What is a disadvantage of participative budgets?

Participative budgets involve input and feedback from various levels of management, allowing for a more collaborative approach in the budgeting process. However, one significant disadvantage is the potential for biases in figure preparation.

When multiple participants contribute to the budget, there may be a tendency for individuals to inflate their estimates or project overly optimistic revenues and expenditures based on personal interests or departmental goals. This can lead to the creation of unrealistic budgets that may not accurately reflect the organization’s capabilities or market conditions. Such biases originate from the desire of individuals to secure resources for their departments, thereby skewing the overall budgetary data.

In contrast, the other aspects typically associated with participative budgets, like quicker creation of budgets or better alignment with corporate objectives, are generally seen as advantages, as they foster a sense of ownership and commitment among employees. Increased control from senior managers is context-dependent but does not inherently reflect a disadvantage of participative budgeting in the same way that potential biases do.