Budgets are simple things, but they are often much abused. We are asked to prepare a budget to show how we would spend money if we got it for a program or project - so we inflate everything, assuming that we will never get as much as we ask for. Or perhaps the budget prepared on last year's figures is not doing too well this year - so we prepare a 'revised budget'. Towards the end of the financial year, we spend heavily to match the budget expectations - because there is a danger that if we fall below budget, we will not stand a chance of getting an increase in the next financial year, regardlesss of increased needs. And some items appear constantly in budgets because they have become implanted - there is no longer a need for them, but they get passed automatically and serve as a contingency for other shortfalls.
However, budgets are a simple and effective controlling tool if used effectively. Many new small businesses go under in the first few years because they do not budget for a loss till they reach a break-even point - they expect to make a profit immediately. Consequently, there is often a need for a 'rolling budget' - one that looks ahead for say 3 or 5 years and is amended as each year passes. Each business will have its own way of preparing one or more budgets, and I merely pass on some general information.
What follows is extracted from SP Robbins & D Mukerji. Managing Organisations: New Challenges and Perspectives. 1990, Prentice Hall of Australia, ISBN 0 7248 0769 1. pp138-141.
The revenue budget is a forecast because it is based on projecting future sales. Managers must take into consideration their competitors, advertising budget, sales force effectiveness and other relevant factors, and they must make an estimate of sales volume. Then, based on estimates of demand at various prices, managers must select an appropriate sales price. The result is the revenue budget.
Found in all units within a firm and in not-for-profit and profit-making organisations alike. Expense budgets list the primary activities undertaken by a unit to achieve its goals and allocate a dollar amount to each. Managers give particular attention to so-called fixed expenses&emdash;that is, those that remain relatively unchanged regardless of volume. As production drops, the variable expenses tend to control themselves because they fall with volume.
Cash budgets are forecasts of how much cash the organisation will have on hand and how much it will need to meet expenses. This budget can reveal potential shortages or the availability of surplus cash for short-term investments.
CAPITAL EXPENDITURE BUDGETS
Investments in property, buildings and major equipment are called capital expenditures. These are typically substantial expenditures both in terms of magnitude and duration. The magnitude and duration of these investments can justify the development of separate budgets for these expenditures. Such capital expenditure budgets allow management to forecast future capital requirements, to keep on top of important capital projects, and to ensure that adequate cash is available to meet these expenditures as they become due.
The incremental (or traditional) budget has two identifying characteristics. First, funds are allocated to departments or organisational units. The managers of these units then allocate funds to activities as they see fit. Second, an incremental budget develops out of the previous budget. Each period's budget begins by using the last period as a reference point. Only incremental changes in the budget request are reviewed. Each of these characteristics, however, creates a problem.
The incremental budget is particularly troublesome when top management seeks to identify inefficiencies and waste. In fact, inefficiencies tend to grow in the incremental budget because it's easy for them to get hidden. In the typical incremental budget, nothing ever gets cut. Each budget begins with the funds allocated for the last period&emdash;to which unit managers add a percentage for inflation and requests for those new or expanded activities they seek to pursue. Top management only looks at the requests for incremental changes. The result is that money can be provided for activities long after their need is gone.
Program budgets allocate funds to groups of activities (programs) that are needed to achieve a specific objective. As such, they are designed to deal with one of the major problems of incremental budgets; that is, funds are allocated to activities, not to departments.
Zero-base budgeting (ZBB), originally developed by Texas Instruments, requires managers to justify their budget requests in detail from scratch, regardless of previous appropriations. It's designed to attack the second drawback we mentioned in incremental budgets: activities that have a way of becoming immortal.
ZBB shifts the burden of proof to the manager to justify why his or her unit should get any budget at all.
ZBB is no panacea. Like incremental budgeting, it has its own set of drawbacks. It increases paperwork and requires time to prepare; the important activities that managers want funded tend to have their benefits inflated; and the eventual outcome rarely differs much from what would occur through an incremental budget.
Most computer accounting packages will enable you to draw up an incremental budget automatically - the program simply takes the totals for the previous year and allots them accordingly. You can then change whatever items you wish, but at least you have guidance as to the current year's expenditure.
You can also draw up a zero based budget using an accounting package - instead of using totals from the current year, the program merely draws up a list of items in the current budget and lets you enter the figures for the coming year.
I am not an accountant and not too happy with financial aspects of management, but I have managed large budgets. In one of my jobs, for example, we had to be within 5% of the budgeted total at the end of the financial year: if you looked like spending too much, you simply refused to spend anything in the last weeks or months ignoring the pleas and cries of your staff and departments - if you looked like not spending enough, you went beserk and procured items you might not really need. The problem was that if you were more than 5% under budget, you had no hope of getting the same amount again, and certainly no hope of getting any increase, regardless of changes to your programs!
Program budgets are difficult because you have nothing to go on. You have to make estimates and try to cover all contingencies. This happens to me now when I apply for funding for the community organisation I run when we want to develop new projects. Applying for continuing funding for the Scheme itself is no problem - the computer produces an incremental budget and I make minor changes to it. The problem arises when we think we could try something new - if we could get money for it.
What we have to do is some problem solving exercises -
Here is a sample budget which I use in my sessions on planning conferences and workshops. You should be aware that if it were available to you as a spreadsheet, you could adjust expenditure figures and see what the outcome would be on the balance. To maintain a slight profit, you could then see how to adjust the income categories. A major international IT conference went horribly wrong in this part of the world recently when organisers planned on some 3000 registrants per day - they allegedly got 30! The conference was wrapped up on day 3 when disgusted delegates went home; State and federal governments were involved in the subsequent investigations.
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