1.Budgeting and Budgetary Control

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    Budgeting and

    Budgetary ControlBy

    Dr. Charles M.M. Ondieki

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    IntroductionBefore you develop the budget:

    As with most good practice in managing anorganisation, good practice in budgeting involves clarityof purpose, detailed planning and considerable thought.

    Among the questions you should be asking yourselvesthroughout the preparatory budgeting stages, and whileyou are actually developing your budget, are:

    Could we have spent less last year and still achieved thesame results, or better?

    ave we wasted money in the past? !f so, can we avoid doingso in the future?

    "hese are all issues that you need to address before youbegin developing your budget. "hey are an e#tension ofthe planning process on which all budgeting is based.

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    WHAT IS A BUDGET?

    A budget is a document that translates plansinto money - money that will need to be spentto get your planned activities done (expenditure)and money that will need to be generated to

    cover the costs of getting the work done(income). It is an estimate, or informed guess,about what you will need in monetary terms to do

    your work in a given period of time.

    A budget helps to co-ordinate the activities ofthe organi ation.

    An example would be an advertising budget or salesforce budget .

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    A budget is not! Cast in stone " where necessary, a budget can be changed, so long as you take steps to deal with the implications of the changes. #o, forexample, if you have budgeted for ten new computers but discover that

    you really need a generator, you could buy fewer computers andpurchase the generator. Simply a record of last years e pendit!re , with an extra $%& added

    on to cover inflation. 'very year is different. rganisations need to usethe budgeting process to explore what is really needed to implementtheir plans.

    "!st an administrati#e and financial re$!irement of donors% sponsors .he budget should not be prepared as part of a funding proposal and

    then taken out and dusted when it is time to do a financial report forthe donor*sponsor. It is a living tool that must be consulted in day today work, checked monthly, monitored constantly and used creatively.

    An optimistic and !nrealistic pict!re of &'at t'in(s act!ally cost "don+t underestimate what things really cost in the hopes that this willhelp you raise the money you need. It is better to return unspent moneyto donors*sponsors than to beg for a bit more so you can complete thework.

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    wo key uestions you should be able toanswer about budgeting are!

    0hy budget1 and 0ho should be involved in budgeting1

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    W'y )!d(et?W'y is it important for an or(anisation* pro+ect or department to 'a#ea )!d(et?

    he budget is an essential management tool. 0ithout a budget, you arelike a pilot navigating in the dark without instruments. he budget tells you how much money you need to carry out your activities. he budget forces you to be rigorous in thinking through the implications

    of your activity planning. here are times when the realities of thebudgeting process force you to rethink your action plans.

    2sed properly, the budget tells you &'en you will need certain amounts ofmoney to carry out your activities.

    he budget enables you to monitor your income and expenditure andidentify any problems.

    he budget is a basis for financial accountability and transparency. 0heneveryone can see how much should have been spent and received, they canask informed uestions about discrepancies.

    3ou cannot raise money from donors*sponsors unless you have a budget.4onors*sponsors use the budget as a basis for deciding whether what youare asking for is reasonable and well-planned.

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    W'o s'o!ld )e in#ol#ed in )!d(etin(? 5udgeting is a difficult and responsible 6ob. 3our

    organisation+s ability to do what it has planned to do andto survive financially depends on the budgeting process.0hoever does the budgeting must understand!

    the values, strategy and plans of the organisation or

    pro6ect7 what it means to be cost effective and cost efficient 7 what is involved in generating and raising funds.

    o ensure you have all these understandings, it is usuallya good idea to have a small budgeting team. his mayonly mean that one person does a draft budget which isthen discussed and commented on by the team.

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    0here staff is competent to take fullresponsibility for the financial side of the

    organisation or pro6ect, the following wouldnormally be involved in the budgeting process! he 8inance 9anager and*or 5ookkeeper7 he :ro6ect 9anager and*or 4irector of the

    organisation or department. 0here staff lack confidence to do the

    budgeting, then 5oard members can be

    brought in. #ome 5oards have a 8inance;ommittee or a 5udget #ub-;ommittee. It is agood idea to have someone on your 5oard withfinancial skills. #*he can then help the staffwith budgeting.

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    he budget is the business of everyone in theorganisation. At the very least, senior staff shouldunderstand the budget, how it has been drawn up, why

    it is important, and how to monitor it. 0here an organisation has branches and*or regions, or

    several departments, then each branch, region ordepartment should draw up the budget for its own

    work. hese budgets then need to be consolidated (puttogether) in an overall budget for the organisation.

    'ach branch, region or department should be able to

    see how its budget fits into the overall budget, andshould be able to monitor its budget on a monthly basis. 8inancial monitoring works best when those closest to

    the spending take responsibility for the budget.

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    THE ,-E.ATI,/A0 -0A/S 3our operational plans are the plans for the actual work.

    hey are also called action plans or business plans. In a normal planning cycle, the organisation or pro6ect will

    begin with a strategic planning process.

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    ESTI1ATI/G C,STS 2 CATEG,.IES he cost estimate is what helps you determine

    realistically what it will cost to implement youroperational plan.

    0hen you carry out your plans you will probablyneed to make use of a wide range of inputs.

    Inputs include people, information, e uipment,skills. 9ost of these inputs will have a costattached to them. hese are the costs you need toestimate in order to develop a budget.

    ;areful cost estimation helps in the following ways! It helps you develop an accurate budget7 and It helps you to monitor and control the actual costs of

    carrying out activities.

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    he costs you need to estimate fall into the followingcategories! ,perational costs " the direct costs of doing the work e.g.

    the cost of hiring a venue, or of printing a publication, or oftravelling to the sites where fieldwork needs to take place.

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    Staffin( costs " these are the costs for your core staff " the peopleinvolved in management, the people doing work that cuts acrosspro6ects. hese costs include their salaries and any benefits such asmedical aid or pension fund payments for which the organisation isresponsible. 3ou can charge staff costs out to the various pro6ectson which the staff members work. #o, for example, if your:ublications fficer is going to spend half her time working onpublications for a particular pro6ect, then you can include half hersalary and benefits in your costing for the pro6ect. If your 4irectoris going to spend $%& of her time providing management support tothe head of the same pro6ect, then $%& of her time and benefits canalso be charged to the pro6ect.

    Capital costs " these are costs for large investments which, whilethey may be necessary because of a pro6ect or pro6ects, will remain

    organisational assets even after the pro6ects are over. =ehicles ande uipment such as computers and photocopiers fit here. hey may beused by all pro6ects, or they might only be re uired for a specificpro6ect. 4epending on how you intend to use the e uipment, you mightbudget for it under operational costs or under organisational costs.

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    DI33E.E/T 4I/DS ,3 BUDGETS In addition to your main &or5in( )!d(et " what you realistically

    expect to generate or raise, and how this will be spent " you canalso have some what if budget options. 6W'at if budgets allow you to prepare for the unexpected "

    whether it is good or bad. 3our what if budgets could include! A s!r#i#al )!d(et . his is the minimum re uired in order for

    the organisation or pro6ect to survive and do useful work. A (!aranteed )!d(et . his is based on the income guaranteed

    at the time the budget is planned. 2sually the guarantees arein the form of promises from donors.

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    DI33E.E/T BUDGETI/G TECH/I7UES he two main techni ues for budgeting are incremental )!d(etin(

    and 8ero )ased )!d(etin( 9

    Incremental )!d(ets are budgets in which the figures are basedon those of the actual expenditure for the previous year, with apercentage added for an inflationary increase for the new year.

    his is an easy method that saves time but it is the la8y: way andis often inacc!rate . his budgeting techni ue is only suitable for

    organisations where each year is very similar to the previous onein terms of activities. =ery few dynamic organisations or pro6ectsare so stable that this budgeting techni ue really works for them.

    In 8ero )ased )!d(ets , past figures are not used as the startingpoint. he budgeting process starts from 6scratc': with the

    proposed activities for the year. he result is a more detailedand acc!rate )!d(et , but it takes more time and energy toprepare a budget in this way. his techni ue is essential for neworganisations and pro6ects, but it is also probably the best routeto go in a dynamic organisation that is proactive in taking on new

    challenges.

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    S,1E BUDGETI/G ISSUES B!d(etin( price increases; Ho& do yo! allo& for price

    increases in yo!r )!d(etin( process? 5udgets are prepared in advance. here are likely to be price

    increases between the time of preparation and the time whenthe amount is spent or received. ake this into account when

    you do your budgeting by estimating what the costs or valuewill be when the expenditure is made or the income received.

    If there is likely to be an increase in costs then make surethat you also estimate for an increase in what you charge infees for services or in sales of products.

    3ou need to keep your calculations for your budget becausesome donors*sponsors may be willing to provide asupplementary grant if you can show clearly that yourcalculations were based on a smaller rate of inflation thanactually proved to be the case.

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    Contin(ency amo!nts; W'at is a contin(encyamo!nt?

    A contingency amount is an amount that you put aside to

    deal with unforeseen events. 0hile budgets should beinformed guesses, there is still an element of guessing inthem. he future is uncertain and organisations andpro6ects have to survive in uncertain times. 5ecause of this,some organisations allow for a contingency line item in thetheir budgets " usually about $>& of the overall annualbudget.

    & over and above yourcalculations.

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    B!d(etary control 1et'ods

    B!d(etary control; A control techni ue whereby actual resultsare compared with budgets.

    Any differences (variances) are made theresponsibility of key individuals who caneither exercise control action or revisethe original budgets.

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    B!d(etary Control and .esponsi)ility Centers

    A responsi)ility center can be defined as any

    functional unit headed by a manager who isresponsible for the activities of that unit. here are four types of responsibility centers!

    .e#en!e centers - rgani ational units in which outputsare measured in monetary terms but are not directlycompared to input costs.

    E pense centers - 2nits where inputs are measured inmonetary terms but outputs are not.

    -rofit centers - 0here performance is measured by thedifference between revenues (outputs) and expenditure(inputs).

    In#estment centers - 0here outputs are compared with

    the assets employed in producing them, i.e. ? I.

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    Ad#anta(es of )!d(etin( and )!d(etary control here are a number of advantages to budgeting

    and budgetary control! ;ompels management to think about the future, which

    is probably the most important feature of a budgetaryplanning and control system. 8orces management tolook ahead, to set out detailed plans for achieving thetargets for each department, operation and (ideally)each manager, to anticipate and give the organi ationpurpose and direction.

    :romotes coordination and communication. ;learly defines areas of responsibility. ?e uires

    managers of budget centers to be made responsiblefor the achievement of budget targets for theoperations under their personal control.

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    :rovides a basis for performance appraisal (varianceanalysis). A budget is basically a yardstick againstwhich actual performance is measured and assessed.;ontrol is provided by comparisons of actual resultsagainst budget plan. 4epartures from budget can thenbe investigated and the reasons for the differencescan be divided into controllable and non-controllablefactors.

    'nables remedial action to be taken as variancesemerge.

    9otivates employees by participating in the setting ofbudgets.

    Improves the allocation of scarce resources. 'conomi es management time by using the managementby exception principle.

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    -ro)lems in )!d(etin(

    0hilst budgets may be an essential part of anymarketing activity they do have a number ofdisadvantages, particularly in perception terms.

    5udgets can be seen as pressure devicesimposed by management, thus resulting in!

    bad labour relations inaccurate record-keeping.

    4epartmental conflict arises due to! disputes over resource allocation departments blaming each other if targets are not

    attained.

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    !t is di$cult to reconcile personal%individualand corporate goals.

    &aste may arise as managers adopt theview, 'we had better spend it or we will loseit'. "his is often coupled with 'empirebuilding' in order to enhance the prestige

    of a department. (esponsibility versus controlling, i.e. some

    costs are under the in)uence of more thanone person, e.g. power costs.

    *anagers may overestimate costs so thatthey will not be blamed in the future shouldthey overspend.

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    C'aracteristics of a )!d(etA (ood )!d(et is c'aracteri8ed )y t'e follo&in(;

    :articipation - involve as many people as possiblein drawing up a budget. ;omprehensiveness - embrace the whole

    organi ation. #tandards - base it on established standards of

    performance. 8lexibility - allow for changing circumstances.

    8eedback - constantly monitor performance. Analysis of costs and revenues - this can be done

    on the basis of product lines, departments orcost centres.

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    B!d(et or(ani8ation and administration In organi ing and administering a budget system the

    following characteristics may apply! a< B!d(et centers ! 2nits responsible for the preparation of

    budgets. A budget centre may encompass several costcentres.

    )< B!d(et committee ! his may consist of senior membersof the organi ation, e.g. departmental heads and executives(with the managing director*principal as chairman). 'verypart of the organi ation should be represented on thecommittee, so there should be a representative from sales,production, marketing and so on. 8unctions of the budget

    committee include! ;oordination of the preparation of budgets, including the issueof a manual

    Issuing of timetables for preparation of budgets :rovision of information to assist budget preparations ;omparison of actual results with budget and investigation of

    variances.

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    c< B!d(et ,fficer ! ;ontrols the budgetadministration7 he 6ob involves!

    liaising between the budget committee and managersresponsible for budget preparation

    dealing with budgetary control problems ensuring that deadlines are met educating people about budgetary control.

    d< B!d(et man!al ! his document! charts the organi ation details the budget procedures

    contains account codes for items of expenditure andrevenue timetables the process clearly defines the responsibility of persons involved

    in the budgeting system.

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