Budgeting

Nayyar Raza Kazmi

• A budget can be defined as ‘a tool used to relate planned resource consumption to a period of time’ (Mellett et al. 1993). This definition highlights the three main features of a budget:

• • it is a plan that is developed before an event has occurred;

• • it can include a broad range of resources – not just money;

• • it relates to a specific period of time.

• A Process of tracking your expenses

• Categorizing your expenditures according to needs.

• A safety valve to prevent over expenditures

• Ensures that the finances are spent for true purpose of spendings.

• Cash Budgeting is normally followed in organizations.

• Budgets must be planned and approved before start of planned activities.

• Use the organizational policies for preparing budgets.

• Budgets do not exists in isolation. They are parts of Projects or Planned activities and usually proceed once detailed work plan has been made.

• Needs careful insights as distorted budgets can lead to over or under expenditures resulting in altered quality of work.

Types of Budgeting

• Incremental Budgeting• Zero Based Budgeting• Activity based on Flexible

Budgeting

Zero Based Budgeting

• Zero-based budgeting, by contrast, assumes the previous year’s budget to be quite irrelevant and begins from scratch to identify and cost all of the inputs that will be required to achieve the desired level of activity.

Activity Based or Flexible Budgets

• Both incremental and zero-based budgets take the level of activity for the budget year as fixed. Increasingly, however, health services managers are adopting flexible budgeting systems designed to respond to changes in activity as the budget period progresses.

• This involves using cost information to calculate standard costs for the various items in a budget, so that the increase or decrease in expenditure associated with an activity level different from that which was budgeted can be forecast.

Variance

• A variance may occur because:• you have used more or fewer resources than planned –

this is referred to as a usage or volume variance or, in the case of labour or overhead costs, an efficiency variance;

• the cost of those resources was greater or lower than anticipated (a price variance).

Variance Analysis

Steps in Budgeting

• Look at your detailed work plan.• List all the activities, purchases,

personnel which consume finances.

• Cost the activities• Prepare Line Item budgets• Sum up the Line Item Budgets into

Master Budget.

Costing

• Costing looks at the current market prices of various items or carrying out various activities.

• Done by market scanning, looking at previous prices and adjusting by discounting or estimating the costs.

Budget Worksheet