What is the Budget and define its techniques ?

What do you understand by term ‘budget’? Elaborate the different techniques of budget.

Budget

Budget is a statement of expected annual receipts and expenditures of the government in the coming financial year, i.e., April 1 to March 31. It also includes government report on its financial achievements and shortfalls over the past one year. However, this part of the budget which contains the description of what happened last year, is not paid any special attention. That part of the budget invites the maximum attention which consists of details of the expected receipts and expenditures of the government in the coming year.

Budget Techniques

In order to deal with the increasing complexity of government’s role, most countries have experimented with a variety of forms for the budget and its presentation. Among the most important are the incremental (or traditional) budget, zero-base budgeting and performance-based budgeting. A brief description of these budget techniques is given below:

I. Incremental (Traditional) Budgeting: Incremental budgeting is the traditional budgeting method whereby the budget is prepared by taking the current period’s budget or actual performance as a base, with incremental amounts then being added for the new budget period. These incremental amounts will include adjustments for things such as inflation, or planned increases in sales prices and costs. It is a common misapprehension of students that one of the biggest disadvantages of incremental budgeting is that it doesn’t allow for inflation. Of course it does; by definition, an ‘increment’ is an increase of some kind. The current year’s budget or actual performance is a starting point only.

The incremental (or traditional) budget has two identifying characteristics. First, funds are allocated to departments or organisational units. The managers of these units then allocate funds to activities as they see fit. Second, an incremental budget develops out of the previous budget. Each period’s budget begins by using the last period as a reference point. Only incremental changes in the budget request are reviewed. Each of these characteristics, however, creates a problem.

The incremental budget is particularly troublesome when top management seeks to identify inefficiencies and waste. In fact, inefficiencies tend to grow in the incremental budget because it’s easy for them to get hidden. In the typical incremental budget, nothing ever gets cut. Each budget begins with the funds allocated for the last period; to which unit managers add a percentage for inflation and requests for those new or expanded activities they seek to pursue. Top management only looks at the requests for incremental changes. The result is that money can be provided for activities long after their need is gone.

II. Zero-based Budgeting (ZBB): This technique of budgeting was developed by Peter Phyrr and was first implemented at Texas Instruments in the 1960s. The then President Jimmy Carter introduced this Budgeting system in USA. In India, the System was first implemented in the Department of Science and Technology in the year 1983. The need for zero-based budgeting was also emphasized in the seventh five year plan. However not much has happened on this front since.

What is Zero-based Budgeting?: Zero-Based Budgeting (ZBB) is an alternative approach that is sometimes used particularly in government and not for profit sectors of the economy. Under zero based budgeting managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather than last year’s budget.

ZBB is a method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a “zero base” and every function within an organisation is analysed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one. In traditional approach of budgeting, the managers start with last year’s budget and add to it (or subtract from it) according to anticipated needs. This is an incremental approach to budgeting in which the previous year’s budget is taken for granted as a baseline. This approach is called incremental budgeting.

ZBB allows top level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations. Because of its detail oriented nature, zero-based budgeting may be a rolling process done over several years, with only a few functional areas reviewed at a time by finance ministers.

Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period’s budget. It is, however, a time consuming process that takes much longer than traditional, cost-based budgeting. The practice also favors areas that achieve direct revenues or production; their contributions are more easily justified than in departments such as client service and research and development.

Performance-based Budgeting (PBB): Performance-Based Budgeting System (PBB) is one of the latest techniques which is achieved in the development process of modern budgeting systems. The first applications of the performance-based budgeting system have started in such developed countries as the United States of America (USA), Australia, New Zealand and the United Kingdom. Following such countries, studies have been carried out to that effect in several developed countries in the continental europe. In developing countries, studies for the system are implemented with support from several developed countries and from such international organizations as the World Bank. There are some reasons why the performance-based budgeting system has started to spread throughout the world. For a state employs the PBB to ensure accountability to its citizens and to high ranked civil servants and to enhance communications in the budgeting process and deems it to be a medium which provides the society with information about the state’s performance.

What is Performance-based Budgeting (PBB): PBB relates to funding linked to expected “results” or “outcomes” – what programmes are able to Accountability is for results or performance achieved. This is a budgeting system that links the funding of public sector organizations to the expected goals. In other words it can be said that performance budgeting system is a way to allocate budget to achieve goals of certain projects. Therefore, the key of this new budgeting system is “result”. Assessing results by measurable, indicators, holding managers responsible for performance, giving flexibility to managers to manage and innovate, and having a medium term and long term view of use of resources are some of the significant features of the performance-budgeting system which enhance the performance of the departments. PBB involves defining three different elements-

1. Intended outcomes or long term goals, which may be difficult to measure;

2. Strategies for achieving this final outcome; and

3. Activities, including the quantity, quality and costs of services to be provided in order to achieve the final outcomes.