Behavioral Aspects of Budgeting

Behavioral Aspects of Budgeting

The technical process for setting a budget emphasizes the need for involvement at all stages of the process. In an ideal world that would produce the best solution. However, the world is not ideal and not everyone can be allowed to do exactly as he or she would wish at the first instance. So potential conflicts arise and those involved in the budgetary process need to be aware of the behavioral aspects in order to maximize the good points and minimize the problems. The behavioral aspects may conveniently be summarized as relating to motivation, participation, feedback, group effects, budget slack and the politics of the organisation. In each of these areas there has been research into the effects, sometimes with inconclusive results.

Motivation
The literature on goal setting suggests that it is important that the budget targets are accepted by the individuals involved. In that, budget targets should be at the ‘difficult’ end of the range, by way of creating a challenge, but should be seen as being attainable. If budget targets are unrealistic, there may be a negative reaction where the individual does not even attempt a reasonable level of performance. Communication between levels in the organisation is also important, so that the individual knows that achievement of targets is reported at a higher level and recognized in some form.

Participation
A full understanding of the behavioral aspects of the budgetary process requires an understanding of psychology. Research into behavioral aspects of budgeting has therefore included psychological studies of the individuals participating in the budgetary process. It is argued that individuals have needs for a sense of belonging, a sense of self-esteem and a sense of personal fulfillment. Participation is one way of meeting those needs, and therefore participation in the budgetary process is a significant aspect of meeting human needs. Those individuals who participate in the