Consider the situation of Ford Motor Company here in the U.S. The company’s new restructuring plan includes “closing perhaps as many as 10 of 43 plants, with some 25,000 jobs cuts out of a total of 123,000 in North America. The cutbacks are designed to halt the company’s losses on its domestic auto operations – $1.2 billion in just the third quarter of 2005” (Time Magazine). I can imagine that the labyrinthine complexities of budgetary systems forecasting and guiding such a massive restructure would boggle most minds, mine very much included!

Posted by: Colin Mangham

There are some ethical considerations to be aware of when designing a budgetary system. In many cases, a system can address potential ethical issues, whereby a manager might be tempted to act in hi or her own best interest, rather than with respect to the organization, likely due to their being inappropriately motivated by the rewards system that is a part of the budgeting process. I would think this becomes more applicable as a function of the increasing size of an organization, but nonetheless important for relatively small companies with, say, 10 to 50 employees, which is common with a lot of the early-stage ventures we work with at Daily.

Further, one behavior that can be of particular concern in an organizational budgeting setting is the extent to which managers attempt to incorporate slack into their budget. In these cases the decision is often driven by self-interest, and as such can potentially be ethically inappropriate. It’s no secret that when managers are involved in budgeting, they can have a tendency to intentionally bias the process so as to make their unit’s budgeted performance results easier to attain, or to secure a more favorable resource distribution than can be justified given the unit’s contributions.

The above falls into challenges of fair budgetary procedures and implementation. When, however, handled appropriately, budgetary fairness can have a very positive effect on other aspects of managerial behavior, including increased job performance and collaboration with coworkers. As The Week Magazine might refer to the above, it’s boring, yes, but important.

Posted by: Colin Mangham

For many companies, mine included, November is a big month to lock in budgets for the next year. Riffing on this topic a bit, here are some top-of-mind key factors for successfully implementing budgets with respect to employee alignment and goal congruence.

Designing a budgeting system must first meet the need for goal congruence, wherein all effected stakeholders in an organization accept and work toward common aims and objectives. It is important that employees are in some way involved in budgeting, establishment of goals/objectives or, at the very least, aware of and effectively guided by the budget. This is sometimes referred to as “participative budgeting,” whereby those who are influenced by the budgetary system have an input into its design and the budgetary targets set. Thus, it is hoped, they will effectively ’buy-in’ to its objectives.

A case example of this is when senior management establishes sales targets and correlating budgets for which sales managers and even the sales representatives they manage will ultimately be held accountable. However, accountability does not necessarily mean responsibility and/or “fault” for, say, unfavorable variances in sales volume. Rather, it is the sales manager’s foremost responsibility to know precisely why the departure from the budget has occurred. In turn, the budget and the functional areas it represents can be modified to positively affect performance moving forward. Again underscoring the value of not only the budget itself, but also the active dialogue between those individuals who can most benefit from its use.

The above is, from my experience, one of the most important in terms of successfully managing a team. Some other useful approaches to ensure successful implementation of a budgeting system include:

• Zero-Based Budgeting – a popular technique that removes pre-conceptions to ensure that the budget is based upon currently attainable parameters, rather than those that might have been achievable in the past,

• Flexible Budgeting – whereby the budget is “flexed” to reflect the volume that actually occurs in relation to what was planned.

Posted by: Colin Mangham