budget development process is often viewed as either a
top-down or bottom-to-top process. A variation on these
approaches is to make the process an iterative one, either
during its initial developmental stages or through periodic
re-forecasts of the original
budget. In each case, executive
management's choice of a strategy
will have a far reaching impact.
The budget process
how the organization's decision-making process is perceived
by lower level managers, how information is disbursed, the
quality of the organization's information and middle
management's level of involvement in reaching the
organization's objectives. These are important
considerations when deciding upon a budget process that fits
with your organization's structure.
Let's be realistic. Many
large scale organizations elect to develop their budgets
based upon the efforts of a relatively small group of
strategic planners. The reasons for limiting the number of
individuals involved vary, but managers often cite cost and
time as two of the primary constraints. Could it be that the
actual costs are much higher as a result of limiting the
planning effort to only a few individuals ?
If the organization's
planners do not have detailed knowledge of the items that
they are budgeting, then they must perform the necessary
research themselves or settle for information whose quality
may be less than optimal. Both scenarios can prove to be
increasingly costly. If your strategic planning group is
spending a great deal of time asking questions to mid-level
managers, then it may be better to get middle management
involved at the beginning of the budget process rather than
later. Take some time to look at the cost
of your organization's information.
Some organizations choose
to implement their budget in a top-down approach in order to
impose performance goals on lower management. This strategy
is common among large, bureaucratic organizations and
organizations whose management style is autocratic. Is it
appropriate for today's lean, thinly-layered organizational
Today's organizations place a
heavy emphasis on workgroups, information dissemination,
participatory-style management and responsible decision
making among their low-level managers. These organizations
are trying to improve information quality and the
decision-making process by promoting the use of information
throughout the organization. A top-down approach may
actually stifle these efforts and possibly even alienate
low-level managers from 'buying in' to the final budget.
Frontline managers, who are
involved in the day-to-day operations of their departments
or divisions, are
best resource for realistic budget
information. These managers' experience and knowledge can
provide realistic information quickly and at a much lower
cost than what usually results from the
finance department's time-consuming research.
Executive management is also more likely to be able to hold
these managers accountable for variances from the final
budget than if the budgets were
developed without these managers'
Somewhere in the Middle
Reaching down to the
lowest levels of departmental managers for budget
information is certainly not practical for very large
organizations. Without a highly-organized and well-designed
mechanism for managing detailed information, a large
organization can be overwhelmed quickly by the sheer volume
of the information that it must consider in the budget
A more practical strategy
is to develop a tiered approach, possibly by establishing
that the lowest level of input will occur at the divisional
or regional level. Even at one of these higher levels, it is
important that managers are able to easily exchange budget
information with the organization's lower level managers.
The greater use of budget information throughout the
organization will improve its quality and promote
responsibility for the organization's performance.
Staying in the Loop
budget processes rely greatly upon effective communications.
Strong communication can contribute to improved information
quality, lower costs, and an
enhanced decision-making process.
Does your organization
experience breakdowns in the process of obtaining and
relying upon budgeted information ? If so, then it may
benefit from making an effort to better structure its
communications during and after the budget process.
An effort to improve
communications could be as simple as documenting the budget
process timelines, managerial guidelines,
and budget assumptions. Efforts like these can help keep
everyone on the same page. The planning department will
benefit by eliminating the number of areas where potential
misunderstandings can occur and disrupt the process. Also,
by developing official guidelines and assumptions, the
planning department builds resources that can be used in
both their administrative and research tasks.
Good documentation also
serves the mid-level managers who are responsible for
explaining performance variances to senior management.
Effective documentation can reduce the time that these
managers spend meeting and explaining their variances to
senior managers. Instead, these managers can spend more of
their time managing their operations and improving their
All This Really Necessary?
Simply having a good idea
of where an organization is headed will never be good
enough. Executive management should have a detailed plan by
which they can measure their performance and adjust the
organization's direction when it becomes necessary. Without
a plan, it becomes very difficult to analyze and understand
the factors that are affecting performance. An integrated
budget process can give management the information and
mechanism they need to align the entire organization and
focus it on its goals.