cannot respond to the criticisms the reports may contain.
- Mechanical considerations. Certain potentially negative effects of budgets can he traced, to the mechanics of budgets and the budgeting process. For instance, there are expenses involved in installing and operating a budget system. If these costs outweigh the benefits derived from the system, the organization’s goals are riot being effectively achieved.
- Communication and budgets. The actual performance of employees is being appraised only at the end of the budget period and the deviations may not be communicated to them until the budget period is over. Hence, the employees do not get the opportunity to learn from their mistakes and to initiate corrective action then and there. As a result, budgets may be regarded as a rating tool or as a device for catching mistakes.
- The motivational impact of budgets. Budgets are believed to be a good motivational device. Managers often try to motivate employees to high performance by promising more rewards or applying verbal pressure. The budgeting process also increases the pressure on employees. Employees, who may begin to resist and resent them, generally feel these pressures for increased efficiency. They may even find ways to minimize their growing workload and protect themselves, from censure. Inter-departmental strife may increase, with every supervisor trying to blame budget deviations on some one else. Scapegoating may increase, as line people blame staff members for budget deviations or production department members blame sales people for a poor sales record.
- Goal difficultly and goal achievement. Budget goals are normally perceived as high and budgetary allocations as highly inadequate. One generally accepted line for effective budgeting is to establish goals that are difficult but attainable. Such goals might inspire the employees to improve their performance.