During my graduate studies, I had a professor who helped me frame a new mental model of budgeting.  The basic idea – when thinking of budgeting as a management tool – is to think about a budget in the context of “predictive” accounting.  As a manager looks into their Chrystal ball of planning work, what expenses do they expect to incur and how should those expenses be recorded for accountability.  Then budget accordingly.

When budgets are used as controls, they are a management tool.  They serve as part of an agreement between two levels of management.  While all contracts are agreements, not all agreements are contracts, so you can’t take your fellow manager to a court of law.  However, what they do share is a meeting of the minds and a commitment.  Therefore, in determining the level of effective planning and budgeting, it is important to first recognize the RAA or Responsibility – before the fact; Authority – for the fact; and Accountability – after the fact.  Thus, trying to hold a first level manager accountable for a budget developed at a high level of management dissolves the symbiotic relationship of RAA and therefore entirely unproductive and intuitively unwise.

When budgets are used as constraints, and imposed by a higher level of management upon a lower level of management, the lower level manager should align expectations and plan out the work that can be accomplished within the budget.  This establishes a meeting of the minds and a commitment between managers.  Therefore, performance can be measured based on the agreement, and unplanned work items should be funded outside the budget.