It seems to be a given that every business must conduct a corporate budgeting process of some sort, but corporate budgets are at best a mixed blessing. Here are a few of the pros and cons.
Reasons that the Corporate Budgeting Process Is Good
- Increase participation in company financial decisions. Each department gets a say in the corporate budgeting process. This might make the company more responsive to individual departments’ needs, and it might make department managers feel better about their role in the organization.
- Create an objective criteria by which departments can be judged. At the end of the year, you can compare actual hard financial numbers to the budgets and easily determine whether departments did what they were supposed to do (at least in terms of spending), according to the corporate budgeting process.
- Incentivize employees. Having specific financial goals in budget-form helps employees understand what is expected of them. Employees will feel motivated to achieve corporate budget goals by the very existence of the budget; bonus incentives can be added to increase that motivation (e.g., a financial reward for members of a department that meets its budget).
Reasons that the Corporate Budgeting Process Is Bad
- Create conflict. The corporate budgeting process is not always the idyllic experience you might imagine. In fact, it can lead to outright conflict as department managers compete for their constituencies’ pieces of the company’s budget pie. It is necessarily a zero-sum game, with winners and losers. Any time you have losers, you also have resentment. This negative side of budgeting can easily outweigh the positive feelings generated by department managers’ participation in financial decisionmaking.
- Motivate departments to distort financial numbers. Although it is useful to have a corporate budgeting process to create objective criteria by which to judge a department’s behavior, such criteria inevitably tempt department heads to cook the books (i.e., distort their financial reporting in order to meet expectations). Because there are no set “rules” of the budget process, department managers might disregard ethical concerns about altering their behavior to meet budget requirements.
- Distort incentives. Any time you create employee incentives, you run the risk of unintended consequences. If, for example, you set a strict financial limit on the funds available to buy office supplies, you might find that employees respond by being less productive (i.e., they slow down their work to avoid exceeding the office supplies budget). That is a simplistic example, and fairly transparent. In actual corporate budgeting situations, there are often difficult-to-see incentives and matching behaviors.
Concusions About The Corporate Budgeting Process
Despite the cons listed above, businesses will continue to participate in the corporate budgeting process. Executives should be aware, though, of the potential pitfalls.
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