Budget & Budgeting

8/17/2019 Budget & Budgeting

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INTRODUCTION

An organization should be managedeffectively & efficiently, to achieve itsobjectives

udgeting or !rofit !lanning is asystematic a!!roach for effectivemanagement !erformance"

The term budget is derived fromFrench word ‘bougettee’ –a leatherpouch in which funds are kept formeeting anticipated expenses

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INTRODUCTION (contd..) A Budget is a comprehensive &

co-ordinated plan expressed in financialterms for the operations & resources of

an enterprise for some specific period inthe future.Basic elements of a budget Comprehensive & coordinated plan Expressed in financial terms For firms operations & resources For specified period

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INTRODUCTION (contd..)

Budget is a kind of single-use plan ofexpected results expressed in numericalterms, expected to be achieved within

specific time period. Hospital budgetis a process of estimatingproposed expenditures and the means offinancing these expenditures.

According to Mc Gibony, budget is thefinancial forecast of future operation inaccounting terms

Budgeting : Is the process of preparing &using budgets to achieve management

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ESSENTIALS OF BUDGET

%re!ared in advance & is related to

future !eriod

t is based on the future !lan of action

t is based on the objective to be

obtained

t is a statement e'!ressed in terms of

monetary & or !hysical unit !re!ared forthe im!lementation of !olicy formulated

by management"

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OBJECTIVE OF BUDGET &BUDGETING To state firms goals in clear, formal termsto facilitate their attainability

To communicate expectations

To provide detailed plan of action To coordinate activities & efforts towardsmaximum utilization of resources

To provide means of measuring &controlling performance & supplyinformation on the basis of whichcorrective action can be taken

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BUDGET

Hosp. budget is a process of estimatingproposed expenditures and the meansof financing these expenditures.

A basic reason for preparing a budget isto enable the hospital to effectively meetits financial requirement.


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ESSENTIALS OF BUDGETING

Top management support Clear & realistic goals Assignment of authority & responsibility Creation of responsibility centers Adaptation of the accounting system Full participation

Effective communication Budgetary education Flexibility

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BUDGET

Essentials of budget:

It is prepared in advance and is relatedto the future period.

It is based on the future plan ofactions.

It is based on objectives to be obtained.

It is a statement expressed in terms ofmonetary and/or physical unitprepared for the implementation ofpolicy formulated by the management.


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TYPES OF BUDGET

I. OPERATING BUDGETS

a) Programme/activity functional budget

b) Responsibility budget

c) Periodic/fixed budgetd) Continuous/rolling/flexible budget

II. FINANCIAL BUDGETS

a) Cash budget

b) Performa financial statementsIII.CAPITAL BUDGET

IV.REVENUE BUDGET

V. MASTER BUDGET

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OPERATING BUDGET

%lanning of the activities or o!erations ofe'ercise eg" %roduction, sales, etc"

1" %rogramme/ activity/ functional budget) *oro!erations/functions to be !erformed

during ne't year t hel! ensures balance among various

o!erations or functions of an enter!rise

asically a !lanning !rocess

#" +es!onsibility budget)

%lans in terms of individual res!onsibility

asically controlling device

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FINANCIAL BUDGET

1" -ash budget)

t is a summary statement of the firms

e'!ected cash inflos & outflos over a !eriod

of time

.bjective is to maintain sufficient cash

balance to meet its need & use the idle

cash in most !rofitable manner"

roen don by monthly or uarterly

!eriod"

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FINANCIAL BUDGET(CONTD..)

-ash budget contd

ts $ major sections are)

2 +ecei!t section

2 isbursement section

2 -ash sur!lus or deficit section

2 *inancing section

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Method of preparing a cash budget include:

Receipts and payment method.

The adjusted profit and lossmethod.

Balance sheet method.

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#" %roforma financial statements)

2 4seful to !re!are a !rojected

balance sheet & income statement

2 ives information as to the future

assets, liabilities & income statement

items

2 dentify the antici!ated results of thebudgeted o!erations

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CAPITAL BUDGET

nvolves !lanning to acuire orthhile

!rojects/ infrastructure /eui!ments, to

gather ith timings of the estimated cost

& cash flos of each !roject ifficult to !re!are as estimates of cash

flo over a long !eriod have to be made

hich involve a great degree ofuncertainty

e!arate committee for ca!ital budgeting

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BUDGETING PROCESS

te! 1) %lanning the %rocesste! #) -ommunicating about the %rocess

te! 3) %rogrammatic oal etting

te! $) nformation athering

te! 5) -om!ilation and +evision of

information

te! 6) -ommittee +evie

te! 7) *inal A!!roval

te! () m!lementation and 8anagement

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TYPES OF BUDGETING

%erformance budgeting 9ero:base budgeting

trategic budgeting

;raditional budgeting is the commonesta!!roach, here in current year


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PERFORMANCE

BUDGETING -once!t originated in 4""A" in 1=60sfor defense budgeting

n!ut :out!ut budget or cost & results

budget

hos cost matching ith o!erations

t em!hasizes non:financial measures of

!erformance hich can be related tofinancial measures, in e'!laining

deviation from !lanned !erformance

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PERFORMANCE

BUDGETING( CONTD)

Resultants of performance budgeting: -orrelates the financial & !hysical as!ects of

every !rogramme or activity

t im!roves budget formulation, revie, &

decision maing at all levels of the organization t facilitates better a!!reciation & revie of

organizational activities by the to! management

8aes !ossible more effective !erformance

audit t measures !rogress toards long:term

objectives

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ZERO BASE

BUDGETING(ZBB) .rigin :4""A" in 1=71 ased on a system here each function,

irres!ective of the fact hether it is old

or ne must be justified in its entiretyeach time a ne budget is formed"

>ach manager has to justify his entire

budget in detail from zero base

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ZERO BASE

BUDGETING(ZBB)(contd) Advantages over traditional budgeting

>ffective allocation of resources

m!rovement in !roductivity & cost

effectiveness

>ffective means to control costs

>limination of unnecessary activities

etter focus on organizational objectives

aving time of to! management

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ZERO BASE

BUDGETING(ZBB)(contd) Disadvantages:

>'cess !a!er or

ifficulty in identifying decision

!acages

;endency to establish minimum level of

efforts

-an overcome ith e'!erience of 9

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STRATEGIC BUDGETING(CONTD..)

-om!aratively neer conce!t ?obs & tass should be designed in

terms of desired strategic results &

!erformances ;o stages in budget !re!eration)

1" %re!eration of !osition !a!ers@ !rovidesbacground for budgeting

#" %re!eration of budget:: is !re!aredthrough interaction beteen cor!oratelevel & 4 level in the light of !osition!a!ers

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MERITS OF BUDGETING

*orced !lanning -oordinated o!erations %erformance evaluation & control

>ffective communication .!timum utilization of resources %roductivity im!rovement

%rofit mindedness 8anagement by e'ce!tion >fficiency

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DEMERITS OF BUDGETING

Budgets can be seen as pressure deviceimposed by management, thusresulting in:

a) Bad labor relations b) Inaccurate record-keeping.

Departmental conflict arises due to:

a) Disputes over resource allocation b) Departments blaming each other

if targets are not attained.

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DEMERITS OF BUDGETING(CONTD)

It is difficult to reconcile personal orindividual and corporate goals.

Overestimation of cost by managersas they want to be on a safer side

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BUDGET COMMITTEE

2 Advisory role only

%ur!ose ) Administration of budgeting

8embers) >'ecutive from each

de!artment es!ecially members from

!roduction, sales & financeB

udget director is the incharge

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BUDGET COMMITTEE(CONTD..)

Functions: ;o !rovide general guidelines for !re!aring

budgets

;o offer technical advice ;o receive & revie individual budgets ;o suggest changes ;o reconcile divergent vies

;o coordinate budgetary activities ;o a!!rove budgets ith or ithout revision ;o scrutinize budget re!ort later on

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BUDGETARY CONTROL

It is a type of financial control “Budgetary control is a process ofcomparing the actual results with

the corresponding budget data inorder to approve accomplishmentsor to remedy differences by eitheradjusting the budget estimates or

correcting the cause of difference”. It points out where control &corrective actions are required

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EFFECTIVE BUDGETARYCONTROL Imp components: Consultation with non-financialexecutives.

Total corporate exercise.

True delegation of authority andresponsibility.

Motivational approach. Past experience.

Minimum level of performance. Human factor. Feedback.

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BENIFITS OF BUDGETARYCONTROL Used as: A tool for planning A tool for control. An aid to co-ordination in theorganization

It leads to maximum utilization of

resources with a view to ensuremaximum returns.

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REFERENCES

• Hospital administrationby R.K.Sharma.• Principles of managementby L.M. Prasad.• Management accounting by I.M.Pandey• Finance management by K.D.Basava

• Effective hospital managementby Pragna Pai.• Principles of hospital administrationby B. M.Sakharkar

• Hospital administration by C.M.Francis.• http://kutenk200.blogspot.com

• www.marcbowels.com/courses/adv_dip/module7chapter2 /ami7_overview.htm

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THANK

YOU !

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Budget & Budgeting