Many researchers praise the benefits of participative budgeting. Is it wise to involve multiple parties at multiple levels in the organization in the budget preparation process? In what ways can participative budgeting be used when creating a master budget for an organization?

Before starting any budgeting process, management must decide whether to implement a participative budgeting (bottom-up) or a top-down budgeting process. The difference between both processes is significant since a top-down budget is determined by upper management and then lower managers and staff must try to comply with the budget. Implementing top-down budgets can sometimes be a little tough since upper management will impose their budgets based on their strategic goals and not the company’s capabilities.

On the other hand, a participative budget works the other way around. This means that the budgeting process starts with lower level managers and their departments and then these budgets are sent to upper managers for their approval (Corporate Finance Institute, 2022). Participative budgets provide several advantages especially since the participants “own” the budget. This means that they are responsible for it. They also tend to be more achievable since those that prepare them know their capabilities and also understand what can be done to improve their performance. Participative budgets empower employees and lower level managers. Participative budgets tend to produce better results when employees’ performance and compensation are evaluated based on the budgets that they prepared (Wagner et al., 2021).

But this does not mean that upper management just sits around and watches how other people decide the company’s budgets. Upper management is responsible for coordinating different budgets and approving proposed budgets. In case they decide that the budget is not a good fit with eh firm’s strategies, they will propose changes and amendments.

Further, explore the different components of the master budget and assess how each is linked to form a cohesive financial plan for a company to follow. How can participative budgeting make the master budgeting process more efficient and effective? Explain.

The master budget is contains three main components (Petroff, 2015):

An operating budget

A capital expenditure budget

A cash budget

The operating budget is generally divided into three main sections:

Sales budget (starting point)

Cost of goods sold budget (including production budget)

Operating expenses budget

The mast budget starts with a sales budget. This is where sales departments can participate and propose realistic annual sales goals. The next steps involve the production budget and the cost of goods sold budget. The production department can contribute to these two budgets. The production budget is based on budgeted sales. Operating expenses budget includes information that is provided by the sales department and the company’s administration.

After the operating budget is complete, a capital expenditure budget is completed with the new investments required by the firm. Several departments participate in this budget including production, sales, and upper management which decides the company’s future investments.

The last budget is prepared by the finance department and it basically includes the company’s budgeted cash flows. This budget is prepared using information provided by the previous budgets including credit policies given to the company’s customers or how payables are scheduled depending on the company’s vendors’ credit policies.

The participation of multiple departments is required to produce an accurate budget. Budgets per se are wrong since no one knows exactly what will happen in the future, but participative budgets are generally more accurate and reduce the margins of error.

References

Corporate Finance Institute. (2022). Participative Budgeting.                                            https://corporatefinanceinstitute.com/resources/knowledge/finance/participative-budgeting