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The Self-Imposed Budget

The success of a budget program is largely determined by the way a

budget is developed. Oftentimes, lower-level managers impose from
above, the budget with little participation. However, in the most
successful budget programs, managers actively participate in preparing
their own budgets. Imposing expectations from above and then penalizing
employees who do not meet those expectations will generate resentment
rather than cooperation and commitment. In fact, many managers believe
that being empowered to create their own self-imposed budgets is the
most effective method of budget preparation. A self-imposed budget or
participative budget, as illustrated in Exhibit 8–1, is a budget that is
prepared with the full cooperation and participation of managers at all
Self-imposed budgets have a number of advantages:

1.Individuals at all levels of the organization are recognized as members

of the team whose views and judgments are valued by top

2.Budget estimates prepared by front-line managers are often more

accurate and reliable than estimates prepared by top managers who
have less intimate knowledge of markets and day-to-day operations.

3.Motivation is generally higher when individuals participate in setting

their own goals than when the goals are imposed from above. Self-
imposed budgets create commitment. 

4.A manager who is not able to meet a budget that has been imposed from
above can always say that the budget was unrealistic and
impossible to meet. With a self- imposed budget, this excuse is not

One important limitation of self-imposed budgeting is that lower-level

managers may allow too much budgetary slack. Because the manager
who creates the budget will be held accountable for actual results that
deviate from the budget, the manager will have a natural tendency to
submit a budget that is easy to attain (i.e., the manager will build slack
into the budget). For this reason, higher levels of management should
scrutinize budgets prepared by lower-level managers. Questionable items
should be discussed and modified as appropriate. Without such a review,
self-imposed budgets may be too slack, resulting in suboptimal

As these comments suggest, all levels in the organization should work

together to produce the budget. Lower-level managers are more familiar
with day-to-day operations than top managers. Top managers should have
a more strategic perspective than lower- level managers. Each level of
responsibility in an organization should contribute its unique knowledge
and perspective in a cooperative effort to develop an integrated budget.
Nevertheless, a self-imposed approach to setting budgets works best when
all managers understand the organization’s strategy. Otherwise, the
budgets proposed by the lower- level managers will lack coherent
direction. In later chapters, we discuss in greater detail how a company
can go about formulating its strategy and communicating it throughout the

Unfortunately, most companies do not follow the budgeting process we

have described. Typically, top managers initiate the budgeting process by
issuing profit targets. Lower-level managers are directed to prepare
budgets that meet those targets. The difficulty is that the targets set by top
managers may be unrealistically high or may allow too much slack. If the
targets are too high and employees know they are unrealistic, motivation
will suffer. If the targets allow too much slack, waste will occur.
Unfortunately, top man- agers are often not in a position to know whether
the targets are appropriate. Admittedly, a self-imposed budgeting system
may lack sufficient strategic direction and lower-level managers may be
tempted to build slack into their budgets. Nevertheless, because of the
motivational advantages of self-imposed budgets, top managers should be
cautious about imposing inflexible targets from above.