While budgets are the point of concern today not only for nations, organizations and families but also for individuals, it is vital to understand what budgeting is and how it is used, what are different models of budgeting and how these can be innovatively improved. Budgets are the quantitative representation of tasks. The budgets tell how an activity or series of activities will be financed and what expenses are included to carry a job. Budgets are time bound and guide entities about how to measure tasks in terms of financing. Many traditional and modern budgeting techniques are used to offer best ways in designing and planning budgets. Budgets can be based on past trends or future forecasts.
Approaches for Budgeting
Budgeting can be labor centric or capital centric (Binswanger, 1974). Some budgets are intentionally designed to favor the labor while the others are bound by technical limitations to use more labor than the capital. On the other hand, there are budgets that have a major portion of capital or equipment than the human resource. Besides the human vs. capital approach, the budgets can be based on past experiences of upcoming trends or needs. Sometimes the budgets, for example that for an agricultural project, might be based on what seasonal factors affect production and use historical data. On the other hand, technological organizations might adjust their budgets to favor research and development since trends are moving towards technological growth.
Models for Budgeting
There are multiple techniques of budgeting, new and old, optimistic and realistic etc. A few budgeting techniques are discussed here with a critical analysis of how helpful or unhelpful these can be.
Static Budgeting: This kind of budget expects future earning and according to that, adjusts the expenses during the period. The budget is based on future anticipated earnings thus the team is asked to adjust expenses of the sub-activities according to the expected earnings. Such a model is quite rigid and the management using it needs to introduce flexibility in such a model because activities do not always consume the only money allocated at the beginning.
Zero-base Budgeting: The zero base budget runs inverse to the static budget. The company decides what financial outcomes it wants to achieve and according to that, the adjustments are made. Thus the expenses are carried out to offer specific set profit targets. Such a budget development is time consuming. It requires a lot of calculations and manipulation.
Flexible Budgeting: The flexible budgeting model does not adjust expenses to revenues rather increases the sales volume to match the expenses. Then the expenses are controlled if the sales level cannot be further adjusted. Thus both sides are active. But this model requires a lot of control both on the company's revenues as well as expenses.
Rolling Budget: The rolling budget extends the expenditure and revenue experience to the future. The model does not work in complex situations and is easily updated.
Payback Method: This budgeting model is also called non-discounted method. It does not consider the time value of money. Thus the costs and expenses are calculated on the basis of existing prices with no adjustments made to the changes in value of money.
Budgeting in Innovative Global World:
Companies, when formed, cannot imagine what size they will be in ten years from then. The organizations grow in size and operations once they set business in the real world. Not every work environment is suitable for a single budgeting model. It is very complex to make budget of a company simply based on past or predictions for future. Global companies work in much more uncertain environment than the local and national firms (Verma, Gupta and Batra, 2009). Thus it is very important that whatever budgeting model is used, it does not ignore the risks involved in the uncertainty of expenses and revenues. The budgets are meant to make future accounting more visible but that requires high degree of market expertise and business vision. The innovative technologies can result into very high sales volumes and on the other hand can also expose an organization to very high expenses. Thus the innovative global world needs budgeting models that are responsive and do not offer trivial old solutions to new and complex budgeting issues.
Innovation and Size of Business
The small businesses are effected less by a problem in budgeting model while the large businesses cannot afford to make errors while adopting a business model. The budgeting models are often adopted on the basis of choice of the bureaucratic system (Schick, Sherr and Tuggle, 1982). However, the organizations should not focus on the choice of management or owner in fact understands the needs of business and the needs of the business environment existing in the industry. The risk factor should be included while designing the budgets. The university of Toronto found that the budgeting should be independent of personnel otherwise it may become very difficult to make changes as required by the time (U of T. budget model wins gold for public sector innovation, 2013). It is not unusual to make semiannual budgets as part of whole budget for the year. These sub-budgets help adjust the changes in next time so as to manage the short comings of the initial part of the year. The problems of over budgeting or under budgeting.
The University tried to understand the nature of challenges that are faced with time in order to adopt several different natures of innovation. It was found that the budget should not only be such that it helps understand how much expenses will be incurred during the time period and what revenues are expected but also the budgeting method should identify methods of generating revenues. The budget should support the adjustments made during the period. In this respect, adopting quarter budgets can be helpful. Or, the organizations can make an annual budget and then the sub-budgets for each quarter. Some organizations have adopted an innovative method in budgeting that these work on the actual costs of the items and then add up the technological and HR utility costs as well. This allows considering the 'soft' costs of the elements counted in the budget. Thus the budgets will not under-represent the costs and expenses. Otherwise many times organizations neglect these costs and then face problems as the budgets are executed and then they make adjustments to match the allocated costs.
Over and Under Budgeting
Organizations often feel safe to over-represent costs and expenditures in the budget. Thus if an activity or a project requires more costs during the run time, the company will not need to sanction more budget during the year but it would have kept an extra amount in the budget to fund the activities that could cost more. But such budgets often end up in additional revenues. This technique is not innovative and can only be adopted by very high earning and profitable organizations. The small organizations often under-budget expenses. And when the cost of an item increases, either the expense of other activities are cut or the company needs to manage funds by other sources. The companies should make such arrangements that the budget is not over or understated. Thus, they can work extra time on the calculation of costs and expenses. The extra time spent on forecasting costs and revenues does not go waste. Rather the company is able to come up with a more realistic budget. Also the innovative budgets should be planned well in time. An in-time planned budget has the advantage of being able to tell if the company can run out of money while it executes its projects (Kensicki, 1974). The static or bureaucratic budgets often take very less time in designing…