Techniques of budget preparation

Techniques of budget preparation

There are mainly two types of budget preparation techniques used

1. Participation Budget
2. Imposed Budget

1. Participatory Budget

Under this technique the lower management effectively participates in the budget preparation process and mainly their recommendation is incorporated in the budget. The participatory technique of budget preparation is suitable in relatively medium scale organization.

Advantages of participatory Budget

1. Commitment

The manager will shoe more commitment to achieve the target set by them. The participation will act as motivating factor for the junior management and it will have a positive impact on the performance of the junior management.

2. Improve communication

This method will improve bottom to up communication. This will help top management to understand the problem at lower level. This technique will also identify the potential of junior management and junior management talent may be utilized effectively in future.

3. Confidence

This method will improve the confidence of the lower management and give him a motivation to work harder for achieving the organization objective. This technique will also have positive psychological effects on the junior management.

4. Accuracy

The lower manager can project the figures more accurately because they are more related to operations and they have more detail knowledge of operations. They will prepare a budget after considering all the relevant facts and figures. Therefore the budget would be more appropriate.

Disadvantages of participative budget Technique

1. Overall Direction is lost

The lower tier management has little idea about overall direction of the organization. The focus only on operational level issues in budgets preparation. For example the junior management may be interested in more efficient methods and dot care about the cost of acquiring those methods while on other hand top management is pursuing a cost saving policy.

2. Conflict

The rejection of budgets by the senior management may create resentment and conflict in the organization. The rejection may be considered as de motivating factor for the junior management and it will adversely affect the performance.

2. Imposed Budget

The budgets are prepared by the senior Management and junior management is informed to achieve the targets. There is no effective involvement of junior management in decision making process.

Advantages

1. Time Saved

Because the decision making is in few hands therefore immediate decision can be made.

2. Overall Direction

This technique helpful to achieve the overall direction of the organization as senior management set the overall direction and they prepare the budget keeping in mind the strategic objective.

Disadvantages

1. Challenging Targets

The target set may be too challenging to achieve. This situation may create resentment in junior management. This situation will also create un due pressure on junior management to achieve un realistic target set by budget.

2. Demoralization

The junior management will have low moral over due to non consultation. The junior management will feel powerless and this will adversely affect the performance.

3. Poor communication

This technique there will be very little communication process between top management and the top management would not be able to incorporate the operational aspect in the budget. There will be over focused on strategic objective and importance of operation in achieving the overall objective is ignored.