What is Participative Budgeting?

Explanation

Participative budgeting is that method of budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more wherein the top-level management shares the responsibility of the budget creation with the bottom level management because lower-level managers are more capable of giving the real picture at the field level like availability of resources, the time needed to prepare the budget, hindrances related to different aspects, etc. than the top-level managers. Here both the parties are affected by which one is preparing the budget and who will imply the budget. It involves the participation of all the employees so that a fair and reality-driven budget can be accomplished.

How does it Work?

Participative budgeting works well when there is a perfect synergy between higher and lower-level management. It is needless to say that top-level managers are very less known about the departmental costs and expenses of the Organization. On the other hand, the lower-level managers are well aware of their respective departments’ costs and deemed expenses. Therefore, delegating duties should be realistic to achieve a perfect budget preparation, which can be effective for the future course of action.

The managers should share the facts, whomever is best concerned for the department, and it would be useful if the Organization adopted the system for the checks and balances method. This system allows the filtration of data at every level. Whenever any statement of expenses/cost is shared by the lower-level management and will be passed in a hierarchy, the data should be checked by the concerned departments and further passed on. In this way, all the irrelevant costsIrrelevant CostsIrrelevant costs are those that are not useful or are not considered when a company makes a business decision. However, this does not imply that such costs will be irrelevant for an extended period and may become relevant if the business environment or priorities change.read more can be avoided. The two favorite ways to adopt Participative Budgeting are Pure Participative Budgeting and Top-Down cum Participative Budgeting.

Examples

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#1 – Portugal Participative Budget (PPB)

This kind of budgeting allows the country’s residents to make investment decisions and choose the project in which they want to invest their money. Initially, the policymakers did not allow the people to interfere in the decision-making process. Still, the public gathering and unity of people made the participation open to the market, and people started taking open voting schemes, which made PPB successful in the country.

#2 – Uganda Participative Budget (UPB)

This kind of budgeting invites budget suggestions from all the stakeholders and looks upon the various priority sectors of the country. Therefore, the budget preparation system is transparent as everyone is taken along to draft the final blueprint, and UPB has been praised globally for its budgeting technique.

Why is Participative Budgeting an Effective Management Tool?

  • The top-level management gets to know the problems/issues faced by the lower/middle-level management.The transparency in the firm increases as the higher authorities show interest in the lower management. In return, their faith in the firm gets restored, lower/middle-level management gets motivated, and organizational goals can be achieved easily.

Participative Budgeting vs. Traditional Budgeting

  • Participative budgeting is a very modern approach and is popularly implemented in organizations these days because it is a very collaborative approach, and it makes everyone around responsible and accountable for the work done so that every work can be well delegated. The concerned department can figure out costs.On the other hand, Traditional BudgetingTraditional BudgetingTraditional budgeting is one of the ways for preparing a company’s budget for a specific time period in which the previous year’s budget is used as the base for preparing the current year’s budget.read more is now a backdated system of budgeting, but still, many companies are using it. These budgeting constraints the participation, and only the top-level managers make decisions regarding the future costs/expenses and investments without looking into the reality check, which may sometimes lead to a faulty over or under-budget preparation.

Advantages

  • Participative budgeting allows the useful exchange of information from lower-level management to top-level management. There can be an easy flow of information and timely reports presented by the concerned department.As the concerned department delivers the information, there is very little chance of over/under budget preparation as the correct data have been shared.The subordinate level is also involved in the decision-making process, and everyone gets an open forum to give their input for the betterment of the budget. This leads to boosting the morale of the employees and, in return, achieving Organizational goals.The confidence in both superior and lower level management gets reinstated because both the parties have revalidated their work and shown interest in them.Through this participation, the efficient allocation of resources can be done; there would be minimum wastage and a correct, realistic budget.

Disadvantages

The only negative remark about this budgeting would be that it is time-consuming because every management level is involved in this. Hence, the time is taken to deliver the cost statement, and the expense chart can hinder the budget in a short period.

Conclusion

Participative budgeting is a new-age budgeting technique. It allows participation so that whosoever has a stake in the Company can get involved and brainstorm their ideas so that the budget is more realistic and achievable in real life.

This has been a guide to What is Participative Budgeting & its Definition. Here we discuss how it works and examples, advantages, and disadvantages. You can learn more about budgeting from the following articles –

  • Strategic BudgetingActivity Based BudgetingCareers in BudgetingRisk Budgeting