Critically Discuss The Various Problems And Proposed Solutions Associated With The Development And Application Of Budgets Within Organisations
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A budget is a detailed plan which sets out, in money terms, the plans for income and expenditure in respect of a future period of time. It is prepared in advance of that time period and is based on the agreed objectives for that period of time, together with the strategy planned to achieve those objectives.

The technical process of setting a budget emphasises the need for involvement at all stages of the process. In an ideal world that would produce the best solution, but the world is not ideal and not everyone can be allowed to do exactly as he or she would wish at the first instance. So potential conflicts arise and those involved in the budgetary process need to be aware of the behavioural aspects in order to maximise the good points and minimise the problems. The behavioural aspects may conveniently be summarised as relating to motivation, partition, feedback, group effects, budget slack and the politics of the organisation.

It is suggested that budgets should help in performance evaluation because they provide formal targets against which to measure performance. If the targets are set with care, there should be motivation for the individual to achieve those targets. The question then arises as to what type of targets should be set. Relatively easy targets will be achieved by all, but they will know the targets were easy and will not feel fully motivated by that level of evaluation of performance. If the targets are moderately difficult there will be a stronger motivation for some individuals to achieve those targets, with a sense of personal satisfaction in doing so. Others will fail and will become despondent. They may decide not to put any further effort in because the targets are too difficult.

If top managers make it clear they want subordinates to achieve budgets at all costs, there may be some undesirable consequences, such as the following:

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All sorts of �game-playing’, to leave enough slack to give a better chance of achieving budgets.
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Reluctance to �over-perform’ this year, however good the conditions, for fear of a much tougher budget target next year.
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A feeling of resentment if people are held accountable for things largely outside their control, such as expense variances stemming from changes in output, in the absence of a flexible budget.

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�Short-termism’; for example, reducing discretionary expenditures too much for long-term health in order to improve the current year’s bottom line.

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Focusing only on financial numbers, even though intangibles, such as staff morale, matter too.
The literature on goal setting suggests that it is important that the budget targets are accepted by the individuals involved. In that context, budget targets should be at the �difficult’ end of the range, by way of creating a challenge, but should be seen as being attainable. If budget targets are unrealistic there may be a negative reaction where the individual does not even attempt a reasonable level of performance. Communication between levels in the organisation is also important, so that the individual knows that achievement of targets is reported at a higher level and recognised in some form. Within all these consideration of positive factors of motivation, there may be personality problems which invalidate approaches which would otherwise be successful.

A full understanding of the behavioural aspects of the budgetary process requires an understanding of psychology. Research into behavioural aspects of budgeting has therefore included psychological studies of the individuals participating in the budgetary process. It is argued that individuals have needs for a sense of belonging, a sense of self-esteem and a sense of personal fulfilment. These needs do not necessarily have to be provided through remunerated employment or self-employment. They could be achieved through charitable work or dedication to a particular way of life. To the extent that people do spend a considerable part of their lives in paid employment, these needs may most readily be satisfied by that work.

Participation is one way of meeting those needs, and therefore participation in the budgetary process is a significant aspect of meeting human needs. Those individuals who participate in the budgetary process will gain a sense of ownership of the process, or belonging to the process. They will experience an increase in self-esteem through having a defined role in the process and will achieve a sense of personal fulfilment through successful implementation of the budget plans.

Feedback on actual performance, as compared with the budget, is an essential part of the control process which follows from the setting of the budgets. Feedback is only effective if it is provided in a short time frame. Good news is preferred to bad news; individuals may thus concentrate on the positive feedback and hope that the negative feedback will disappear. The information on the negative feedback may have to be presented in a constructive manner if it is to result in action. For example, �Sales this month were 10 per cent down’ may be seen as a negative aspect about which little can be done after the event, but a statement such as �Next month’s sales effort must take account of the cause of last month’s 10 per cent decrease’ requires positive action in identifying and seeking to remedy the cause of the decrease.

Feedback must relate closely to the responsibility level of the individual if it is to encourage remedial action. There may be a personality problem here, as elsewhere, if individuals see the feedback as criticism of their work. That adverse reaction to criticism could be a function of age or insecurity. Negative aspects of feedback may need a different form of communication from that needed for positive aspects.

The impact of the budgetary process on a group of persons may be quite different from the impact on the individual within the group. Participation by individuals will lead to greater group interaction, which will be a good thing if the individuals value their membership of the group and see the goals of the group as being collective targets that they all regard as desirable. Such a group will show cohesion, which will be increased by participation in the budget process.

Where a group does not have such cohesion, or the majority pressure is towards lower targets, the performance of the individual may be reduced by participation within the group. It may

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Formal Targets And Application Of Budgets. (July 11, 2021). Retrieved from https://www.freeessays.education/formal-targets-and-application-of-budgets-essay/