budgeting. at district level and management

BUDGETING

BY

AKOL PETER PEDO

2013-MHP-FT-005

www.ihsu.ac.ug

31-Mar-14 Akol Pedo Peter

PRESENTATION OUTLINE

• Definition of Budgeting,• Significance of Budgeting,• Approaches to Budgeting, merits and demerits• Types of Budgets,• Outline of the Budgetary process,• Features of an effective Budget• Link between budget planning and project

activity(Earned Value Analysis-EVA).


BUDGETING

• A plan translated in financial terms for the resource and operations of a business, organisation or project for a stated period in the future.

• Or simply a statement of incomes and expenditures.

• Budget = Quantitative expression of a plan


SIGNIFICANCE OF BUDGETING

• To help management in the planning of annual operations.

• To co-ordinate the activities of the various parts of the organisation/project and ensure that the parts are in harmony with each other.

• To communicate plans to the various responsibility centre managers.


SIGNIFICANCE…………2

• To motivate managers to strive to achieve the organisational/project goals/objectives

• To control activities (organisational or project)

• To evaluate the performance of managers,

• To generate activity schedule forecasts


Approaches to Budgeting

• There are three common budgeting methods:

Top-down Budgeting,Bottom-up Budgeting,Iterative Budgeting,


Top Down Budgeting(TDB)

is the term given to a budgeting process based on estimating the cost of higher level tasks first and using these estimates to constrain the estimates for lower level tasks.

A crucial factor for successfully implementing this method for estimating budgets is the experience and judgment of those involved in producing the overall budget estimate.


MERITS OF TDBTakes less timePromotes upper-level commitmentInvolves no multilevel participationLower management better understands

what upper management expectsIndividual activities need not to be

identified prior to approvalAggregate budget can be reasonably

accurate.31-Mar-14 Akol Pedo Peter

DEMERITS OF TDB

Translating long-range budgets into short-range budgets.

Problems scheduling projects in a "sub-optimal way" to meet the strategic goals

Result of top management's limited knowledge of specifics of project tasks and activities


Bottom Up Budgeting(BUB)

• Sometimes called Zero Based Budgeting (ZBB)

• Bottom-up budgeting begins with identifying all the constituent tasks that are involved in implementing a project and working out the resources and funding required for each activity.


BUB….2

• Provides the opportunity to create organisation level budgets by rolling up project budgets.

• Create centralized project level budgets from their sub-project budgets (WBS)

• Applicable to recurring programmes in the public sector.


ADVANTAGES OF BUB

accuracy of the budgets for individual tasks is enhanced

Clear flow of information Use of detailed data available at project

management level as basic source of cost, schedule, and resource requirement information.

Participation in the process leads to ownership and acceptance


DISADVANTAGES OF BUBMore persuasive managers sometimes get a

disproportionate share of resources A significant portion of budget building is in the

hands of the junior personnel in the organisation Sometimes critical activities are missed and left

unbudgetedDifficult to control aggregate spendingAllocations may not be optimalHard to keep multi-year perspectiveTendency to overstate the needs is common


Bottom-up and Top-down compared

• Bottom-up • Top-down

- Multi-year - Annual Delegated authority - Time consuming joint ownership - ownership of proposal

specific Proactive - Reactive


ITERATIVE BUDGETING(IB)

Iterative – to repeat or do again

A combination of top-down and bottom-up budget building

Higher project level estimated (top down)Lower level costed (bottom up)The two costs negotiated and reconciled


ADVANTAGES OF IB

• It promotes employee involvement and stimulates a high degree of information flow between those involved in the project at different levels

• Both senior management and lower level managers closer to the actual process participate in the budgeting process


DISADVANTAGES OF IB

• there’re relative inefficiencies and time consuming nature of the negotiations over the budgets.

• Process may not work well when communication channels are either informal or blocked between lower-level managers and senior management


TYPES OF BUDGETS

Operating Budgets – Recurrent Capital Budgets – Development Financial Budgets (cash budgets, projected

income and expenditure statement and projected balance sheet).


SCOPE BUDGET PLANNING

Scoping can be an expression of a budget.

Budgets of specify the following;Performance measuresIncentives for efficiencyProject selection criteria i.e. numeric & non-numericExpression of organizational policy & commitment


..2Plans for how resources are to be expendedCatalyst for productivity improvementControl basis for mangers and

administratorsStandardization of operations within a

given horizon.


BUDGETARY PROCESS

A budgetary process is a system of rules governing the decision-making that leads to a budget, from its formulation, through its legislative approval, to its execution.


Budgetary Process outline

a. Identification of the budget committeeb. Derive key forecasts,c. Prepare “quantity” budgets with appropriate

Managers,d. Check for feasibility to policies,e. Amend if necessary,f. Produce financial budget,g. Submit budget to CEO for approval


Features of an effective budget

1. Accurate forecasting

2. Based on organisational goals

3. Information is timely and accurate

4. Formed with multilevel input

5. Regular reviews are built-in


Problems with budgeting

a) The process is too longb) There is a lot of game playingc) Business decisions change but the budget

does notd) People in charge of budget are held

accountable in areas where they have no responsibility

e) Applying an arbitrary percentage to prior actual period.


Budgetary control

• Publish agreed budgets

• Recording of actual results

• Comparison and identification of variances

• Reporting to budget holders and senior management about existing variances

• Variance investigation

• Developing solutions to problems revealed by budgetary control.


Linking Budgets and Activities

Budget deviation analysis (variance analysis) regularly compares what you expected or planned to earn and spend with what you actually spent and earned. Variation analysis can help greatly when detecting how well you’re tracking your plans, how much to accurately budget in the future, where there might be upcoming problems in spending.


Example of a variance reportDate: June 30, 2006

Account: Product Development MONTH TO DATE

ACCOUNT REF. ACTUAL BUDGET VARIANCE %

SALARIES 5025 £48,000 £43,750 - £4,375 - 10 TRAVEL 6442 £1,500 £1,200 - £300 - 25

SUPPLIES 532 £500 £700 £200 28.5

Respectfully submitted,John Travolta BumlansekiProgramme Manager.


QUESTION ON EVA

Clovis road under construction by UNRA is expected to be completed in 5 weeks up to 17th march 2012, they would have constructed 10 km of tarmac at a unit cost of US$4/km. assuming that today is 17th march 2012, and they have actually constructed 7 km at a total cost of US$35.


QUIZ….2

Required:Calculate;a)BCWS( a.k.a Planned value)b)BCWP( a.k.a Earned value)c)ACWP( a.k.a Actual cost)d)Comment on the schedule and cost variancee)The SPI and CPIf)What advise would you offer UNRA to correct any problems if any?


SOLUTION TO QUIZa) BCWS=10 x 4

=$ 40

b) BCWP=7 x 4

=$ 28

c) ACWS=$ 35

d) SV=BCWP-BCWS

=28-40

=-$12, Comment: this means the project is behind schedule.


SOLUTION..2


..3


….4

Poor procurementsLack of skills by staff leading to reworksBad luckInsecurityPoor weatherPoor planningInflation Poor machinery, etc


Benefits of Variance Analysis(EVA)

1. Strengthens M & E

2. It’s a planning and budgeting tool

3. It’s a fraud detection tool

4. It helps managers detect errors

5. Enhances accountability/transparency

6. It’s a cost control tool

7. It’s a tool used in risk assessment and mgt


Budgetary control Measures

• procedures put in place by an organization to prevent and detect errors and fraud.

Accounting Controls (Internal and external audit controls) involves the following procedures like Approval and control of documents, Reconciliation Statements among others).


…..2

Administrative Controls (Quality Controls, Stated conflict of interest policy, Performance statistics checks, Annual leave and job rotation among others)


REFERENCES

1. Karl-Martin, et al, November 2000: Budget Processes: Theory and Experimental Evidence, Harvard school of Business, Massachusetts. USA

2. Wright.D 1994 :“A practical foundation in costing” ,Routledge, London

3. MOFPED, 2007: The Local Governments Financial and Accounting Manual. Kampala.
