BUDGETTING
INTRODUCTION:-
Budget is the
heart of administrative management. It served as a powerful tool of co-ordination
and negatively an effective device of eliminating duplicating and wastage.
Budgeting, though primarily recognized as a device for controlling, becomes a
major part of the planning process in any organization.
Budget is a
formal expression of policies, plans, objectives and goals laid down in advance
by top level authorities of the organization as a whole in a given period of
time. It involves forecast and future performance and also it contributes to
control by anticipating cash needs, planning, necessary financing and
establishing the standards for measuring the current performance. Lastly
budgeting presents an opportunity for evaluation programmes and policies
thereby identifying obsolete or unnecessary activities and giving a call for
their discontinuance. It is this sense pre- audit.
MEANING:-
Literally the word
‘budget’ means a leather bag or sachet to carry official paper in. From that
association, it came to mean those papers themselves, more particularly the
paper containing the financial proposals for the year.
The word
“budget” derived from the old English word “budgettee” means a sack or pouch
which the chancellor of the exchequer used to take out his papers for laying
before the parliament, the Government, the financial scheme for the ensuring
year. Now the term budget refers to the financial papers not the sack.
ABOUT BUDGET:-
Ø
Budget is a concrete precise picture of the
total operation of an enterprise in monetary terms. HM
Donovan
Ø
Budget is an operational plan, for a definite
period usually a year.
Ø
Budget disciplines and streamlines
administration & goes hand in hand with programme planning.
Ø
Budget is a formal expression of polices, plan,
objectives and goals laid down in advance by top level authorities of the
organization as a whole in a given period of time.
BUDGET------ A TOOL FOR EFFECTIVE
ADMINISTRATION:-
When budget
becomes really an effective tool of administrative management, the executive
must have adequate power. The following principles should be followed-
Ø
Executive
programme: Budget should go hand in hand with programming under the direct
supervision of chief executive.
Ø
Executive
responsibility: the chief executive must observe the economy in the
execution of the programme.
Ø
Reporting:
Budgetary process like preparation of estimates, legislative action and the
budget execution must be based on full financial & operating reports coming
from all levels of administration.
Ø
Multiple
procedures: The method of budgeting may vary according to the nature of
operation.
Ø
Flexibility
in timing: should have provisions to accommodate necessary changes in the
light of changing economic situation.
Ø
Two-way
budget organization: Traffic between central offices & the agency
offices responsible for budgeting and programming should move in two-way rather
than one way street.
BUDGET-------- A TOOL FOR LEGISLATIVE
CONTROL
The budget is the
most important tool of legislature control over the public purse. Legislative
control signified that no tax can be collected without its prior authorization
and no expenditure incurred without its prior approval. Harold A Smith explains
the principles of legislative as follows:-
Ø
Publicity:
The main stages of the budget process, which includes executive
recommendation legislative consideration and action & budget execution,
should be made public.
Ø
Clarity:
The budget should be understandable to every citizen.
Ø
Budget
unity: All receipts should be recovered into one general fund for financing
all expenditure.
Ø
Detailed
speciation: Receipts & appropriation should be specific for to transfer
the items
Ø
Prior
authorization: Budget execution should stay strictly within the legislative
authorization & should be checked by an auditing agency reporting to the
legislature.
Ø
Accuracy:
It should be accurate as possible, & there should be no padding of
expenditure estimates or providing for hidden reserves by underestimating
revenue.
PURPOSE OF BUDGETING:-
v
Budget supplies the mechanism for translating
fiscal objective into projected monthly spending pattern.
v
Budget enhances fiscal planning & decision
making.
v
Budget clearly recognizes controllable and
uncontrollable cost areas.
v
Budget offers a useful format for communicating
fiscal objectives.
v
Budget
allows feedback of utilization of budget.
v
Budget helps to identify problem areas and
facilities effective solution.
v
Budget provides means for measuring &
recording financial success with the objectives of the organization.
FEATURES OF BUDGET:-
- It should be flexible.
- It should be synthesis of past, present & future.
- It should be product of joint venture+ co-operation of executives/department heads at different levels of management.
- It should be in the form of statistical standard laid down in specific numerical terms.
- It should have support of top management throughout the period of its planning supplementation.
IMPORTANCE OF BUDGET:-
Budget is a
Numerical description of expected income & planned expenditure for an
organization for a specified period of time. It is a concrete, precise, picture
of the total operation of an enterprise/organization/institution in monetary
term, i.e. finance.
The
following points serves the importance of budget:-
- Budget is needed for planning for future course of action 7 to have a control over all activities in the organization.
- Budget facilities coordinating operation of various department & sections for realizing organizational objectives.
- Budget serves as a guide for action in the organization.
- Budget helps one to weigh the values & to make decision when necessary on whether one is of a greater value in the programme than the other.
PRINCIPLES OF BUDGET:-
Budget is an
operational plan for a definite period, usually a year, expressed in financial
terms 7 based on expected income & expenditure.
1.
Budget should provide sound financial management by
focusing on requirements of the organization.
2.
Budget should focus on objectives & policies of the
organization. It must flow from objectives & give realistic expression to
the way of realizing such objectives.
3.
Budget should ensure the most effective use of scarce
financial and non-financial resources.
4.
Budget requires that programme activities planned in
advance.
5.
Budgetary process requires consistent delegation for
which fixed duties & responsibilities are required to be allocated to
managers at different level for framing & executing budget.
6.
Budget should include coordinating efforts of various
departments establishing a frame of reference for managerial decisions, &
providing a criterion for evaluating managerial performance.
7.
Setting budget targets requires an adequate checks
& balance against the adoption of too high or too low estimates.
8.
Budget period must be appropriate to the nature of
business or service and to the type of budget.
9.
Budget is prepared under the direction and supervision
of the administrator and financial officer.
10. Budgets are to be prepared and interpreted consistently throughout
the organization in the communication of planning process.
11. Budget necessitates a review of the performance of the previous year
and an evaluation of its adequacy both in quality and quantity.
12. While developing a budget, the provision should be made for its
flexibility.
WHO SHOULD BE
INVOLVED IN BUDGETTING?
Budgeting is a difficult and
responsible job. Your organisation’s ability to do what it has planned to do
and to survive financially depends on the budgeting process. Whoever does the budgeting
must:
·
Understand the values,
strategy and plans of the organisation or project;
·
Understand what it
means to be cost effective and cost efficient
·
Understand what is
involved in generating and raising funds.
To ensure you have all these
understandings, it is usually a good idea to have a small budgeting team. This
may only mean that one person does a draft budget which is then discussed and
commented on by the team.
Where staff is competent to take
full responsibility for the financial side of the organisation or project, the
following would normally be involved in the budgeting process:
ü
The Finance Manager
and/or Bookkeeper;
ü
The Project Manager
and/or Director of the organisation or department.
Where staff lack confidence to do the budgeting, then
Board members can be brought in.
Some Boards have a Finance
Committee or a Budget Sub-Committee. It is a good idea to have someone on your
Board with financial skills. S/he can then help the staff with budgeting.
The budget is the business of
everyone in the organisation. At the very least, senior staff should understand
the budget, how it has been drawn up, why it is important, and how to monitor
it.
Where an organisation has
branches and/or regions, or several departments, then each branch, region or
department should draw up the budget for its own work. These budgets then need
to be consolidated (put together) in an overall budget for the organisation.
Each branch, region or department should be able to see how its budget fits
into the overall budget, and should be able to monitor its budget on a monthly
basis. Financial monitoring works best when those closest to the spending take
responsibility for the budget.
CLASSIFICATION OF BUDGET:-
Budget consist
mainly three sections:-
§
Manpower
budget: - includes wages and other benefits provided for regular and
temporary workers.
§
Capital
expenditures: - includes purchase of land, buildings and major equipments
of considerable expenses and long life.
§
The
operating budget: - includes the cost of supplies, minor equipment, repair
and overhead expenses.
Budgets can be classified according
to Time, Function, and Flexibility.
ACCORDING
TO TIME:
- Long Term Budget
- Short Term Budget
- Current Budget
- Rolling budget
ACCORDING
TO FUNCTION:
- Sales Budget
- Production Budget
- Cost of Production Budget
- Purchase Budget
- Personnel budget
- Capital Expenditure Budget
- Cash Budget
- Master Budget
ACCORDING
TO FLEXIBILITY:
- Fixed Budget
- Flexible Budget
BUDGETTING PROCESS:-
Every head of the office
is required to prepare budget estimates in respect of salaries of
establishment, contingent expenditure and various other expenses, rent of
building etc. In hospital requirements in respect of medicines, diet equipment,
hospital contingencies, surgical dressing, clothing, linen etc. are also needed
to be worked out.
For budget
preparation will include:-
v
Forecasting:
- Related to making decisions on purchase, expansion, advertising, services,
working capital needs etc.
v
Accounting:
- Needed to compare the budget information with actual accomplishment.
v
Lines of
authority: - Budget preparation, operation and supervision need/require
clearly defined lines of authority.
v
Budget
committee: - Needs an organization—
·
To receive and approve all forecast,
departmental budgets, periodic report showing comparison of actual and budgeted
income and expenditure.
·
To request for special studies of deviations
from the budget and consider revision of budget to meet changed conditions.
v
Business
policies: - clearly defined business policies serve as basis for budget
preparation.
v
Statistical
information: - In the form of figures, i.e. estimates regarding the budget
terms are essentials for budget.
v
Top level
management: - support is essential to ensure successful instillation of the
budget programme.
v
Period of
budget; - Length of budget period (usually a year) should be specified.
STEPS IN BUDGETING; -
ü
Review the goals of the agency or hospital
because these are most likely to receive funding.
ü
Review the objectives of the existing programme
and written for proposal programme to ensure that achievement of these
objectives.
ü
Existing programme are revised and proposal
programme designed to maximum goal achievement.
ü
Manpower, capital and operating expenses are
computed for each programme old and new.
ü
Alternative methods are identified for realizing
designated objectives and price of each alternative is determined.
ü
Comparisons are made to determine which alternative
is most cost-effective.
ü
Budget requests is developed for the preffered
programme indicates alternative method for meeting the same objective, and
explain why the recommended programme is preferred.
ü
Officers and supervisors to present their need
for the coming year by a specified date.
ü
Review the budget appropriation and actual
expenditure for the current year.
ü
Prepare the programme with new budget.
ü
Determine the percentage of salaries of
personnel.
ü
Estimate the requirements for coming year from
the information supplied as the expenditure for supplies, equipments and
repairs to date.
ü
Prepare a summary of new needs, both personnel
and material with data to support the request
BUDGET PLAN:-
It is for the
top, management to define the planning premises and provide procedural details.
In the committee after discussion, the members have the opportunity to plan
amongst themselves. A best possible plan combining the talents of the entire
group thus emerges; the approach enhances communication, coordination and
harmony of various operational plans and efforts.
BUDGET CONTENT: -
The budget
consists of a master budget supported by various functional and supporting
budgets. The master budget consists of:-
v
Revenue & Expenditure budget.
v
Balance sheet budget.
v
Funds flow budget.
The
master budget is supported by functional/departmental budgets. Some of the
important functional budgets are: Purchase, personel, engineering and research.
The functional budgets are in two parts. Part one deal with the departmental
costs. Items over which the departmental head has full control-such as material
used, departmental manpower, maintenance expenditure etc. these are not
specifically identified with the department such as salaries of hospital
administration, general maintenance etc.Part two deal with their performance
expressed in terms of numbers to the extent possible.
The initial
draft budget contain proposal for additional manpower, equipment, space and any
other resources or changes in rate structure or operating system. Then these
are discussed with the top management, who after deliberating and considering
all aspects either accept, reject or suggest changes to the draft budget. Once
the budget is accepted, the departmental manager is committed to achieve the
targets set.
BUDGET PERIOD:-
The
budget period indicates the time span covered by a budget. It is generally one
year, coinciding with the financial year, such as in construction or film
industry, each job could have a separate budget to coincide with the time
required to complete the assignment. These are consolidated in annual budget.
Others are supplemented by long range plan, which covers 3 to 5 years period.
PROBLEMS, DISADVANTAGES, LIMITATION OR
BUDGETARY CONTROL:-
v
Inaccuracy---- Budget figures are expressed in
monetary terms.
v
Personal bias---- Imperfection in human
judgments.
v
Non-availability of cooperation---- Inefficient
employee.
v
Rigidity
v
Results are not attainable.
v
Consistency---- The budgets are not prepared a
fresh every year.
v
Time consuming process.
v
Ineffective budgetary control.
v
Discourage the initiatives.
v
More paperwork.
SOME
BUDGETING ISSUES:-
- Budgeting price increases:- Budgets are prepared in
advance. There are likely to be price increases between the time of
preparation and the time when the amount is spent or received. Take this
into account when you do your budgeting by estimating what the costs or
value will be when the expenditure is made or the income received.
If there is likely to be an
increase in costs then make sure that you also estimate for an increase in what
you charge in fees for services or in sales of products.
You need to keep your
calculations for your budget because some donors may be willing to provide a
supplementary grant if you can show clearly that you calculations were based on
a smaller rate of inflation than actually proved to be the case.
- The level of detail
needed:- On the one hand, the less detail you give, the more flexible
you are. On the other hand, leaving the budget too open makes it less
useful as a management tool. This does not mean that every single thought
and detail should be included in the budget line items.
One way to deal with this is to have different
versions of the budget for yourselves and for donors and potential donors. The
donor version would be more flexible and less detailed, and the management
version so less.
- Contingency amounts:- A contingency amount is an amount that you put aside
to deal with unforeseen events. While budgets should be informed guesses,
there is still an element of “guessing” in them. The future is uncertain
and organisations and projects have to survive in uncertain times. Because
of this, some organisations allow for a “contingency” line item in their
budgets – usually about 10% of the overall annual budget.
However, many donor
agencies do not like this and refuse to fund a “contingency” line item,
possibly because they believe that organisations and projects should be more
accurate in their budgeting. One way to deal with this is to build contingency
amounts into the major line items in your budget, allowing for an additional
10% over and above your calculations.
- Budgeting income generating
projects:- In overall budget for the project
or organisation, include the costs in the line items reflecting
expenditure, and the income in line items reflecting income. However, for
management purposes you will want to be able to monitor in greater detail
than this, in order to establish at what stage a break-even point is
reached. Bookkeeping records should be set up in such a way as to make it
easy for management to access this information.
- Timeframes:- Organisational budgets (for the whole organisation)
are usually calculated for a year at a time (based on the financial
year of the organisation). This also applies to ongoing departmental
budgets. Once you have an annual budget, it is best to break it down into
months, for management purposes. A monthly breakdown facilitates
monitoring (see the sections on budgeting for monitoring and watching your
cash flow).
When you present a budget that covers several years,
make sure that this budget is based on a medium-to long-term plan, and is not
simply an uninformed guess.
Budgets for specific, timebound projects may be
calculated for the whole life of the project. For monitoring purposes it is
probably best to break this overall project budget into years (where the
project runs over several years). You may then also decide to break it up into
months.
RESPONSIBILITY OF NURSE ADMINISTRATOR IN
BUDGET:-
Ø
Participation in planning budget.
Ø
Consult & take assistance of his/her
subordinates in determining the needs of the unit for the ensuing year on the
basis of information received.
Ø
Request sufficient funds to suggest a sound
programme provision, expansion of programme to attract and hold qualified staff
to provide for expansion of physical facilities.
Ø
The administrators have to support the budget.
Ø
She is responsible for budget & should cover
the routine budget control.
ROLES:-
Ø
Is visionary in identifying or forecasting short
& long term unit needs, thus inspiring proactive rather than reactive
fiscal planning.
Ø
Is knowledgeable about political, social &
economic factor.
Ø
Demonstrate flexibility in fiscal goals setting
in a rapidly changing system.
Ø
Anticipates, recognize & creatively
problems-solves budgetary constraints.
Ø
Ensures that client safety is not jeopardized by
cost constraints.
FUNCTIONS:-
Ø
Identifies the importance of, & develops
short & long range fiscal plan that reflects unit needs.
Ø
Articulates and documents unit needs effectively
to higher administrative level.
Ø
Assess the internal and external environment of
the organization in forecasting.
Ø
Demonstrate knowledge of budgeting and uses
appropriate technique.
Ø
Participate in relevant fiscal planning.
Ø
Coordinates the monitoring aspects of budget
control.
