Budgeting

1 Definitions of Budgeting
In organisations, objectives and policies are set which are laid down in quantitative
data through budgeting. Budget is therefore nothing but a quantitative aspect of
planning. A budget is a statement of the desired performance of an organisation in the
pursuit of its objectives, in short-term(one year),usually expressed in financial terms
It is an action plan for the immediate future representing the operational and tactical
end of the corporate planning chain.
Budgets are sometimes referred to as business plans or profit plans. The budget and
budgetary control form the back bone of any control system.
Budgetary control takes the targets of desired performance as its standards, then
systematically collates information relating to actual performance (usually on a
monthly or four weekly period basis) and identifies the variances between target and
actual performance.
A budget of any organisation whether government (which we are all very familiar
with), corporate, private and etc. can be surplus or deficit.
 Types of Budget
Basically, budgets are of two broad types: Capital and Expense.
The Capital Budget (long term investment in assets)
Capital spending is investment and it may provide the single most important way for an
organisation to increase both sales share of the market. The capital investment has a longer
time horizon; it can make it possible for the company to produce a new product or a better
product, serve customers quicker or to reduce prices.
Since no company has unlimited funds, of course, nor can it call an unlimited credit or always
sell new equities at the price it would like to get, it must therefore set or adopt some criteria or
priority for new investment that must be undertaken.
In capital budgeting, the criterion for judging among projects is the rate of return on
investments over the long-term.
Expense Budget (day-to-day operational costs)
Expense budgets allot the money to be expended for various operational activities. Some of
these amounts will be fixed while others will depend on the level of operations planned for i.e.
the amount of production, the sales effort to be expended, the amount of advertising to be
done.
Budgets in this category include the cash budget.
 Objectives of Budgeting or Profit Planning
The following are the main objectives of budgeting or profit planning:
(a) to ensure by means of an overall plan that available resources are
utilised to the maximum advantage.
(b) to ensure that sufficient cash to finance the proposed scale of
activity will be generated internally or will be available from additional
capital loans and overdraft.
(c) to approve major items of capital expenditure specifically and to fix
all other limits for minor items.
(d) to fix target for current income and expenditure.
(e) to have a detailed basis for comparing performance throughout the
year with estimates.
 Budgeting Techniques
In governments and the corporate world, the budget is being talked about as a tool
to promote accountability and effectiveness, rather than simply as a vehicle for
allocating resources and controlling expenditure.
The response has therefore been at reforming their budgetary practices and
techniques. The techniques are discussed below.

1. Line-Item Budgeting
The line–item or incremental budgeting represents the most commonly used
budget. Each categories of activity is afforded its separate appearance. It assumes
the continuation of present programmes. Here, previous year’s actual spending is
extrapolated for next year by adding a percentage increase (for inflation). The main
advantage of the line-item budget is the ease of its preparation; it makes a simple
comparison of performance from one fiscal period to another fiscal period.
The main disadvantage with this approach is the difficulty of relating the line
budgeting to the goals of the present organisation.
2. Performance Budgeting
Performance Budgeting (PB) is a system where the managers are provided with the flexibility to utilise
department or organisation’s resources as required, in return for their commitment to achieve certain
performance results. It is a system of planning, budgeting and evaluation that emphasizes the relationship
between money budgeted and result expected. The primary disadvantage associated with a PB is the
emphasis on quality, not quality of the activity being monitored.

3. Zero-Base Budgeting
Zero-base budgeting (ZBB) is a budgeting method for a corporation or government in which all
expenditures must be justified afresh each year and not just amounts in excess of the previous year, like the
line-item or incremental budget. Every time, the mangers are supposed to start from scratch or writing on a
“clean slate”.
ZBB is claimed to be a new technique of planning and decision-making.
It reverses the working process of traditional budgeting. In traditional budgeting, departmental managers
need to justify only increases over the precious year budget. This means what has been already spent is
automatically sanctioned. While in ZBB, no reference is made to the previous level of expenditure. Every
department function is reviewed comprehensively and all expenditures rather than only increases are
approved.
ZBB is a technique, by which the budgeting request has to be justified in complete detail by each division
manager starting from the zero-base.
The zero-base is indifferent to whether the total budgeting is increasing or decreasing.
 Benefits of ZBB
(i) Elimination of obsolete, non-relevant decision packages.
(ii) Increased or decreased levels of funding for some decision packages
and addition of new packages.
(iii) ZBB encourages budget participation at the operating level. As a
result, managers and employees become focused.
(vi) Results in efficient allocation of resources as it is based on needs and
benefits.
(v) Useful for service department where the output is difficult to identify.
(vi) Increases communication and coordination within the organisation.
(vii) Managers and employees learn more about the organisation
activities and problems.
 Possible Problems of ZBB
(i) Increase in paper work and time consuming.
(ii) In certain areas of the organisation, it is difficult to define decision
units and decision packages.
(iii) It forces the managers to justify everything related to expenditure.
Sometimes, certain departments like R&D may be threatened while
production department would benefit.
(iv) In the first year, cost of training, paper work and implementation of
ZBB may go up because without its proper understanding, it cannot be
successfully implemented.
(v) Organisation may face some resistance from the employees and their
unions.
(vi) Difficult to administer and communicate the budgeting because more
managers are involved in the process. Since ZBB threatens certain position
of the managers and executive they may play games and politics.
 4. Programme Budgeting
Under programme budgeting system, department or agency budget requests not only
include the funding that it would like to receive, but also the outputs and outcomes they
expect to produce as a result of the funding. The legislature then establishes performance
targets for outcomes and outputs in the implementing act to the appropriation act.
Department or agencies then report their actual performance in their long-range
programme plans and budget requests for the following fiscal year.
Agencies may be given incentives for performance that exceeds standard or disincentives
for performance that falls below standards. These incentives and disincentives can be
monetary or non-monetary. By its nature, a programme budget focuses on the output
services that the programme provides to its users. It also more readily relates to overall
organisational goals and objectives.

Conclusion
We have in this unit considered budgeting. We have defined it as expressing
plans/objectives in quantitative terms in writing for definite period of time - a
year/month. All organisations find budgeting useful not only as a vehicle for allocating
resources and controlling expenditures, but now also as a tool to promote accountability
and effectiveness.