Negotiation of Targets

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Setting the difficulty level of a budget

Targets will motivate employees if they are at the right level.

An expectations budget is a budget set at current achievable levels. Therefore, it is unlikely to motivate managers to improve.

An aspirations budget is a budget set at a level which is higher than the achievable level. Therefore, this will motivate managers to improve if it seen as achievable.

The relationship between budget difficulty and actual performance

The relationship between budget difficulty and actual performance

Budgeting in Public Sector Organisations vs. Private Sector Organisations

In the public sector, the objectives of the organisation are more difficult to define in a quantifiable way than the objectives of a private company.

For e.g., a private company’s objectives may be to maximise profit. This can then be set out in the budget by aiming for a % increase in sales revenue and perhaps the cutting of various costs.

On the other hand, if the public sector organisation is a hospital, then the objectives may be largely qualitative, such as ensuring that all outpatients are given an appointment within six weeks of being referred to the hospital. This is difficult to define in a quantifiable way.

Just as objectives are difficult to define quantifiably, so too are the organisation’s outputs. In a private company the output can be measured in terms of sales revenue. In a hospital, on the other hand, it is difficult to define a quantifiable relationship between inputs and outputs.

What is easier to compare is the relationship between how much cash is available for a particular area and how much cash is actually needed.

Therefore, budgeting naturally focuses on inputs alone, rather than the relationship between inputs and outputs.

Finally, public sector organisations are always under pressure to show that they are offering good value for money, i.e. providing a service that is economical, efficient and effective (value for money approach).

Therefore, they must achieve the desired results with the minimum use of resources. This, in itself, makes the budgeting process more difficult.

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