Approaches to Budget Preparation
1. Imposed Budget
Also known as Top-Down Budgeting
Suitable for:
- Start-ups
- Small businesses
- Times of economic crisis
- Situations where managers lack budgeting skills
Characteristics:
- Budget is prepared by top management or a central team
- Lower-level managers and departments are expected to implement without input
- Faster to prepare, but may result in low motivation and limited ownership
2. Participatory Budget
Also known as Bottom-Up Budgeting
Suitable for:
- Established, large organizations
- Times of economic stability or affluence
- Autonomous units and skilled operating managers
Characteristics:
- Budgets are created with input from departmental managers
- Encourages ownership and accountability
- Takes more time but often results in more realistic and accepted budgets
Budget Execution and Monitoring
Once the budget is in place:
- Managers are given financial authority to achieve targets.
- Performance is monitored periodically (monthly/quarterly).
- Deviation analysis (Variance between budgeted and actual figures) is conducted.
- Helps identify root causes of underperformance or overspending.
- Enables budget revision for better control and planning.
Link to Cost Control
- Budgets help in macro-level cost control.
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Detailed cost control is achieved through:
- Standard costing
- Variance analysis
These techniques will be discussed in detail in the upcoming session.
Summary Table
| Approach | Best For | Key Feature | Drawback |
|---|---|---|---|
| Imposed Budget | Startups, crises, small firms | Fast and centrally controlled | Low participation, low morale |
| Participatory Budget | Large, stable, skilled organizations | High ownership and collaboration | Time-consuming |