Budgets: Setting Targets
Budgeting involves setting targets. Clear targets motivate people to high performance levels.
Budgets are your stories of tomorrow. They show choices, aims and objectives.
Targets are typically shown in terms of money, i.e. income, costs and profits. Tough targets play their part in motivation and performance.
One use of budgets is to measure business performance. If income is more than expected, and/or costs less expected then this is over performance. If income is less than expected, and/or costs more than expected then this is under performance
When setting targets, make them S.I.C. Read more to see what we mean by S.I.C. targets
Level of Difficulty
Some managers prefer setting soft targets. They are less stressful and more achievable.
Also, some managers prefer tight, almost impossible targets. This isn’t financial masochism, but low targets tempt you to stop once you reach them. Tough targets gives you something to aim for.
Setting tough targets has a negative motivational affect. Too soft and there is no motivation to achieve anything but the minimum. A lot of businesses accept that budgetary targets should be ‘stretching but achievable’.
Research says that:
- Managers must adopt budgets as their own personal budgets, if they are to have a motivational effect
- Budgets need to be demanding to get good results. If the demands are ridiculous, there will a point where the budget target is no longer accepted
- Unrealistic budgets result in negative attitudes
- Demanding budgets are more relevant than less difficult budgets
- Bottom up communication is key to budgets being accepted
- Personality, business culture and organisational norms affect how we react to budgets
Some managers prefer loose budgetary targets. those targets are less stressful and more achievable.
Furthermore. some managers prefer tight, almost impossible targets. This isn’t financial masochism, but low targets tempt us to stop once you reach that target. At least an impossible target gives you something to aim for and doing better than you thought was achievable.
Another view is that tough targets have a negative motivational. Too slack and there is no motivation to achieve anything but the minimum. A lot of businesses accept that budgetary targets should be ‘stretching but achievable’.
In conclusion, if targets are too tight and difficult then getting the best from your team will not happen. Looser, or easier targets, which have little motivational effect, will usually be achieved.
It sounds odd, but business should expect a degree of under performance to get maximum motivation and performance. Under performance is normally seen as a sign of failure and is seen as poor performance.
If this is the case, then next time budget holders will submit more easily achievable budgets. The result being under performance. But with reduced motivation of managers to achieving optimum performance.
To get the best level of performance, small amounts of under performance against budget is healthy. It is not failure. Perfect performance against budget indicates a loose budget, and, little motivational impact.
Are Budgets for Planning or Motivation?
Budgets are a step towards achieving your long-term plans. Budgets also play their part in motivating your teams to superior levels of performance. This dual role can create potential organisational conflict.
Setting budgets that will not be achieved is not suitable for planning forward. Several tough budgets would add up to a tough and unrealistic long-term plan.
Some suggest that separate budgets are used for planning and motivational purposes. Of course, this may have some behavioural difficulties of its own. The reality is that a single budget is unlikely to meet both planning and motivational needs of the organisation.
Budgets affect behaviour, in terms of management and business performance.
Controllable and uncontrollable costs
Measuring performance against factors managers cannot control, makes managers disconnect from the budget process.
Goals and ambitions
Whilst personal goals may be linked to the achievement of business goals they may also be in conflict. For example, manager’s wanting to maximise salary and benefits can lead to higher costs for the organisation. Budgets cannot always satisfy the goals of individuals and the organisation.
The disciplinary effect of budgets
Budgets can be used as ‘sticks with which to beat people’ when poor financial performance occurs. In that case, managers will find subtle and clever ways of ‘cheating the system’.
Tight budgetary controls creates a cautious approach to business opportunities and innovation. What’s the point of sticking your head above the business parapet if it’s going to be shot at. This is a very short-term view that may not be compatible with the organisations long term plans.
For example, a sales manager may have the chance to take on new business near the end of the budget year. Initial customer orders often involve high set up costs, and initial orders may make a small or negative margin. This may damage their achieving the budgeted margin targets. Hence the new business is not taken on. Turning down business may not be in the best long-term interests of the company.
Make your targets SIC. Stretchy is what you want when you set targets. This is not impossible. For example, don’t double turnover next year when there’s no basis or support for it. Don’t make targets too soft or slack
Involvement. Make sure that those who are involved in delivering the budget set their own targets. Lastly, make sure that whatever they’re responsible and accountable for, that can influence and impact them.