Participative budgeting is a budgeting strategy that encourages participation and development from lower-level employees in an organization. In other words, a participative budget is a budget for a department or an entire organization created with the active participation of a wide range of employees.
According to the book “Budgeting Basics and Beyond,” participative budgeting is a bottom-up approach that not only involves owners and managers but also the operational employees within the organization. One of the primary advantages of this type of budgeting is that employees usually feel a greater connection with the company, improving morale within the organization. This increased morale can also have a positive impact on employee productivity potentially increasing profit.
When creating a participative budget, the company will invite employees from all areas of operation within the company to provide input. Employees will help managers and owners assess company budgetary needs for the upcoming budgetary period. Within guidelines provided by the company management, employees will normally evaluate several line items to recommend the allocation of budgetary funds. This potentially allows the organization to more readily identify possible money-saving and efficiency-increasing strategies. Participative budgeting recognizes that employees directly involved in the daily operations of a specific area of the company generally have more knowledge of the budgetary needs of the specific area.
There are several strategies that an organization can use when implementing participative budgeting. The individual needs of the company will determine best approach for the company. One commonly used strategy invites specific employees from a department to propose the budget for the department. Another strategy pools together employees from various departments to work together on the company's overall budget plan. The size or complexity of the company will influence the most effective strategy to implement participative budgeting.
Although employees have more input in participative budgeting, the company’s owners and managers continue to have the final decision regarding budget approval. For example, managers could determine that based on income projections, the employees´ budgetary suggestions are not viable options at the time. However, even in cases where managers reject the budgetary suggestions of employees, the ideas generated can provide valuable insight for the company moving forward.