Behaviour in response to budgeting
An interesting aspect of budgeting is how it can affect individual and organisational behaviour.
Taking the individual level first, some of the issues arising are:
Is the individual responsible for the budget, aware of it, or not involved at all?
Did the individual help prepare the budget, or was it imposed on them?
Do they agree with it and understand it? Do they accept it? Or do they perhaps disagree with it?
Is it within the individual’s power to control their part of the budget? What are the consequences of them failing to control it?
Does the individual modify their behaviour to follow the budget and if so is this good or bad?
Is the budget a working tool for the organisation? Or is it prepared by one part and ignored by the rest?
Is the budget modified for changed circumstances so that it stays relevant, or is it allowed to become irrelevant and of no use?
Are variances from budget investigated and explained and is anyone accountable for these?
Many of these issues relate to how a budget is set. Consider an example of a professional services firm. Individuals will be expected to charge a certain number of hours each year to clients, for which the firm can get paid.
Imagine the firm works 35 hours a week, and that two weeks holiday is given per year. Ignoring overtime, the maximum hours that could be worked is therefore 50 x 35 =1750 hours. However the individual will have training courses, internal meetings, internal administration work etc, which will not be client time. An allowance of two weeks might be made for this and it can also be assumed that the individual might be ill at some stage during the year, so allowing three weeks all told the realistic maximum becomes 47 x 35 = 1645 hours.
The firm might want the individual to do other work which is valuable but not chargeable to clients, such as marketing or chasing payment.
On the other hand, the minimum chargeable hours would be related to the work the firm knows that it will have to do, based on its experience from previous years. This might be, say, 60% of the maximum available hours or 1050 hours. The firm might reasonably expect to have another 20% of ad hoc work on top of that, making a total of 1400. The theoretical maximum of 1750 is not likely to be achieved and neither is the realistic maximum of 1645. The individual will not be motivated by a target which they cannot achieve and will not accept a budget at this level. However, the minimum budget of 1050 is not challenging enough. The firm wants the individual to do more than just the minimum. It will not be best for the firm if the individual does just the minimum required and sits around for the rest of the time. The firm needs to encourage the individual to do more work. So the minimum budget would be acceptable to the individual but would allow the individual to do less than they should. A pragmatic budget is something between 1400 and 1645 and it is best to set the budget at this level, where the target is achievable for the individual but not too easy.
In view of the above, it is evident that the exact figure would depend on the individual’s circumstances and their own work duties. In a “bottom up” budgeting system this would be agreed jointly between the employee and the firm. These questions become of particular concern when they are related to performance measurement of the individual and if pay, bonuses or promotions depend on achieving targets.