The budgeting process involves all levels of management. Top managers want lower-level managers to participate in the budgeting process because they have more specialized knowledge and firsthand experience with the day-to-day aspects of running the business. This is the information benefit of bottom-up participatory budgeting. Participation also creates greater commitment and accountability toward the budget among lower-level managers. But bottom-up budgeting creates incentive problems. Because subordinate managers are evaluated against the budget, they tend to set targets that are easier to achieve. To counterbalance this incentive, senior managers probe and debate the budgets submitted by subordinates to make them demanding but achievable. This is the top-down feature of budgeting.
The back-and-forth between superior and subordinate managers at all levels makes budgeting a time-consuming process. Estimates suggest that senior managers spend about 10–20% of their time on budgeting, and financial planning departments up to 50%.* For most organizations, the annual budget process is a months-long exercise that consumes a tremendous amount of resources.
The widespread use of budgets in companies ranging from major multinational corporations to small local businesses indicates that the advantages of budgeting systems outweigh the costs. To gain the benefits of budgeting, management at all levels of a company, particularly senior managers, should support the budget. Lower-level managers who feel that top managers do not “believe” in budgets are unlikely to be active participants in the formulation and successful administration of budgets.
Budgets should not be administered rigidly. A manager may commit to a budget, but unplanned events may require managers to deviate from the budget. For example, Chipotle, devastated by food-safety issues that sickened about 500 diners in the second half of 2015 and resulted in a halving of its stock price, responded with a new marketing campaign and the largest media buy in its history in an effort to woo customers back. The dramatic decline in consumer demand during the 2007–2009 recession led designers such as Gucci to slash their ad budgets and put on hold planned new boutiques. Macy’s and other retailers, stuck with shelves of merchandise ordered before the financial crisis, slashed prices and cut their workforces.