DELM 216

Budgets are an essential feature of the control system and, as such, an integral feature of effective
management. Organizations will not improve if budgets are set the wrong way, therefore, decision
makers in an organisation have to understand the strengths and weaknesses of the budget system used
in their organisation so as to ensure that prime decisions are taken at all times.

A common misconception made by management is that budgeting is wholly the function of the
accounting department, and this tends to cause inefficiencies and problems with the budgets. A Good
efficient budgeting system is a task for all involved.

They are several budgeting system an organisation can use depending on the prevailing circumstances.
These are

1. Activity based Budget

2. Fixed Budget

3. Flexible budget

4. Incremental Budget

5. Rolling budget

6. Zero Based Budget

Of course, each one of these budgeting system carries their own unique advantages and disadvantages,
and management will have to consider them in detail before selecting or combining them before using
them.

However, overall the main advantages and disadvantages of the budgeting system are:

The advantages of budgets are:

1. As an essential part of the management process budgets compel planning, making people within an
organisation think about the future. A formal budgeting procedure with specified deadlines compels
operations managers to divert their attention away from day-to-day business and get down to
completing the budget.

2. Budgets promote essential principles of communication and coordination.

3. Budgets are a guide for action.

4. A basis for performance evaluation is provided by budgets. They are an integral part of control and
review procedure in that they establish agreed targets to be achieved, and for performance to be
monitored against. This is why participation in budgets is so vital, since operations managers are
effectively being asked to achieve an agreed objective within agreed parameters.
5. Historically it has been argued that budgets can be used to identify considerable savings in overheads
and costs. This may be true, but what is important is that the budgetary control system keeps the
organisation fit, monitors its progress and provides an important database in the decision-making-
process.

As to disadvantages, it can be argued that:

1. Budgets are bureaucratic.

2. If an organisation has clearly identified its Key Volume or Activity Indicators, why go for the time
consuming exercise of budgeting? This idea is flawed since you need to consider what the Key Indicators
might be and suggest a day-to-day control system based upon them. In such circumstances, cash is an
obvious answer and many entrepreneurial forwarders still rely on managing the business with few
indicators.

3. Budgets are coercive and although control is important, good management should be able to control
and motivate a work force without resorting to coercion.

‘Budgeting is about planning, and if one fails to plan then one is certainly planning to fail.’

Budgeting

William Hartman, author of School District Budgeting (1999), defines education budgeting as a "working
tool" for the successful operation of states and local school districts, and as a "significant opportunity to
plan the mission, improve their operations, and achieve their education objectives" (p. 1). As such, the
budgeting process allows various levels of government to "make better financial and program decisions,
improve operations, and enhance relations with citizens and other stakeholders" (National Advisory
Council on State and Local Budgeting, p. 2).

In more technical terms, a budget is a statement of the total educational program for a given unit, as
well as an estimate of resources necessary to carry out the program and the revenues needed to cover
those expenditures. A vertical budget includes the various income and expenditure estimates (by line
item, function, object, and cost center) in a given fiscal year, while a horizontal budget will include
current estimates for a given fiscal year, compared to prior audited income and expenditures, and a
projection of costs into the future. Hence, the budget is a statement of purpose and a review of income
and expenditures by function–with a timeline to explain past, current, and future financial practices.

Education agencies, like businesses and other enterprises, have experimented with various forms of
budget organization: line-item and function/object budgeting are basic to all systems; and planning-
programming-budgeting systems, zero-based budgeting, and site-based budgeting are attempts to link
the budget to goals and objectives while devolving the budgeting process to the school level.

Line-item budgeting. Barry Mundt et al. define line-item, or "traditional," budgeting as "a technique in
which line items, or objects of expenditures–e.g., personnel, supplies, contractual services, and capital
outlays–are the focus of analysis, authorization, and control" (p. 36). While helpful in tracking costs, line-
item budgeting is virtually useless for planning or management, since the functions of the expenditures
are not explained and the particular need, school site, and type of students being served are lost in
spending aggregated by "line." Thus, teachers' salaries, for example, is a budget line-item; but which
teachers, at which schools, teaching which types of students (e.g., bilingual special needs) is not
explained.

Function/object budgeting. Most districts use function/object budgeting, since it organizes spending
around the basic functions of the system, such as instruction, student support, operations,
administration, and transportation. In addition, functions are subdivided (e.g., into elementary
instruction, high school operations), while the object being purchased (e.g., elementary textbooks, high
school cleaning equipment) is also specified. Personnel services or salaries and benefits may be handled
by function; that is, for instructional, support, or plant maintenance staff, for example.

While these broad categories, objects, and processes are generally the same for education budgeting
across the country, a strategic attempt has also been made to determine the most effective and efficient
uses of resources. These efforts have led to such innovations as zero-based, program-planning, and site-
based budgeting, which attempt to be more mission-driven and constituent-friendly than traditional
types of budgeting in education.

Zero-based budgeting (ZBB). Popular in the 1950s and 1960s, ZBB began with the assumption that the
school system starts out yearly with a "clean slate." Thus, each function, program, and agency has to
justify its expenditures annually, relating all costs to system goals and objectives to avoid habitual
spending. Because so many costs, such as tenured teachers' salaries and benefits, are "fixed" across
annual budgets, and because the programs are so complex, zero-based budgeting becomes more an
exercise than a practical reality. As Hartman explains, "ZBB … forces comparisons of and choices among
programs and activities that are often difficult to compare adequately" (p. 49). In addition, most
programs are not "up for grabs" on an annual basis, since, for example, schools cannot eliminate their
elementary school classes, making such a requirement difficult to justify.
Budgetary control methods
a) Budget:

 A formal statement of the financial resources set aside for carrying out specific activities in a
given period of time.

 It helps to co-ordinate the activities of the organisation.

An example would be an advertising budget or sales force budget.

b) Budgetary control:

 A control technique whereby actual results are compared with budgets.

 Any differences (variances) are made the responsibility of key individuals who can either
exercise control action or revise the original budgets.

Program-planning-budgeting systems (PPBS). Used by the U.S. Defense Department during the Vietnam
War, PPBS seek greater efficiency by attaching spending to particular programs (e.g., the development
of a new multipurpose fighter jet aircraft that might be used jointly by the Army, Navy, and Air Force–
thus saving costs, but failing, in fact, to meet the needs of any of the armed services very well). While
rarely used in education, PPBS would require school districts to spell out their mission and goals, lay out
alternatives to reach these objectives, attribute costs to each choice, analyze the costs, select the best
option, and then build the budget around this outcome, and finally feed data back to adjust the costs to
the results. While this method sounds ideal, it often becomes so complex, and the programs so
numerous, that school districts and states cannot readily sustain this approach.

Site-based (school-site) budgeting (SBB). SBB is concerned with who will do the budgeting and where in
the organizational hierarchy the decisions will be made. In attempts to bring the budgeting process
closer to "end-users"–the teachers, parents, and school administrators–SBB encourages, if not requires,
decision-makers in each school to examine their programs and to set their budgets to meet their
particular needs as part of the process of shared decision-making. Allan Odden et al. explain that school
reform may require greater decentralization, a step "in which teams of individuals who actually provide
the services are given decision-making authority and held accountable for results" (p. 5). Under site-
based budgeting, districts must determine who will serve on SBB committees; which decisions and
resources are devolved to schools–and using what formulas; how much autonomy is granted to spend
for local school needs; exactly how to analyze the budget at each school; and what training and support
are needed to make SBB work effectively.
In practice, school districts or divisions thereof will utilize variations of many, if not all, of the above
methods in compiling their budgets. For example, a school principal may require teachers to justify their
individual budget requests (zero-based) in the development of a school (site-based) budget. A
component of the district's budget may include a proposal for a new educational program, including all
anticipated expenditures, revenues, and cost savings (program-planning budget). The entire district
budget may be compiled onto a state-mandated format that requires line items to be categorized by
fund, function, program, and object (function/object budgeting). Once the fiscal year begins, the budget
is transformed from a financial plan into the initial baseline data for a working, dynamic financial
accounting system.