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Participative budgeting is a budgeting process under which those people impacted by a budget are involved in the budget creation process. This bottom-up approach to budgeting tends to create budgets that are more achievable than are topdown budgets that are imposed on a company by senior management, with much less participation by employees.

Participatory budgeting is also better for morale, and tends to result in greater efforts by employees to achieve what they predicted in the budget. However, a purely participative budget does not take highlevel strategic considerations into account, so management needs to provide employees with guidelines regarding the overall direction of the company, and how their individual departments fit into that direction. Because of the larger number of employees involved in participatory budgeting, it tends to take longer to create a budget than is the case with a top-down budget that may be created by a much smaller number of people. Another problem with participative budgeting is that, since the people originating the budget are also the ones whose performance will be compared to it, there is a tendency for participants to adopt a conservative budget with extra expense padding, so that they are reasonably assured of achieving what they predict in the budget. This tendency is more pronounced when employees are paid bonuses based on their performance against the budget. This problem of budgetary slack can be mitigated by imposing a review of the budgets by those members of management who are most likely to know when budgets are being padded, who are allowed to make adjustments to the budget as needed.

Participative Budgeting is the situation in which budgets are designed and set after input from subordinate managers, instead of merely being imposed. The idea behind this sort of budgeting is to assign responsibility to subordinate managers and place a form of personal ownership on the final budget. Nearly two decades of management accounting research has resulted in equivocal findings on the consequences and effects of participative budgeting (Lindquist 1995). Participative budgeting certainly has various advantages, these include the transferral of information from subordinate to superior increased job satisfaction for the subordinate, budgetary responsibility and goal congruence. Its disadvantages include budgetary slack and negative motivation, however it is the conditions in which participative budgeting takes place determines whether the budgeting process is successful. The conditions are dependent on various factors such as the level of participation, level of subordinate

influence, the extent to which budgetary slack takes place, volatility, job related information, and the complexity of the budget. Participative budgeting has the advantage of transferring information from the subordinate to their superior This knowledge is likely to be more reliable and accurate as the subordinate has direct contact with the activity and therefore is in the best position to make budget estimates. Participative Budgeting also gives subordinates the opportunity to discuss organisational issues with superiors, in which an exchange of information and ideas can help to solve problems and agree future actions (Nouri & Parker 1998). This transferral of information is important particularly when dealing with a matter of high task difficulty as, the more difficult a task, the greater the need for consultation with subordinates. Participative budgeting has a higher performance rate when dealing with more difficult and...

Budgetary slack can take one of two forms: It can either underestimate the amount of income or revenue that will come in over a given amount of time, or overestimate the expenses that are to be paid out over the same time period.) *******************************************************************

What is Performance Budgeting? Performance budgeting is a system of planning, budgeting, and evaluation that emphasizes the relationship between money budgeted and results expected. Performance budgeting: Focuses on results. Departments are held accountable to certain performance standards. There is a greater awareness of what services taxpayers are receiving for their tax dollars. Is flexible. Money is often allocated in lump sums rather than line-item budgets, giving managers the flexibility to determine how best to achieve results. Is inclusive. It involves policymakers, managers, and often citizens in the budget discussion through the development of strategic plans, identification of spending priorities, and evaluation of performance. 3 Has a long-term perspective. By recognizing the relationship between strategic planning and resource

allocation, performance budgeting focuses more attention on longer time horizons. 4 Common characteristics of performance budgets include: Agency identification of mission, goals, and objectives; Linkage of strategic planning information with the budget; Development and integration of performance measures into the budget; and Disaggregation of expenditures into very broad areas (such as personnel, operating expenses, and capital outlays) rather than more specific line-items.

Contrast to Traditional Budgeting Methods Performance budgeting represents a significant departure from traditional line-item budgeting. A line-item budget is primarily a tool for controlling expenditures. As shown in Figure 2, a line-item budget typically spells out the level of spending allowed for specific purposes. As the fiscal year progresses, departmental spending must be within these amounts unless formal budget amendments are approved. Underspending in one category cannot automatically be used to supplement another category.
In contrast, performance budgeting has more of a policymaking orientation. It: Connects plans, measures, and budgets; Forces departments and policymakers to think about the big picture; Provides better information about the impact of budget decisions on people; Gives departments increased budgetary flexibility and incentives for generating budget savings; Allows for ongoing monitoring to see if agencies are moving in the right direction; Strengthens legislative decision making and oversight; Enhances financial accountability to citizens, decision makers, and governmental monitoring agencies; and Supports better management and evaluation. As shown in Figure 3, a performance budget tells the reader

Business budgeting is one of the most powerful financial tools available to any small-business owner. Put simply, maintaining a good short- and long-range financial plan enables you to control your cash flow instead of having it control you.

The most effective financial budget includes both a short-range, month-to-month plan for at least one calendar year and a long-range, quarter-to-quarter plan you use for financial statement reporting. It should be prepared during the two months preceding the fiscal year-end to allow ample time for sufficient information-gathering. The long-range plan should cover a period of at least three years (some go up to five years) on a quarterly basis, or even an annual basis. The long-term budget should be updated when the shortrange plan is prepared. While some owners prefer to leave the one-year budget unchanged for the year for which it provides projections, others adjust the budget during the year based on certain financial occurrences, such as an unplanned equipment purchase or a larger-than-expected upward sales trend. Using the budget as an ongoing planning tool during a given year certainly is recommended. However, here is a word to the wise: Financial budgeting is vital, but it's important to avoid getting so caught up in the budget process that you forget to keep doing business. Many financial budgets provide a plan only for the income statement; however, it's important to budget both the income statement and balance sheet. This enables you to consider potential cashflow needs for your entire operation, not just as they pertain to income and expenses. For instance, if you'd already been in business for a few years and were adding a new product line, you'd need to consider the impact of inventory purchases on cash flow. Budgeting only the income statement also doesn't allow a full analysis of the effect of potential capital expenditures on your financial picture. For instance, if you're planning to purchase real estate for your operation, you need to budget the effect the debt service will have on cash flow. In the startup phase, you'll have to make reasonable assumptions about your business in establishing your budget. You will need to ask questions such as:

How much can be sold in year one? How much will sales grow in the following years? How will the products and/or services you're selling be priced? How much will it cost to produce your product? How much inventory will you need? What will your operating expenses be? How many employees will you need? How much will you pay them? How much will you pay yourself? What benefits will you offer? What will your payroll and unemployment taxes be? What will the income tax rate be? Will your business be an S corporation or a C corporation? What will your facilities needs be? How much will it cost you in rent or debt service for these facilities? What equipment will be needed to start the business? How much will it cost? Will there be additional equipment needs in subsequent years?

What payment terms will you offer customers if you sell on credit? What payment terms will your suppliers give you? How much will you need to borrow? What will the collateral be? What will the interest rate be?

As for the actual preparation of the budget, you can create it manually or with the budgeting function that comes with most bookkeeping software packages. You can also purchase separate budgeting software such as Quicken or Microsoft Money. The first step is to set up a plan for the following year on a month-to-month basis. Starting with the first month, establish specific budgeted dollar levels for each category of the budget. The sales numbers will be critical since they'll be used to compute gross profit margin and will help determine operating expenses, as well as the accounts receivable and inventory levels necessary to support the business. In determining how much of your product or service you can sell, study the market in which you operate, your competition, potential demand that you might already have seen and economic conditions. For cost of goods sold, you'll need to calculate the actual costs associated with producing each item on a percentage basis. For your operating expenses, consider items such as advertising, auto, depreciation, insurance and so on. Then factor in a tax rate based on actual business tax rates that you can obtain from your accountant. On the balance sheet, break down inventory by category. For instance, a clothing manufacturer has raw materials, work-in-progress and finished goods. For inventory, accounts receivable and accounts payable, you'll figure the total amounts based on a projected number of days on hand. Consider each specific item in fixed assets broken out for real estate, equipment, investments and so on. If your new business requires a franchise fee or copyrights or patents, this will be reflected as an intangible asset. On the liability side, break down each bank loan separately. Do the same for the stockholders' equity--common stock, preferred stock, paid-in-capital, treasury stock and retained earnings. Do this for each month for the first 12 months. Then prepare the quarter-to-quarter budgets for years two and three. For the first year's budget, you'll want to consider seasonality factors. For example, most retailers experience heavy sales from October to December. If your business will be highly seasonal, you'll have wide-ranging changes in cash-flow needs. For this reason, you'll want to consider seasonality in the budget rather than take your annual projected year-one sales level and divide by 12. As for the process, you need to prepare the income statement budgets first, then balance sheet, then cash flow. You'll need to know the net income figure before you can prepare a pro forma

balance sheet because the profit number must be plugged into retained earnings. And for the cashflow projection, you'll need both income statement and balance sheet numbers. Whether you budget manually or use software, it's advisable to seek input from your CPA in preparing your initial budget. Your CPA's role will depend on the internal resources available to you and your background in finance: You may want to hire a CPA to prepare the financial plan for you, or you may simply involve them in an advisory role. Regardless of the level of involvement, your CPA's input will prove invaluable in providing an independent review of your short- and long-term financial plan.