Budgets - An Overview

Budgeting involves setting out a plan of action which serves as a yardstick to measure the future performance of a business. Secondly it also helps motivate the staff by setting some targets for them, so they strive harder and the organization benefits from it. The outcome of the entire budgeting exercise depends on how it is implemented within the organization.

A Top-down approach is one where the top-management of the company create the budget and impose it on the lower managers and staff. Such a budget might not have the desired effect. On the contrary a Participative Budget approach involves the managers of all different functions to actively participate and provide their input into the budgeting process. Because of their participation they naturally own the budget and are motivated to achieve the targets set.

However, some times the managers involved in the budget preparation process intentionally set mediocre targets. This is called Padding the Budget. The managers in such a situation set only what can be achieved with an average performance.

Budgets should be ideally challenging but still realistic so that the organization can grow larger and at the same time the managers remain motivated to work towards the organizational objectives.