A budget is a detailed plan which sets out, in money terms, the plans for income and expenditure in respect of a future period of time. It is prepared in advance of that time period and is based on the agreed objectives for that period of time, together with the strategy planned to achieve those objectives.
The technical process of setting a budget emphasises the need for involvement at all stages of the process. In an ideal world that would produce the best solution, but 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 behavioural aspects in order to maximise the good points and minimise the problems. The behavioural aspects may conveniently be summarised as relating to motivation, partition, feedback, group effects, budget slack and the politics of the organisation.
It is suggested that budgets should help in performance evaluation because they provide formal targets against which to measure performance. If the targets are set with care, there should be motivation for the individual to achieve those targets. The question then arises as to what type of targets should be set. Relatively easy targets will be achieved by all, but they will know the targets were easy and will not feel fully motivated by that level of evaluation of performance. If the targets are moderately difficult there will be a stronger motivation for some individuals to achieve those targets, with a sense of personal satisfaction in doing so. Others will fail and will become despondent. They may decide not to put any further effort in because the targets are too diffi ...