Dysfunctional behaviours in budgetary control system are those suboptimal decisions that managers make just to ensure that they meet targets and get their bonus. The essence of budgeting which includes motivation of managers will be defeated if proactive action is not taken at both the design stage and implementation stage of budgetary control system.
The aim of this article is to identify those dysfunctional behaviours that managers might exhibit in order to beat a budgetary system and then make recommendations that when followed by management will prevent those dysfunctional behaviours from happening.
7 dysfunctional behaviours of a badly designed budgetary control system
- Budgetary slack and padding: this is a situation where managers either over budgets or under budgets. Most managers when given the opportunity of participating in the budgetary process tend to introduce some elements of slack into the budget. The reason behind this act is to give cushion for the next periods in such a way that the current period’s budget will still be achieved. One way of overcoming this is to negotiate budget and agree on reasonable terms- what is reasonable surely creates a problem of its own.
- Gaming: managers focus on the easy measures and ignore the ones that are perceived to be hard. This problem can be avoided by having weighted bonus and measures. The more difficult objectives to be achieved should be assigned more weights. This way, managers will have no choice but to place proportional efforts on all facets of performance measures.
- Management fraud: common example of this problem is when managers prepare creative and fraudulent accounting. Budgetary systems should be designed in such a way that it will be specific and auditable. The use of information technology in accounting has made it very easy for top management to strive towards design and implementation of accounting information system that leave audit trails.
- Conflict: conflict arise when managers competes with other managers in order to achieve their target without minding what happens to the overall objectives of the company. One way of making sure that this does not happen is to include group measures. The effect of having a group measure is that managers will be forced to take actions that will make the job of other departments easier thereby improving the overall business process within a company.
- Short termism or myopia: this problem arises as a result of the fact that managers only care about what yields immediate result at the expense of longer term objective. One way of overcoming this is to have range of measures to include both financial and non-financials. You can include a shares bonus scheme to the overall perks of managers if certain long-term objectives are met.
- Fixation of actions: here, managers only focus on only things that are measured. This supports the saying that what gets measured gets done. This aggravates the effects of short-termism in the sense that measures are broken down into shorter and manageable goals. Best practice suggests that management broaden the scope of measures to include all key areas.
- Obfuscation: this is common in a poorly designed budgetary control system and where the objectives of a budgeting system are not communicated to line managers in a clear and concise manner. The true meaning and rationale behind the preparation of budgets are lost as a result of it being hidden in vaguely prepared budgetary control system. The real aim of having a budgetary scheme is swallowed by distractions when too much irrelevant information is included. Reward scheme needs to be flexible so that it can easily be adjusted when it becomes obvious that the process is losing its essence
Budgetary control system when tied into the reward system of a company will ensure that dysfunctional behaviours like the ones described in this article will be avoided.
Again, there is a danger that budgets restrict actions even when a new idea will greatly improve things. I remember making a suggestion to one of my managers in my 1-2-1 while I was working for a well-known company.
My line manager made it clear that the idea is good but not in the budget and the budget cannot be changed once locked. I bet you are as surprised as I was when I heard this.
But, this is what happens in real life work place where budgets act as barriers rather than enablers in businesses.
The dysfunctional behaviours of budgetary control systems that are discussed in this article will be avoided if the tips provided in this articles on the potential problems of budgetary control will be adhered to.