An important feature in control in business is that control is exercised the managers over people. Their attitude and response to budgetary planning and control will affect the way in which the business operates. A budgetary system does not consist only of accounting, forecasting and other management techniques. The success of a budgetary planning and control system depends on the cooperation of those who are to be involved in its operations. Individuals may not always behave in the best interest of the organization or they may be unwilling to strive to achieve the budget as set for the period. This is known as dysfunctional behavior. A budgetary system should be designed to minimize the occurrence of dysfunctional behavior. This can be achieved if the systems designers and operators bear in mind the behavioral aspects of such systems. The human aspects to be considered are numerous and many of them are unrelated but the following are the most important:
1. Motivational aspects – The process of budget preparation and subsequent performance evaluation budgetary control need to be carried out so as to motivate managers rather than create resentment and adverse reactions. The process should be participative, encourage initiative and responsibility. A budgetary system will not be successful if individuals do not want to achieve the targets which have been set for their area of responsibility. A lack of the necessary motivation can exist for many reasons including;
- The targets have not taken into account the individual aspiration level – the level of performance that an individual has set as a personal target. If the performance target is set too far above the aspiration level, the individual will reject the budget as unrealistic and will be demotivated. If the target is set too far below the aspiration level the individual may also be demotivated the lack of challenge and may then work at a level of performance below that which could otherwise have been achieved. A department or section of an organization can also have an aspiration level which will be the collective results of all the individuals’ aspiration levels.
- There is inadequate provision for the recognition of achievement – When performance levels have been achieved or exceeded, it is important that mangers acknowledge this and reward the relevant people. The reward need not necessarily be a financial one. A good manager will be able to motivate staff with appropriate psychological reward-simply acknowledging the achievement may be sufficient.
i) Participation as a motivator
Participation promotes common understanding regarding objectives and makes the acceptance of organizational goals the employees much more likely. If people are genuinely involved, they feel part of the team and become highly motivated to achieve the budgets.
ii) Use of budget targets as a motivator
Once budgets have been prepared, they become targets and can be used to motivate employees to achieve a high level of performance. The targets set should be realistic, challenging and achievable. Ideal or unrealistic targets are demotivating since they will always lead to adverse variances. Low targets are also demotivating since they are easy to achieve.
iii) Performance evaluation as a motivator
Employees who are evaluated are motivated to do their best.
2. Communication– targets must be communicated to those who are expected to achieve them. People cannot be expected to perform against the target they do not know about. It also important that target are understood- otherwise they will be rejected. Communication of actual results is also important; this is known as feedback.
3. Participation – participative budgetary system is always the most successful. If the system is dictatorial, with imposed budgets, there is more likely to be dysfunctional behavior. Individual managers should not simply be issued with their budgets without consultations. They should be consulted about their budget during the planning process. Managers are then more likely to accept the target contained in the budget when it is published.
A participative budgetary system will also encourage goal congruence. This exists when the budgetary system motivates individuals or groups to take actions that achieve their own personal goals while at the same time achieving those of the organization. The system is designed so that there is a relationship between the company’s goals and the individuals’ goals. Goals are more likely to be congruent if individuals or groups have been involved in setting their own budgets.