The Role of Budgeting in Organizations

One of the problems managers face with budgets is that budgeting has a variety of different roles. These roles can all be important but the roles sometimes conflict. Barrett and Fraser writing in the Harvard Business Review more than 40 years ago distinguished between three types of budgets: Capital (major investment planning), Financial (cash flow/bank requirement planning), and Operational (Income and Expenditures on a shorter term).

One challenge is that these budgets have to fit together while all trying to do very different things. Even a single budget, say operational, can be trying to achieve different things. As such it is important to “[r]ecognize that role conflicts exist. Although the adverse effects of the conflicts can often be reduced, they cannot be totally eliminated.” (Barrett and Fraser, 1977, page 145).

What roles to budgets play? “Budgets can be called upon to play a variety of roles. … Three are major roles: planning, motivation, and evaluation; two are minor: coordination and education.” (Barrett and Fraser, 1977, page 145). Looking at it this way some of the conflicts are inevitable. To motivate employees the budget should be challenging but achievable. To plan cash usage the budget should be accurate (likely with a skew toward the overly cautious to prevent too many nasty surprises for the bank).

The fact that budgeting is not as simple as ‘creating a budget’ does not mean budgeting is not a useful process. It has many benefits from the roles outlined above. That said to really understand a budget one must have a good idea what the budget is trying to achieve and what trade offs those setting the budget are willing to tolerate. Budget setters will certainly have to sacrifice something.

Read: M. Edgar Barrett and LeRoy B. Fraser III (1977) Conflicting roles in budgeting for operations, Harvard Business Review, 55 (4) 137-146