Budgeting Operations and Approaches

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Table of Contents

Budget Planning and Control
Program Change Proposal
Performance-Based Budgeting (PBB)
Budget Reductions
Cost-Benefit Analysis
References

Budget Planning and Control

A budget is an economic plan that contains an estimate of the required resources and the resources available to achieve specific goals and objectives within a definite period. Budgeting, therefore, involves all activities that contribute to the making of a budget. Control orientation focuses on a narrow range of activities, especially the activities that limit the operating officials to the maximum budget set. A control orientation compels budget makers to concentrate on crucial aspects of a budget only. A management orientation is concerned with specific issues such as an organization’s plan to accomplish a given task (Morgan, Robinson, Strachota, & Hough, 2015). Therefore, the management orientation obliges a policymaker in the budgeting process to align the budget with the organization’s goals. On the other hand, a planning orientation considers a wide range of long-term concerns such as the alignment of goals and policies of the corporation with the expenditure choices and specific programs that should be implemented, terminated, expanded, or curtailed (Morgan et al., 2015). Consequently, this orientation compels policymakers and managers to commit the establishment’s resources to the appropriate programs. Overall, the control, management, and planning orientations of a budget ensure that all budgetary functions are met with precision (Morgan et al., 2015).

Program Change Proposal

A program change proposal is a formal written proposal to amend the level of service or funding to cover a certain scope of work (Kasdin, 2017). The most effective way to present a proposal for program change should be preceded by daily monitoring and control of expenditure during normal organizational operations. When it becomes apparent that changes should be carried out in the budgetary allocation, the departmental staff and the principal investigator review the terms and conditions of the cost principals to determine whether the change should be executed (Kasdin, 2017). If the proposal for change violates the established cost principles, the change is not implemented. The presentation of the proposal for change should be timely, complete, and relevant. Additionally, the program change proposal should be consistent with the objectives of the department. It should state its goals clearly and outline unambiguous criteria through which the goals will be achieved. Additional details that should be contained in the change proposal include cost justification, workload, overall planning, and control. The review of a proposal for program change should involve all stakeholders of the program, for example, the donors and program leader. The project leader should present the anticipated changes to the stakeholders to obtain their approval before implementing the change.

Performance-Based Budgeting (PBB)

Performance-based budgeting (PBB) is a budget that is formed by comparing the expected results and the input needed to fund a project (Ljungholm, 2015). PBB emphasizes the outcome rather than the cost. Its goal is to create a flexible budget system that is founded on targets rather than limits that can adjust smoothly to changing conditions such as funding or agendas. Elected officials are reluctant to use the PBB system because it is highly political and may limit their discretion in the decision-making process (Ljungholm, 2015). The PBB would be useful in the development phase of the budget process because it would ensure that the budget does not deviate from the overall goals and guarantee the maximization of resource efficiency to produce the best outcomes. Performance information enhances program implementation by finding solutions that combine performance information with specific items during budget consideration. Performance information also furthers program performance by guiding future actions of the public manager to warrant project success. Data collected through the PBB system reflect the reality of the situation and promote the public manager’s accountability to the chief executive (Speklé & Verbeeten, 2014).

Budget Reductions

Budget reductions are necessary for coping with the current tight economic situations. Budget cuts could be as a result of cutbacks by funders, lower demand for goods or services, price competition, or unusual cost events (Gitman, Juchau, & Flanagan, 2015). Various financial models determine the size of budget cuts. Small budget cuts of less than 5% may compel the program manager to provide information, which may lead to a reduction of the budget, for example, excess funding, which is no longer needed or positions that could remain vacant without disrupting the normal operations of the organization. Budget cuts greater than 5% could require analyzing project operations to determine which programs could be closed and which services could be terminated. It may also be crucial to cut back on support services. Reductions that are likely to be permanent necessitate examining trends and carrying out long-term forecasting of the project. Budget reductions may involve a complete restructuring of the program, re-evaluating the services offered, and complete assessments of departments, staff, and managers.

Cost-Benefit Analysis

A cost-benefit analysis (CBA) is a systematic approach that determines if an investment idea is sound (if the benefits of the investment outweigh the costs incurred). This method is efficient for businesses that involve small or medium capital expenditures. However, it is not appropriate for extensive and long-term projects. Conducting a CBA involves compiling all the outlays (direct and indirect costs) and profits associated with the investment idea. Regrettably, human error may cause CBA inaccuracies, for example, unintentionally overlooking certain expenditures and profits because of the failure to predict indirect causative relationships. Measuring and allocating a monetary value to imperceptible items is an equivocal process that generates an inaccurate CBA, which elevates risk and uneconomical decision-making. Also, cost-benefit analyses fail to consider important factors such as interest rates, inflation, variable cash flows, and the present value of money (Mechler, 2016). Alternative methods of capital budgeting analysis should be used in such situations.

References

Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance (6^th ed.). Frenchs Forest, Australia: Pearson Higher Education AU.

Kasdin, S. (2017). An evaluation framework for budget reforms: A guide for assessing public budget systems and selecting budget process reforms. International Journal of Public Administration, 40(2), 150-163.

Ljungholm, D. P. (2015). The practice of performance management in public sector organizations. Geopolitics, History and International Relations, 7(2), 190-196.

Mechler, R. (2016). Reviewing estimates of the economic efficiency of disaster risk management: Opportunities and limitations of using risk-based cost–benefit analysis. Natural Hazards, 81(3), 2121-2147.

Morgan, D., Robinson, K. S., Strachota, D., & Hough, J. A. (2015). Budgeting for local governments and communities. New York, NY: Routledge.

Speklé, R. F., & Verbeeten, F. H. (2014). The use of performance measurement systems in the public sector: Effects on performance. Management Accounting Research, 25(2), 131-146.

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Budgeting Operations and Approaches

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