Imposed budgeting can be described as a process where the top management of the company is responsible for preparing a budget, and then that particular budget is then imposed on the lower management staff to be duly implemented.
It is also referred to as a top-down budgeting process because it involves the higher management preparing the budget, and then it trickles down to the lower rungs of the organization.
The manner in which this budget works is that the higher management sets the budgets based on what the company is looking to achieve in the forthcoming financial year.
In this regard, it can be seen that when decisions are being made, higher-level managers may, or may not include the opinion of lower managers during the budget creation process.
However, it is up to the discretion of the higher manager whether they want to include those recommendations or not.
Therefore, those budgets are strictly made by the higher management, and lower management is required to abide by the budget and make sure that targets are duly met in this regard.
Example of Imposed Budgeting
The example of imposed budgeting is described using the illustration below:
Tree Co. is looking to expand business in the coming year. They plan on doing this by increasing their sales by 15%, while keeping the marketing budget down to 12%, and sustaining the net profit margin of 17%.
These targets were communicated by the top management to the higher management so that they can duly be planned and executed by the lower management staff in the coming year.
The illustration given above is a classic example of imposed budgeting. In this example, the top management of Tree Co. has laid down strict and stringent rules about the Key Performance Indicators they want to improve on in the coming year.
How does Imposed Budgeting work?
When implementing imposed budgeting, the managers are normally expected to follow the steps given below:
- Target Setting: This is the first step in the budgeting process, and it involves higher management deciding on the broader target or goal that they have for the particular financial year. This broader goal then needs to be broken down into smaller parts, so that it can be allocated across departments in an effective manner. For example, in the illustration mentioned above, Tree Co. laid down that they need to expand, by increasing their sales. This was the broader goal that was set.
- Department Approval: After setting the goals, it is important for the higher management to take the finance department on board. This is because it would help them to study the impact quantitative impact of the goal on the organization. From the illustration above, it would mean that managers would get a chance to see how a 10% increase in sales is going to increase the profit of the company, in the case where the company is met.
- Allocations to different departments: After targets have been set, and the viability and the economic impact of the budget have been decided upon by the managers, it is then important to allocate the budgets to the respective departments, in order to get their feedback about the targets that are set. This is important because budgets would otherwise not be implemented if they are not on board with these targets.
- Allocation and Review of budgets: After approval and discussion from different departments, budgets are set, and then allocated to the departments to work towards. This will then be reviewed by companies after the end of the period to determine which targets have been achieved, and which have been left out.
Advantages of Imposed Budgeting
There are numerous advantages of using imposed budgeting. Some of the advantages are given below:
- It helps companies to target greater efficiency: Imposed budgeting is greatly helpful for companies because it helps departments to have strict and clear directions to work towards. This prudent approach is considered to be extremely pivotal in helping companies to combat the issue of declining productivity.
- Better financial planning: Since imposed budgets are created in collaboration with the finance department, the organization is able to identify key areas that need to be focused on in order to ensure that they are able to identify areas that need to seek further improvement so that better results can be generated. Financial planning will ensure that the company does not suffer unprecedented financial setbacks.
Limitations of Imposed Budgeting
Regardless of the advantages mentioned above, there are a couple of limitations of imposed budgeting that also need to be incorporated.
- Imposed budgeting leads to declining motivation on the part of the lower staff. In certain cases, the higher management might not be fully aware of the problems faced by the lower management, and therefore, they might end up losing motivation as a result of imposed budgets. This is also because of the fact that higher-level decision-making might not always involve lower management when setting those budgets.
- The loss of productivity as a result of excessive pressure on the employees might also occur because employees would end up feeling excessively pressurized as a result of strict targets being set by the higher management.