It is also important to point out that budgeting allows the smooth running of the economy by creating awareness between the executive or management and those charged with the responsibility of executing the budget at its lowest level. This awareness is created by involving the various levels of people who will have anything to do with the contents of the budget. These include the various departmental or parastatals head, sub-divisional heads, and even supervisors when necessary.
We are going to talk about the advantages of budgeting, the problems, and the dangers of budgeting.
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Advantages Of Budgeting
Budgeting is a management tool, it is a way of managing. Meanwhile, many benefits are derived from budgeting, although it is a means not an end in itself. The following are some of the most significant advantages of budgeting:
1. Forced Planning
Budgeting compels the government or any management to plan for the future. It instills the habit of evaluating carefully problems before making any decisions.
2. Productive Improvement
Budgeting increases the morale and thus, the productivity of the employees by seeking their meaningful participation in the formulation of plans and policies.
3. Management By Exception
Budgeting focuses public/government/ management’s attention on significant matters through budgetary reports.
4. Efficiency
Budgeting measures efficiency, permits self-evaluation, and indicates progress in attaining desired objectives.
5. Effective Communication
Budgeting improves the quality of communication. Budget goals, plans, authority and responsibility, and procedures to implement plans are written and communicated through budgets to all individuals in the society or organization, or country.
6. Optimum Utilization Of Resources
Budgeting helps to optimize the use of the firm/state resources capital and human.
7. Coordinated Operations
Budgeting helps to coordinate, integrate and balance the efforts of various units or departments in the light of the overall objectives of the firm or state.
Problems And Dangers Of Budgeting
Budgeting is a systematic approach to the solution of problems. But it is not foolproof. It suffers from certain problems and limitations:
1. Management Judgement
Budgeting is not an exact science. Its success hinges upon the position of estimates. Estimates are based on facts and judgment. Judgment can suffer from subjectivism and personal biases.
2. Continuous Adaptation
The budgeting program should be continuously adapted. It is a dynamic process and as such budget officers and committees should continually try various techniques and procedures in developing and using the budgeting system.
3. Implementation
A skillfully prepared budgetary program will not improve governance or management unless it is properly implemented. It is therefore necessary that all those involved in the planning of the budget should also be part of its implementation.
4. Unnecessary Details
Budgeting will be ineffective and expensive if it is unnecessarily detailed and complicated. A budget should be precise in format and simple to understand. It should be flexible not to reject an application.
5. Evaluation Of Deficiencies
Budgeting will hide inefficiencies instead of revealing them if a proper evaluation system is lacking. There should be continuous evaluation of the actual performance standards and should be re-examined regularly.
6. Unrealistic Targets
Budgeting will lower morale and productivity if unrealistic targets are set and if it is used as a pressure tactic. Care must be taken in using budgeting as a pressure device.
Now that you have known the problems and dangers of budgeting you also have to know the budgeting system so that you can be able to mitigate some of these problems.
By budgeting system, we are referring to techniques to be adopted in the budget preparation that would result in a better budgeting procedure. Some of the budgeting techniques in use are as follows:
1. Incremental Budgeting System
The incremental budgeting system otherwise known as the traditional budgeting system uses the current year’s budget or past actual as a springboard for subsequent one. In the system, we have a markup on the current year’s budget or past actual projects for the coming year.
The markup will be a function of inflation, economic trend, and resource availability. This method is easy to prepare and understand but lacks in-depth analysis.
2. Zero Based Budgeting System (ZBB)
Under the system, the budget is prepared from a zero point. This implies that it does not rely on past budgets and the use of projections. The system entails a detailed analysis of projects and items to be included in the budget. The planning process of the system starts from scratch. The zero budgeting system adopts the following procedure in selecting activities or input for the budget:
1. Identification of projects
2. Evaluation of the projects
3. Analyze the cost-benefit implication of each Project
4. Adopt the best method from various alternatives (projects) based on priority and available resources.
The zero-based budgeting system on points of advantage is efficiency based and makes for the optimum allocation of resources. It is target based and result-orientated.
On the other hand, political consideration may override the outcome of cost-benefit analysis. It is also cumbersome and requires a lot of documentation. The problem becomes more compounded in an economy with inaccurate data.
3. Planning, Programming, And Budgeting System (PPBS)
The PPBS is program-driven and calls for the application of cost-benefit analysis to detailed expenditure projects. It tries to define the objective to be achieved at the end of a given time with a detailed plan for actualization. To a good extent, it is medium and long-term in nature as opposed to short-term. It focuses on the entire program and requires detailed financial plans to achieve it. It is costly to prepare and time-consuming.
However, it makes for efficient and effective use of resources. It attaches importance to long-term benefits and alternative means of attaining set goals are equally evaluated to determine the best option.
