Explain at least three ways how an organization can motivate employees by using budget and the budgeting process.
Budgeting refers to the allocation of capital often by managers for the sole purpose of controlling and planning the limited resources available effectively. It is used for planning and coordinating organizational activity, allocating resources, and motivating employees to achieve company vision/objective (Schick, 2007). A budget is a right step in ensuring that the capital is spent properly to achieve the financial goals set while meeting the objective in a bigger picture. There are multiple ways in which an organization can motivate employees by using the budget and the budgeting of which three ways are as described below:
Increase the ownership and commitment level of employees. By making them involved in the process, a company can increase that feeling of ownership among its staff. They’ll feel like it’s mine and work with more commitment to meet the requirements. They also feel valued as the company is listening to them while formulating the budget. Both success and failure of the process are owned by everyone and keep them motivated to give their best to make it a success rather than a failure.
Reward performance. Awarding staff for meeting the targets set in the budget and considering that as the factor for performance evaluation can motivate the employee to perform even better. Budgeting helps in anticipating demand and expectations from an employee and thus provides a clear set of guidelines for the targets that need to be achieved/worked toward. As the employees will be aware of the target they need to meet and work towards it with lesser anxiety of what is to be done.
One of the other important aspect of motivating employees with the inclusion of participative budgeting . In this process, all the people who might be impacted by the budget are involved in the process of formation of the budget. Also called s bottom-up approach as the employees at even the lower level may be involved if they’re to be impacted by its implementation and is thus more achievable (Walker & Johnson, 1999). It increases the morale of the employees and calls for an effort of higher amplitude among them towards the result.
Schick, A. (2007). Performance Budgeting and Accrual Budgeting. OECD Journal On Budgeting , 7 (2), 109-118.
Walker, K. B., & Johnson, E. N. (1999). The effects of a budget-based incentive compensation scheme on the budgeting behavior of managers and subordinates. Journal of Management Accounting Research , 11 , 1-28.
Motivation can be termed under two categories, one being intrinsic form of motivation while the other an extrinsic. Intrinsic relates more with inner satisfaction while extrinsic being satisfaction by something as an output to your work. Budgeting is a process of classifying various expenditures that is estimated to meet the expenses of a project or service.
Participation and Satisfaction:
In the process of participation in budgeting two types of satisfaction is generated. One is intrinsic, meaning that just with the participation in budgeting process an employee is motivated internally just to take part in the process of contribution. On the other hand an employee who expects certain final output as a result of budgeting for a project is more of an autonomous extrinsic motivation. (Wong-On-Wing, Guo, & Lui, 2010)
Remuneration and Benefits:
One of the main object of employees are working in the organization to get return or financial benefit. Budget of an organization annual plan also includes the increment budget and provision for other related benefits. Growth in the incremental plan will motivate them to be loyal. Sense of contribution: More and more organizations are involving employees into the budgeting process. While participating in budgeting process, an employee becomes a part of the company goal-setting process. They invest both intellectually and emotionally, resulting in the growth of feeling of responsibility to attain the goal the budgeting has been done for. The goal set in the process of budgeting will directly influence the performance of employees positively as they will be responsible for what they have mutually arranged and agreed upon. (Usman, Usman, & Sugianto, 2016) These are some ways in which participation of employees in the budgeting process motivates them.
Usman, E., Usman, A., & Sugianto. (2016). LEADERSHIP STYLES IN BUDGETING PARTICIPATION TO SUPPORT MANAGERIAL .
International Journal of Organizational Innovation (Online), 251-259. Wong-On-Wing, B., Guo, L., & Lui, G. (2010).
Intrinsic and Extrinsic Motivation and Participation in Budgeting: Antecedents and Consequences. Sarasota: American Accounting Association.
Cash budget serves as the most important techniques of planning and controlling the use of cash. Cash budget is the statement that depicts the firm’s estimated cash receipts and estimated cash disbursements drying the plan period. A firm can apply a number of cash management techniques to improve the efficiency of cash management. Managing Collections, Controlling Disbursement and Cash flow synchronization (Michael, 2016) are the three major technique of cash management and budgeting.
By maintain the proper budgeting a firm can speed up its cash collection effort by using lockbox system and concentration banking. The should be able to take the advantage of float meaning that the firm should shorten its collection float and lengthen its disbursement float as long as possible without any deterioration in creditworthiness (Libby, 2009).
At first we give the specific training package to our employees so that only they have clear understanding of why budgeting process is important in business. After clear understanding they automatically motivate for investment. They should have clear knowledge about capital budgeting and its process. The budgeting is the process of acquiring the fixed assert or process of investment in capital project. It is very important investment decisions. Its impact is long lasting, and involves the considerable amount. So, it is considered as crucial function of financial manager in any firms. Financial manager should make capital budgeting types - dependent, independent, mutually exclusive project, replacement, expansion, and diversification of capital project cautiously.
There are two types of decision criteria: undiscounted cash flows and discounted cash flows. Payback period is the commonly and widely used undiscounted cash flow method and NPV and IRR are the popular discounted cash flow methods. All methods of capital budgeting decision expect to the ARR are based on the net cash flows of the project. ARR is based on the accounting profit of the project. Discounted cash flow methods. Since they take all cash flow streams while making capital budgeting decision into account, incorporate the risk and time value of money in decision process. They should have clear understanding of NPV and IRR so that they can confidently invest money by using budget. These are the important criteria how budgeting can be described overall context of project so that our employees are motivated for investing the cash.
Budgeting process helps to determine project size.
Budgeting process and plan helps to determine project life.
It helps to determine the timing of investment.
It also helps to determine helps to improve quality of assets acquisition.
It helps to arrange the financing.
Budgeting process helps to determine project size
Generally, the project size refers to the amount of money that is required to be invested in a project or assets. The size of project must be optimal. The budgeting process helps to determine the optimal size of the project because it is monetary presentation of capital expenditure plan. So that employee can invest confidently in any project.
Budgeting process and plan helps to determine project life
The Budgeting is the process of forecasting and estimating expected cash flows of a project. Therefore, it helps to determine optimal life of the project. When they have clear idea about project life then they are motivating toward investment.
Helps to determine the timing of investment
The organization must install capital asset before requirement, otherwise, the similar firm may increase their market share and the demand goes down. Therefore, the capital budgeting is based on expected future demand, so it helps our employee to determine appropriate timing of the investment so that they confidently invest the money.
Libby, T. &. (2009). Beyond budgeting or better budgeting? Strategic Finance, 89( 2) .
Michael, O. (2016). The Importance of Budget and Budgetary Process among Non-Publicly Accountable Entities (NPAEs): A Survey of Micro-Sized Firms in Nigeria. International Journal of Business and Management, 4(7):305-312 .
Budgeting process involves efficient allocation of the financial resources available in an organization to different units, activities and investments by reviewing the financial results of prior period. Apart from method of planning the revenue streams to meet the expected expenses, budget can be viewed as a tool to prevent from unnecessary spending or spending too much, process to co-ordinate different activities of an organization, way to communicate stakeholders about the activities that the organization will undertake and technique to allocate financial resources of an organization (Ndiwalana, 2009).
The budget and budgeting process can also be used for motivating the employees in following ways:
One way to motivate employees by budget and budgeting process is to make them involve in the process itself. If the financial manager prepares the budget alone and ask the employees to behave in a certain way to accomplish the targets set, the employees may not be willing to give their best as their views and opinions are not considered in the budgeting process.
Consulting with the staffs about budgeting, organizing regular departmental meetings regarding budget, incorporating the ideas of those meetings in budget, ensuring free flow of budgeting information between management and employees, communicating the final budget to everyone and making the employees clear about their input in budgeting activities will intrinsically motivate the employees as they feel they are valued by the organization since the budget reflects their opinions (DeMicco & Dempsey, 1998).
Ownership and Commitment
Engaging the employees in the budgeting process makes them valued and they feel responsible for the achievement of the organizational goals. They will feel sense of ownership as the budget is the representation of their ideas, opinions and inputs. This will help in alignment of individual and organizational ensuring the use the available resources consistently with the mission and priorities of the organization. Thus incorporating ways to ensure ownership and commitment of the employees in budgeting process can motivate then and escalate their performance (Ndiwalana, 2009).
Performance and Reward Management
Measuring the employees’ performance based on their contribution in the achievement of financial goals set by budget and linking it directly with their rewards, bonuses, promotions and other benefits can also motivate the employees. Setting budget as the criteria for performance and reward management avoids anxieties and confusions and gives clear idea to the employees about what is expected from them. For example: If a company requires individual salesperson to sell goods of Rs.1,00,000 per month to achieve its desired revenue and it has provision for rewarding employees crossing the targeted sales figure which is well communicated to the employees, the employees will be motivated extrinsically to work harder and cross the target to get the rewards associated with it. In addition, it will also help in correcting the employees who are staying away from the goal (Freedman).
DeMicco, F. J., & Dempsey, S. J. (1998). Participative Budgeting and Participant Motivation: A Review of the Literature. Hospitality Review, 6 (1), 77-97. Retrieved from http://digitalcommons.fiu.edu/cgi/viewcontent.cgi?article=1121&context=hospitalityreview
Freedman, J. (n.d.). How Is a Budget Used to Motivate a Staff? Retrieved from Chron: https://smallbusiness.chron.com/budget-used-motivate-staff-50432.html
Ndiwalana, J. K. (2009). Budgeting Participation, Goal Commitment and Employee Motivation. Makerere University, Accounting and Finance. Retrieved from https://www.mak.ac.ug/documents/Makfiles/theses/Ndiwalana_John_Kizito.pdf