Budgets can create many conflicts within an organization depending upon how they are used. If a company can remember that budgets have an unpleasant connotation and acknowledge that implication, it will be able to avoid many of the negative reactions that employees have when the term is used.
If a budget is too tight, the goals were set very high and may be unachievable. Unreasonable expectations create stress at all levels within the company. Management dictates the expectations to employees, who become frustrated. Members of the management team know that the performance of the company is tied to their personal performance reviews, which forces them to push the employees. This can create a very difficult working environment, causing friction among employees, between management and employees, and between management and owners.
If a budget is too loose, the goals are very easily attained. The budget may be padded to allow for unexpected problems. This kind of budget provides a “use it or lose it” spending environment. As the period ends, management rushes to spend its allotment so that the budget for the department is not cut in the future. Eventually, someone catches on, and the company must clean up its budgets.
Budgets should be reasonable, attainable, and flexible to provide for changes in the business environment.