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Behavioral Aspects of Budgeting

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Behavioral Aspects of Budgeting

The technical process for setting a budget emphasizes the need for involvement at all stages of the process. In an ideal world that would produce the best solution. However, 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 behavioral aspects in order to maximize the good points and minimize the problems. The behavioral aspects may conveniently be summarized as relating to motivation, participation, feedback, group effects, budget slack and the politics of the organisation. In each of these areas there has been research into the effects, sometimes with inconclusive results.

Motivation
The literature on goal setting suggests that it is important that the budget targets are accepted by the individuals involved. In that, 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 recognized in some form.

Participation
A full understanding of the behavioral aspects of the budgetary process requires an understanding of psychology. Research into behavioral 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 fulfillment. 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 fulfillment through successful implementation of the budget plans.

Feedback
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 negative feedback may have to be presented in a constructive manner if it is to result in action.

Group effects
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.

Budget slack
Where budgets are used to measure performance, the managers who set those budgets may be tempted to build in some element of spare resources that allows a lapse from actual high levels of performance without deviating from budget targets.

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