A common mistake during or even before starting the budget planning process in a company is confusing the organizational structure with the structure of responsibility. This error is common, especially in organizations that also have other budgeting challenges we’ve written about before, such as budgetosis or creating an organization’s strategic budget. When budgeting, these two concepts are often thought of, often the budget is built around the organizational structure, not the structure of responsibility, which in the long run turns out to be a mistake and can lead to many problems in managing the company.
Organizational structure vs. responsibility structure
Why should the organizational structure correspond to the structure of responsibility and what impact does it have on shaping and planning the budget in the organization?
- First, if the organizational structure does not match the accountability structure, then those responsible for certain tasks may act outside their scope of responsibility or not have full control over their actions. In such a situation, it is not clear who is responsible for making decisions and who bears the consequences for possible mistakes.
- Secondly, confusing the organizational structure with the structure of responsibility can lead to an excessive focus on hierarchy and formal structures in the company, not on results and achieving business goals. If those responsible for a given area do not have full autonomy and decision-making power, they may be limited in their ability to make innovative decisions or actions that improve the company’s efficiency.
- Third, confusing organizational structure with responsibility structure can lead to to misunderstandings and conflicts between different organizational units, as it is unclear who is responsible for carrying out a specific job or who is responsible for achieving specific goals.
To avoid these problems, it is important that the organizational structure of the company is in line with the structure of responsibility, so that budget planning in the company can run as efficiently as possible. Persons responsible for specific tasks should have full autonomy and decision-making power in their area, and their goals and indicators should be clearly defined and consistent with the company’s business goals. Thanks to this, it will be possible to effectively manage the company, motivate employees to act and achieve the set goals.
Where to start planning your budget?
The beginning of any budget planning should be a look at the accountability structure, which is often built on historical records or based on cost centers imposed by the accounting department and often does not match the needs of the organization at a given moment. Building a good structure of responsibility should always take place before creating a budget, only then is it able to interact with the incentive system and achieve the goals set by the organization.
What are accountability centers and how to build them?
The structure of responsibility is most often based on responsibility centers, which in the organizational structure of the company are organizational units that are assigned a specific scope of duties and responsibility for achieving specific goals. These centers are typically divided by function or geography and are key elements of a company’s management control system.
In the context of this topic, responsibility centers are the primary control units through which the performance and efficiency of a company are monitored. Each center has its own goals and indicators, and their performance is compared to specific standards, budgets or goals. Thanks to this, managers can assess the extent to which a given center contributes to the achievement of the company’s general goals.
Responsibility centers are also often used to allocate costs and determine the profitability of individual departments or products. Costs are allocated to each responsibility center based on criteria such as the amount of work, materials or time needed to complete the task. Thanks to this, managers have full insight into the costs associated with a given unit, which enables them to make better business decisions.
How to build a responsibility structure?
The structure of responsibility should be built around the goals we want to set, aggregated in responsibility centers. The effectiveness of the budget most often depends on this element, which is also associated with the motivational function of the budget. The incentive function of the budget is to motivate managers to achieve goals, but if the goals are set at the level of the organizational structure, and not the structure of responsibility, we will achieve the opposite effect. The motivating function of the budget, resulting from the fact that the manager is assessed for the implementation of the budget, can be implemented only when the structure of responsibility is well adapted to the scope managed by the given manager.
The structure of responsibility should not be a need of a given person managing the organization (president or owner), it is a substantive need resulting from the management of the company.