When an institution is large enough to have a number of separate parts or departments, it must decide whether to practice centralized or decentralized budgeting. To practice centralized budgeting is to make all budgeting decisions from a single location. This method offers a number of advantages to those who practice it.
In certain situations, various branches of an organization may rely on the same target market from which to draw funds. When this occurs, the separate branches may begin to view each other more as competitors than as specialized contributors to a common cause. For instance, the separate departments of a university may see each other as competitors and try to recruit the same students. Such unnecessary competition and infighting can lead to a poor image, as well as inefficiencies that result from the parties involved having little reason to cooperate. By centralizing a budget, however, an organization can lessen this attitude of competition.
If every department of a company, university or agency has its own separate budgeting structure, the total amount of time and money spent on money is higher. This is largely because the organization has to hire more total personnel and have its employees engage in more total hours of budget-related activities to achieve what's theoretically the same effect. By pulling all budgeting efforts into a single department, however, the organization can streamline the budgeting process and minimize expenditures — one of the principal purposes of budgeting.
When budgeting is decentralized, this offers more opportunity for department leaders to misappropriate funds. By pulling the budgeting structure together, however, organizations can establish an overarching authority structure to account for funds spent in dubious ways and keep such misappropriations from occurring.
The various departments of an organization may commonly experience income fluctuations. If they have decentralized budgets, they may have trouble managing such fluctuations when they're negative. However, as long as the combined income streams of the various departments of the organization maintain a sustainable average, centralized budgeting can help individual departments by giving them what they need to ride out temporary setbacks without being devastated by them.