Budgeting and Organizational Behavior

Executive Summary

Business managements have traditionally tried to achieve organizational objectives through the shaping of the actions and behaviors of their employees towards the furtherance of their aims. Such attempts at controlling humans have not just led to a body of thought and literature on motivating, directing and controlling human behaviour in the organizational context, but also to the evolution of Organizational Behaviour into an important modern-day management discipline.

Whilst budgets have for long been recognized as important tools for the creation of goals and the direction of employee effort and behavior, new viewpoints are now emerging regarding the positives and negatives of traditional budgeting exercises. Budgeting, in the opinion of many experts, adversely affects both organizational behavior and organizational performance by being fixated upon past events,  bureaucratic, and restrictive in its approach; the process, it is felt, also leads to contention, organizational conflict and unhealthy business and operational practices.

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This study attempts to investigate the issue, examine the concepts of organizational behavior and budgeting, look at the positive and negative impact of budgets upon organizational behavior,  and understand the new stratagems being adopted by financial managers and managements to make budgeting a more dynamic, responsive and behaviorally positive process.

Advances in budgeting include the implementation of rolling monthly budgets, reducing the role of hierarchical decision making models and devolving responsibility upon line managers. Such actions, if taken by financial managers, can lead to the inculcation of a personal culture of responsibility, increase feelings of ownership and improve organizational behavior at all organizational levels.

 Introduction

With the concept of people being the most important asset of business firms finding progressive and widespread acceptance among theorist and practitioners of management, the growth of Organization Behavior in recent times as an important management discipline, has been emphatic. Enriched by contributions from areas like psychology, the social sciences, and various management sub-disciplines like Human Resource (HR), marketing, financial and strategic management, OB adopts a systems approach towards various issues, interpreting people-organization relationships in terms of the whole person, whole group, whole organization, and whole social system (Robbins and Others, 2008).

Its purpose is to build better relationships by achieving human objectives, organizational objectives, and social objectives, and thereby improve the competitive advantage of organizations. Budgeting, on the other hand, is a long standing financial and managerial process that is extensively used by all organizations in the business, government and not-for-profit sectors as an important strategic tool for the elucidation, crystallization and achievement of organizational objectives. Having evolved into extremely complex management and strategic tools, budgets are widely regarded as essential for providing organizational direction and for optimizing operational performance of all sorts of organizations (Marginson and Ogden, 2005).

With OB theories now encompassing a wide range of organizational issues that were once considered to have little relevance to individual and group behavior, modern day OB theorist are drawing and establishing strong relationships between the budgeting processes followed by organizations and their effect upon the behavior of members and groups involved in organizations, as well as upon the organization as a whole.

This study aims to establish the links between OB and budgeting, and examine the positive and negative influences of budgeting on aspects like performance, motivation and job satisfaction, as well as the efforts being made by financial managers and budget controllers to improve the quality, responsiveness, and relevance of budgeting procedures and practices.

Commentary and Analysis

An organization consists of individuals. Each individual being unique in his or her own right, their behavior in everyday life is shaped by a range of factors that include age, heredity, ethnicity and religion, gender, physical ability, physical and mental disabilities, and their learning, education, and training (Robbins and Others, 2008). Apart from such factors, individual human behavior is also influenced by attitudes, influences, values, ethics, and moods (Robbins and Others, 2008).

Organizational managements, be they from the business, governmental, or not for profit sectors, are faced with the complex and unenviable task of working with numerous such individuals, (whose number in an organization could range from as few as 3 to 5 to tens of thousands), modifying and shaping their behaviors, individually and in groups, and aligning their actions towards meeting the strategic objectives of the organization (Robbins and Others, 2008).

The Growth of OB

With the performance of organizations depending upon the successful shaping of the behaviors of organizational employees, the area of OB, though known by different nomenclature, has been critical to organizational working from the days of the industrial revolution (Robbins and Others, 2008). With labor being thought of as nothing more than just another component of the four factors of production, the behavior of humans in business organizations, throughout the 18^th and 19^th centuries, has been controlled mainly though the administration of extreme forms of organizational severity and discipline.

The early decades of the 20^th century saw huge changes in the organizational approach towards employees after the advent of Fordist and Taylorist techniques. Rapid enrichment of HR and OB theory, in terms of providing primacy to employees, occurred however only after the Second World War with the propagation of motivational and performance oriented theories of thinkers and researchers like Maslow, Herzberg, McGregor, Clayton, and Vroom, followed in turn by the theories put forward by the Harvard School and experts like Guest, Storey, and Ulrich (Robbins and Others, 2008).

Organization behaviour theory has now evolved into a comprehensive discipline and offers a wide range of motivational and control processes for shaping organizational working towards the furtherance of the strategic objectives of organizations. It encompasses a wide range of topics, such as human behavior, change, leadership and teamwork.

The foundation of an organization rests on its philosophy, values, visions and goals, which in turn drive its organizational culture, a concept that is composed of the formal and informal organization, as well as of the social environment. The organizational culture determines the type of leadership, communication, and group dynamics within the organization; which, by determining perceptions of workers, and directing their degree of motivation, lead to outcomes like performance, individual satisfaction and personal growth and development. The four major operating models for organizations are as under:

• Autocratic: This model is based on power with a managerial orientation of authority. Oriented towards obedience and dependence on the boss, the subsistence needs of employees are met and performance orientation is minimal.
• Custodial: Founded on economic resources with a managerial orientation of money, the employees in this model are oriented towards security and benefits and dependence on the organization. Their security needs being met, they respond with passive cooperation.
• Supportive: based upon leadership with a managerial orientation of support, the employees are oriented towards job performance and participation. With employees provided with status and recognition, motivation for performance is strong.
• Collegial: Based upon partnership with a managerial orientation of teamwork, this model calls for responsible behavior and self-discipline. Self actualization needs are met and employees respond with moderate to high enthusiasm (Leggae, 2005).

The Importance of Budgets

Whilst autocratic styles are, with time, giving way to more participative styles of management, especially in the growing domain of knowledge oriented businesses, most modern day organizations continue to depend upon the use of budgets to state and achieve their operational and business objectives.

A budget by and large is an allocation of money for a specific purpose. Standing for a pouch or a purse, a budget actually represents the contents of a purse. As an activity, budgeting ranges from the managing of household finances to the preparation of the annual US Budget, a document that is normally more than 1,000 pages long. Whilst budgeting has always been integral to all business organizations, the process of formal budgeting, as it is practiced today, emerged in the 1950s as part of the corporate planning process.

Budgeting, in most organizations has become a collective process wherein individual units and departments prepare their forecasts in line with corporate goals set by the management. With each unit expected to contribute towards the achievement of corporate goals, departmental managers prepare forecasts of sales, operating costs, overhead costs, and capital requirements, which is followed by the computation of operating profits and returns on investment (Marginson and Ogden, 2005).

Modern formal budgets are as such not confined to being devices for limiting expenditures. They are used to forecast incomes, profits and return on investment and are used as tools for controlling the actions of employees and for shaping their behavior in line with organizational objectives by laying down goals and targets (Leggae, 2005). With achievement of budgets being linked to rewards, recognition and career progression, budgets have effectively become one of the most powerful tools for influencing and shaping employee behavior and improving organizational performance (Leggae, 2005).

The most important benefit of formal budgeting lies in ensuring that responsible managers take time each year, as well as at fixed intervals throughout the year, in thinking about their operation by looking at all of its aspects. Budgeting creates a wide-ranging picture of the future and throws up likely opportunities and barriers, the process helping to optimize day-to-day activities.

Disadvantages of Budgets

The continuous employment of budgets, particularly their use in intimidating employees to meet progressively higher targets, has led to a number of adverse consequences. Budgets have become instrumental in fomenting organizational discontent and contention, with there being frequent disagreements on the setting of targets between the managers fixing budgets and the operational staff, who are responsible for achieving targets, especially when they are exceedingly difficult and unrealistic.

Budgets are often prepared in a bottom-up fashion, i.e. they are prepared by operational managers. The fact that performance measurement occurs on the basis of exceeding projections, for items like sales and profits and  being lesser than estimates, for various cost items, can in such cases motivate managers to adopt unethical ways of working, understate forecasted sales, and overestimate costs. With top managements having directly opposing objectives, budget processes can well turn out to be contentious and conflict-prone episodes .

The usefulness of the budgeting process has also come in for extensive criticism in recent years because of its excessive complexity and the time required for its preparation (Marginson and Ogden, 2005). It is believed by some modern day theorists to be unnecessarily bureaucratic, unresponsive to the changed business environment, and restrictive towards managers, who, whilst desirous of taking worthwhile initiatives, are constrained by the numerous restrictions imposed by budgets in areas of revenues, production and costs .

Its preparation has also become so complex that baseline managers often get mired in its complexity and are prevented from applying their minds to the process . With meeting of budgets being closely linked to the reputation and career progression of managers, their construction is often impacted by the personal plans and ambitions of individual managers rather than by what is best for the organization (Marginson and Ogden, 2005).

Theoreticians like Peter Drucker have criticized the budgeting process arguing that increasing uncertainties in business and economic life have led to the introduction of so many variables that forecasting based upon probabilities, which is what all budgets are about, is essentially counterproductive and bound to fail. Uncertainty has grown even more rapidly since the time (1992) Drucker put forward his argument, with the proliferation of the internet, the expansion of terrorism, the occurrence of epidemics like Bird Flu and SARS, and now with a sudden worldwide financial crisis, which, in a matter of a few months, has devastated the global banking system (Johnson, 2005).

Traditional budgeting, in such a scenario is perceived to be no more than an unreliable, unnecessary, cumbersome, restrictive, complex and sometimes untruthful exercise that adversely affects intra-organizational relationships, leads to contention and conflict, and motivates businesses to resort to unethical practices (Johnson, 2005). Sales managers are known to start dumping goods and engage in false billing at the close of the budget period in order to come close to, meet or exceed their targets, thus putting their organizations at the risk of suffering from sales returns, customer and dealer disaffection, and loss of reputation (Johnson, 2005).

“Think about the actions of the sales force. When meeting the numbers proves impossible, the sales force leans on customers to order goods they have every intention of returning. And if by some chance a business unit looks like exceeding its target, customers are persuaded to have their orders delivered in the next fiscal period even if this means delaying valuable cash flows” (Johnson, 2005).

Conclusion and Recommendations

The many disadvantages of and unhealthy practices associated with the budgeting process, especially their impact on the managers and employees of business organizations, have led to considerable debate among financial managers, theorists and management practitioners and led to some radical changes in the process of preparation and usage of budgets.

The contingency theory of management suggests that the uniqueness of each organization is liable to make a “one shoe fits all” concept of budgeting inappropriate and even harmful to organizations, and budgeting processes have to essentially be tailored to fit individual organizational needs. Similar straitjacketed budgeting practices for units in different businesses, even if they belong to the same company, are likely to be ineffective and possibly detrimental to employee performance and the meeting of organizational objectives (Johnson, 2005).

Jeremy Hope, an expert on the new concept of “Beyond Budgeting” argues that traditional budgeting practices are liable to act as barriers to change and need to be suitably modified. “The budgeting system influences the behaviour of managers and employees in a way that is counter productive to strategic management. Budgets tie managers and people to the old management system, and its paradigms.” (Marginson and Ogden, 2005)

The concept of Beyond Budgeting, being slowly put into practice by enterprising and forward looking financial managers, is more adaptive to changing circumstances, and does not tie down managers to predetermined actions; it involves regular reviews of targets, and is based on stretch goals that link performance to world-class benchmarks, peers, competitors, as well as previous periods (Johnson, 2005).

Models like Beyond Budgeting, which are being adopted in modified forms by progressive financial managers, are reducing the role of traditional hierarchies and centralized leaderships. Making the process far more decentralized, and enabling decision making and accountability for performance to devolve to line managers, they are leading to the creation of a self managed working environment and the propagation of a culture of ever growing personal responsibility (Johnson, 2005).

The use of rolling budgets enables financial managers to focus management attention on present and expected realities within the context of the organization and help managements to remain ahead of change and face the challenges confronting them (Johnson, 2005). Modern-day finance managers would be well served by phasing out traditional budgeting practices and adopting more flexibility in their thinking and approach. Engagement of fresh budgeting approaches could impact organizational behaviour positively, increase employee motivation and productivity, and improve customer service.

References

1. Drucker, P, (22 July 1992), Planning for Uncertainty, Wall Street Journal. 22 July 1992.
2. Francis, H. and Keegan, A, 2006, The changing face of HR: in search of balance, Human Resource Management Journal, 16, 3, 231–49.
3. Johnson, S, (2005), Beyond Budgeting, ACCA, Retrieved November 29, 2008 from www.accaglobal.com/students/study_exams/qualifications/acca_choose/acca/professional/apm/technical_articles/2950520 -
4. Legge, K, 2005, Human Resource Management: Rhetorics and Realities, Basingstoke: Palgrave Macmillan.
5. Marginson, D and Ogden, S, (April, 2005), Budgeting and Innovation: Do budgets stifle creativity?  Financial Management (UK)
6. Robbins, S, Judge, T, and Sanghi, S, (2008), Organizational Behavior, Pearson Prentice hall

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