Executive summary
Planning and organizations are inextricable. Organizations often find themselves planning in one way or another. The budget is the most common planning tool not only in the business organization but also in nonprofit making institutions and the government sector. A budget is a document that contains projections of revenues and expenditure for an organization within a specified period of time usually one fiscal or financial year (Civicus, 2007). However, budgets do not only include the financial aspects of the organization but also may include a detailed schedule of all the organizational activities intended within the budget period (Emmanuel et al., 2007). Fitting a budget in an organizational context is a difficult task. This is because the organization is a multifaceted environment and contains structure, people, and procedures. Budgets, therefore, have an influence on the organizational behavior. Whether the influence is positive or negative will depend on the budgeting culture of the organization. In order to prevent the budget from having a negative impact on behavior, the budgeting should be streamlined so that it acquires satisfaction from all the stakeholders. Modern approaches to budgeting as well as participative management will aid in achieving this objective. In addition, the budgets will provide a reliable platform for managerial decision-making.
Introduction
Budgeting forms the basis of our day-to-day life. Since resources are scarce, proper planning of such resources ranging from finances to time planning becomes inevitable. This is due to the fact that proper appropriations will have to be made so that each and every aspect of the operation is well taken into account. Failure to plan would otherwise find an individual in a mess having allocated too many resources to some aspects and completely neglecting or under considering others causing unfavorable asymmetry in life (Emmanuel et al., 2007).
Business organizations are no exception. An organization operates in a multifaceted environment, characterized by acutely limited resources and a lot of challenging goals to meet, whether it is a profit-oriented or a nonprofit-making enterprise(Lawrence, 2008). As a result, management of these organizations finds themselves planning in one way or the other without which the organization will have remote chances of success. The widest tool used for planning is the budget (Drischel, 2007). Individuals and organizations ranging from nonprofit making ventures, government to business enterprises widely use the budget to plan for their activities and allocation of the ever scarce resources. The budget, therefore, forms the basis of organizational planning in virtually all organizations (Emmanuel et al., 2008). Irrespective of budgeting being conceptualized as being a complex and involving process it has continued to present organizations with the most effective planning tool. Virtually, all organizations are involved in budgeting which degenerates into a budgeting culture that varies among organizations
An organization is an association of numerous aspects and sections making it a complex system that incorporates structures, resources, and human beings all of which relate in one or another. All the structures of the organization are mutually related to each other, with every bit of it playing a very significant role in its formation and well-being. The relationship among the human constituent and other organizational attributes are what forms the organizational behavior (Lawrence, 2008). For the purpose of this paper therefore, we look at the effects of the budgeting processes on organizational behavior and review how managers are improving the budgeting processes to enhance its effectiveness as a decision making tool.
Effects of Budgeting On Organizational Behavior
Background Information
Budget defined
A budget is a document that provides a chronological schedule or plan of all the activities that an individual or an organization plans to do within a specified period of time; the latter which must be specified in the budget (civicus, 2007). It is a complex document that provides detailed guidelines of all the activities intended to be undertaken within an organization within a specified period of time. A general budget involves both financial and non financial aspects of the organization hence it is a detailed guide for the organizational activities. According to Emmanuel et al. (2007) a budget is a document that comprises estimates and represents organizational plan in monetary form. It is a chronological representation of estimated money that will be spent to enable the intended activities of an organization within a specific duration done successfully and the estimated amount that will be generated so as to cover the costs.
In summary, a financial budget is a document representing estimates of planned expenditure and expected income for an organization within a specified period of time (Civicus, 2007). Individual in the organizations find themselves involved in the budgeting process from time to time. In many organizations, budgets are designed for a period covering up to one financial year or rather 12 months. According it Civicus (2007), budgeting is in most cases done at the beginning of the 13th month hence it is a routine. Budgeting therefore form part of the organizational culture in majority of the organizations.
According Walton (2007), some organizations use internal human resources to prepare budgets while for others experts (outsourced) do the budget for them. Being a human oriented process from the preparation to implementation, its effect on the organizational behavior can not be underestimated. According to Lawrence (2008), budgeting can have both positive and negative effects on the organizational behavior. The budgeting culture of the organization can have a positive effect on the employees’ morale and motivation to work towards realizing the goals of the budget. Usually, budgets are made for the employees and line managers to implement. As a result, the budget that an organization comes with will have a direct effect on the employees’ behavior since it will ultimately look upon the latter for successful implementation. According to Emmanuel et al (2008), the budgeting culture, and the way organizations carry out the budgeting process will determine whether it positively or negatively impacts on the organizational behavior.
Successful budgets therefore are the ones that are able to win the interests of all the employees (Walton, 2007). A Budget that is prepared from the employees’ point of view will promote positive behavior. In such a case, the employees will be motivated to support the implementation of the budget thus enabling the organization to realize the budget goals. When budgeting process favors the interest of employees will have a positive effect on the organizational behavior. Organizations often use budget as a center to promote equitable environment within the organization. The extents to which the budget is viewed to promote equity by the various organizational stakeholders will definitely shape the behavior of the latter (Drischel, 2008). According to Emmanuel et al. (2007) budget that favors all that stakeholders within and without the organization and receives applause with support from across the board will obviously yield a positive behavioral response. It is of paramount importance therefore that the budgeting process involves all parties that hold stake to the organization. In some organization, the budgeting process is used as a tool to bring the entire individual together and focus on the destiny of the organization as a unit. In such case the budget entrenches unity in the organization, creates a culture of team work and instills a feeling of belongingness among all the members of the organization. When all individuals are involved in the budgeting process, a culture of collective responsibility towards the achievement of the organizations vision and mission is created (Walton, 2007). Such organizational culture is the right recipes for organizational success.
Budgeting processes are used to successfully introduce and entrench participative management culture in the organization. According to Drischel (2008) participative management is an approach that encompasses the behavioral aspects of the organization where a free environment exist and each stakeholders view is taken into consideration when organizational decisions are being made. According to Drischel, positive participative management or rather involvement of employees and line managers in active decision making through budgeting is likely to generate positive behavior in the organization. When this aspect is incorporated in budgeting, every stakeholders view is taken in to account during the budgeting process. As a result, barriers that exist between the top management and the other organizations members are completely done away with. The organization thus becomes an open social system where every one is recognized and viewed as important. The budget in this case is used to motivate members and creates an environment where every one is involved in running the organization. A culture is established where every person feels to be part of the organization and is committed to the realization of the organizational objectives (Pfeffer, 2008).
Budgeting involve setting goals for the organization and for the employees to achieve within a specific period of time (Drischel, 2008). For this exercise to generate positive behavioral response among the employees, it is important that they are involved through out the budgeting process. Involving employees in budgeting and target setting will positively impact on their behavior through setting of realistic and attainable goals, enhanced motivation and high performance (Lawrence, 2008). Active employees’ participation and not just mere consultation will help management do away with dysfunctional repercussions (Civicus, 2008). Involvement of the employees in budgeting will have maximum positive influence of organizational behavior if the line managers and workers at all levels are made to have significant influence in preparation of the budget (Walton, 2007).
In order to impact positive behavior and motivation in the organization, lower level management and employees will have to be genuinely involved in the budgeting process as opposed to just being remotely consulted when budgets are being prepared. Although leadership and top level management plays a very important role in the budgeting process (they provide guidance and leadership throughout the process), participation of each and every stakeholder will obviously evoke a favorable environment and positive behavior in the organization (Drischel, 2008). In budgeting, setting of reasonable goals for employees, genuine involvement of employees and genuine consultations when changes are made on the budgets are key to promoting positive behavior in the organization (Lawrence, 2008). According to Lawrence Budgeting also promotes a sense of recognition, belongingness and loyalties among the human capital in the organization. Participative budgeting and organizational decision making makes stakeholder develop a feeling of owning the organization. According to Pfeffer (2008), budgeting is part of the organizational culture. Thus if an organization has good budgeting culture it will promote favorable organizational behavior.
The budgeting process can also have negative effects on the organizational behavior. This will largely depend on how a particular organization budgeting environment is, the budgeting culture of the organization and how budgeting processes within the organization are organized (Lawrence, 2008). While looking at the effect of budgeting on the organizational behavior however, we should take in to account other factors which have a direct influence on the behavior within an organizational context. As a result, the budgetary influence will only be a subset of the whole behavioral influence in the organization (Pfeffer, 2008). According to Pfeffer the budgeting process will result in negative influence on the organizational behavior if the process fails to satisfy the expectations of all stakeholders in the organization. In organizations, where budgeting is a reserve of the top management (centralized budgeting), the process may create a barrier between such decision makers and the lower level employees. This is likely to degenerate to unfavorable organizational environment and negative effect on the organizational behavior (Emmanuel et al., 2007). Budget that is not employees’ oriented is likely to lack employees support. In such a case, the employees will be reluctant to wholeheartedly commit themselves to the implementation of the budget. Their commitment to meet the budget objectives and set goals will be low. Similarly, their morale and performance will be negatively affected (Walton, 2007). In addition, budgeting will impact negatively on employees’ behavior if it sets goals that are unrealistic and beyond their ability to achieve (Lawrence, 2008).
According to Pfeffer (2008), budgeting culture could be a source of managerial dictatorship as the top management tends to use the budget as a means of imposing tasks on the subordinates. This will have negative effect on organizational behavior as the relationship between the employees and the management will be negatively affected. Budgeting can also impact negatively on the organizational behavior in circumstances where it is viewed by individuals within the organization as being rigid. According to Emmanuel et al. (2007) budgeting may be counteractive to promoting positive behavior if they are written on stone (inflexible). A budget should allow room for alteration in case of changes in the external environment. Budgets are prepared to serve a long period; within which many aspects are likely to change hence the budget should change with them. A rigid budget will cause stakeholders dissatisfaction (Lawrence PR, 2008). For instance, inflation leads to increase in cost and hence a budget should have a provision for inflation factor. Otherwise, the implementers will be faced with difficulties thus generate negative dysfunction consequences (Pfeffer, 2008).
Budgets provide manager with an affective basic tool for managerial decision making (Emmanuel et al., 2007). As a result, a lot of emphasis has been placed on streamlining the budgeting process in order to increase its reliability and accuracy for strategic decision making. To achieve the latter, organizations keep on improving their budgeting culture and modes. According to Lawrence (2008) several improvements have been made in budgeting process that equates to a paradigm shift in budgeting. Organizations have incorporated modern technology (computerization) in budgeting processes. The modern technology that consists of financial soft wares have improved the accuracy of budget forecasting and considerably minimized the manual budgetary errors (Walton, 2007).
The state of the art technology currently being used in budgeting and financial managements have enabled managers to standardize the budgetary process making it easier to prepare at the same time minimizing human error (civicus, 2007). According to Civicus, the Budgeting software can predict estimates of both cost and revenue with maximum accuracy thus increasing the reliability of the forecasts when such are used to make decisions.
In addition, the budgets have been made to be more detailed and complex so as to include each and every aspect of the organization. The details provide a wide range of information that forms a solid platform for making authentic management decision (Emmanuel et al. & civicus, 2007). In a further development, there is increased employees and departmental participation in the budgetary process. This allows for management to utilize the banks of knowledge that lies in the employees in budgeting with minimum cost. With technological development, it is possible for the employees and department to participate fully in budgeting. This allows the process to incorporate the views of every individual in the organization hence the resultant budget will provide reliable facts for accurate decision making. In addition, more frequent revisions of the budget have been initiated to ensure that decisions are made based on the best budget possible (Emmanuel et al. & Civicus 2007). According to the latter, Budgets are no longer written on stones and managers ensure that they remain as flexible as possible to allow for alteration in case other variables change within the budget period.
In conclusion, the budgeting processes in the organization can either have negative or positive effects on the organizational behavior. The nature of the effect depends on the organizational budgeting culture and how the budgeting process is organized. Human capital is involved in budgeting and hence relationship between individuals in the budgeting process will directly determine their behavioral response. Furthermore, budgets are major source of information for management decision making and hence the budgeting process should be streamlined to ensure maximum accuracy and authenticity. I would recommend that participative management be enhanced to make all stakeholders participate fully in the budgeting process. In addition, the budgets should be prepared from the implementers (line managers and employees) point of view and not from the top. Furthermore, budgets should set realistic targets achievable by employees so as to win their support and evoke positive organizational behavior. In relation to the above, more employees’ participation in budgeting should be encouraged. Finally, the budget should be as flexible as possible to incorporate changes that may occur within the budgeting period.
References
- Civicus et al., (2008), Budgeting and Forecasting.
- Drischel J, (2008), Participative Budgeting and Its Effect on Employees’ Motivation: Inc Journal of Business Finance: Vol 12(2), 10-17.
- Emmanuel et al. (2007). Modern Approach to Financial Budgeting: Inc Journal of Business Finance Vol 12(1) 11-23.
- Lawrence, PR. (2008), Effect of Budgeting on Organizational Behavior: Harvard Business School Working Paper; Boston, MA Web.
- Pfeffer J. (2008). New direction for organizational budgeting 10th edition, New York Oxford University press
- Walton, RE. (2007). Towards a Strategy for Eliciting Employees’ Commitment Based on Budgeting Processes: Inc Walton RE and PR Lawrence (eds) hr trends and challenges, 34-65 Boston MA, Harvard Business School Press (2007)