Please assist. What\'s your thought? Both the budget process and budgets themsel
ID: 2471726 • Letter: P
Question
Please assist. What's your thought?
Both the budget process and budgets themselves can impact management actions, both positively and negatively. For instance, a common practice among not-for-profit organizations and government agencies is for management to spend any amounts remaining in a budget at the end of the budget period, a practice often called “use it or lose it.” The view is that if a department manager does not spend the budgeted amount, top management will reduce next year's budget by the amount not spent. To avoid losing budget dollars, department managers often spend all budgeted amounts regardless of the value added to products or services. All of us pay for the costs associated with this budget system.
Required:
What would you say to a local not-for-profit organization or government agency that would offer a solution to the “use it or lose it” budgeting problem.
Explanation / Answer
Yes, it is a practice of the top management to reduce the budgeted amount of next year if they see that their department manager was not able to utilize the whole amount of the previous year budget. To avoid such thing department manager will use the previous year budgeted amount regardless of value added to product or services. Therefore, this system is called use it or lose it.
If someone wants the offer of this “use it or lose it” budgeting problem, he has to ensure proper utilization of the budgeted funds. It requires proper plans/ strategy, proper project, proper team and proper report of the project. Since not-for-profit organization or government agency work for the good cause, it is good thing to utilize the funds fully and avoid wastage. Therefore, department manager need to take certain steps in this regards. These steps are following:
To understand the mission and vision of the non-profit organization and government: It is important to understand the vision and mission of the non-profit organization and government to adopt the project and decide the amount of the budget. A proper plan should be made and top-management approval should be given.
Budget based upon performance: Team’s performance should be transparent and should be directed towards the mission and vision of the non-profit organization and government.
Quotation system or bidding system should be adopted to obtain the trust of the top management.: Expenditure towards the project should be made through quotations and bidding systems. It will bring transparency in the project work and will enhance the trust of the top-management.
Performance audit helps to enhance trust of the top management.: After completion of the project, performance audit should be done by the experts. This will help in finding the variance in the performance. If full amount could not be utilized, than audit will check the shortfalls in the performance. If some variance are found, management will come to know why full amount could not be utilized. If there are no shortfalls and the performance was good than management will take the decision regarding shortening the amount of the budget.
There is no benefit in wasting the amount of the budget irrespective of the value of the goods and services. It is good to conduct the audit and to know that why budgeted amount could not be generate completely. If some variations are found, top management will not cut the budgeted amount for the next year. And if no variations are found, it will be good to perform good and generate better results which are better than the mission and vision of the top management.