What is Participative Budgeting? (Definition, Example, and Importance)

Budgeting has different types and each type serves a different purpose. Participative budgeting is therefore one such type of budgeting approach.

It is quite evident from the name that participative budgeting is an inclusive approach that involves the contribution of staff from every level of the hierarchy to prepare the budget.

A small team usually makes budgets of managers and personnel who are quite high up in the hierarchy, with a macro view of the organization, its processes, and financing needs; lower-level employees are usually not included in the budgeting process.

Participative budgeting also involves employees from lower levels who give their input about the cost allocation.

Due to the inclusion of employees from lower levels of the hierarchy. 

Importance of Participatory Budgets

Participatory budgeting allows lower-level employees to feel a sense of ownership and belonging to the organization, as they feel that they are an important part of the budgeting process.

The effect therefore on motivation levels cannot be denied. This approach makes the employees feel more connected and more in control.

Participatory budgets are also generally seen as more slackened budgets that are achievable more easily.

This is because the employees know their limits well, they understand the targets they can achieve and this, in turn, means that the budgetary targets are lower and thus easily achievable.

Traditional budgets set by a team of executives and financial managers are seen as detached, as sometimes the targets set by the senior management may seem unreasonable or rather unattainable for the employees and this may demotivate the workforce, especially if the management doesn`t have a detailed plan on how to attain the targets set in the budget.

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Participatory budgets, on the other hand, are more reasonable with lower and more easily attainable targets.

Apart from this, participatory budgets tend to be more allocated effectively because lower-level employees such as supervisors have a better idea of the areas that need more funds than higher-level management.

For instance, the senior management may be looking at increasing the budget for the production department because of a projected increase in demand for the next year, however, the factory floor supervisors may feel that there is a greater need to allocate more budget to the maintenance, lighting, and heating of the factory as the dismal conditions are affecting the motivation levels of the employees.

Senior management sometimes can be quite out of touch with the ground realities that the supervisors know better.

This situation gives rise to opportunity cost, where the managers can either allocate a budget to increase production or improve the working conditions. Both decisions will have their trade-offs.

Increasing the production budget will affect revenue but low motivation levels may result in increased waste.

In contrast, the focus on improvement in working conditions will increase motivation and may increase production but it won’t be enough to meet increased demand.

The participatory budget makes decision-making easy by allowing personnel from the concerned departments and areas to give their own suggestions and therefore the final budget is more achievable.

There is a clear pitfall though. When budgeting is left to subordinate managers and supervisors, there is a risk of too much budgetary slack.

Budgetary slack is the intentional understatement of revenues or overstatement of expenditures, to make target attainment easier.

It may make the employees less inclined to work hard and thus make the organization less competitive.

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This is why participatory budgets follow a step-by-step approach. The budgeting process for this approach begins for the lower management levels, then the middle management level, and then the top management level.

At each stage, the higher management level reviews the suggestions and input. Any suggestion that may result in inefficiency during each review can be corrected or removed.

It has to be understood that upper-level management has the final decision-making power.

However, this does not mean that the upper-level management can completely disregard the suggestions of the lower levels.

There has to be a consultative process, where the lower levels may put forth their reasons and understanding for certain budgetary proposals.

Pros and Cons of Participatory Budgets

Participatory budgets do have their benefits and drawbacks. This simply means certain situations where participatory budgets should be used.

When used elsewhere, without proper management controls and reviews, they may create inefficiency and waste.

Pros

  • Ownership: As discussed above, participatory budgets make the lower management personnel feel like they are a part of the organization; they get a sense of ownership that their voice and opinions are important for the organization’s growth.
  • Motivation: When employees are heard and their opinions are considered, the sense of ownership creates increased motivation. Employees try to work hard towards an organization that values their opinions.
  • Information flow: The transfer of suggestions and opinions from lower levels to upper levels of management creates a bottom-up flow of information that would otherwise not have been efficiently possible. Upper management can get a good idea of the ground realities, without spending much time working on the ground.
  • Congruence: Participatory budgets also result in goal congruence. When ideas from the bottom to the top levels of the hierarchy are shared, discussed, and reviewed, the whole organization is on the same frequency. The upper management understands the needs of the lower management and vice versa and this results in a consensus on how the organization needs to work and the goals that need to be attained. 
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Cons

  • Time factor: The fact that participatory budgets take a very consultative approach to budgeting where the advice and suggestions are sent up from the lower levels, reviewed, and then discussed again with the lower levels, means that the whole process consumes a lot of time. Traditional and incremental budgets can be prepared relatively quickly compared to participatory budgets. The review and negotiation process can waste a lot of time, and may stall other organizational activities.
  • Budgetary slack: There is a very high risk of budgetary slack regarding participatory budgets. Managers at any level may try to set easily attainable targets if their bonuses are linked with attaining certain performance targets.
  • Disagreements: It is also highly likely that some of the lower management’s suggestions and budget proposals may be declined by the upper management, resulting in disagreements and a prolonged negotiation round that may end in the upper level “imposing” their decisions.

Conclusively it can be said that participatory budgets have their pros and cons. They are best suited in conditions with a high level of organizational decentralization.

Large organizations may find the participatory approach more cumbersome. Still, small businesses may benefit from this approach, given that appropriate internal controls are in place to prevent budgetary slack.