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A budget (derived from old French word baguette, purse)

is a quantified financial plan for a forthcoming accounting
A budget is a quantitative expression of a plan for a
defined period of time. It may include planned sales
volumes and revenues, resource quantities, costs and
expenses, assets, liabilities and cash flows. It expresses
strategic plans of business units, organizations, activities
or events in measurable terms.

What is Budgeting?
Budgeting is the process of creating a plan to spend your
money. Creating this spending plan allows you to
determine in advance whether you will have enough
money to do the things you need to do or would like to
Budgeting is simply balancing your expenses with your
If they don't balance and you spend more than you
make, you will have a problem. Many people don't realize
that they spend more than they earn and slowly sink
deeper into debt every year.
Performance Budget
A budget that reflects the input of resources and the
output of services for each unit of an organization. This
type of budget is commonly used by the government to

show the link between the funds provided to the public

and the outcome of these services.
An economic or
productive factor required to accomplish an activity, or
as means to undertake an enterprise and achieve desired
outcome. Three most basic resources are land, labor,
and capital; other resources
include energy, entrepreneurship, information, expertise,
management, and time.
Performance budgeting is a process for budget
preparation and adoption that emphasizes performance
management, allowing decisions about allocation of
resources to be made in part on the efficiency and the
effectiveness of service delivery.
Performance budgeting occurs when department heads
and program managers use performance data to support
and justify budget requests during the annual budget
preparation process.

Significance of performance budgeting:

A major element of financial data activity rests in the act
of budgeting. Budgeting is the process of allocating finite
resources to the prioritized needs of an organization. In
most cases, for a governmental entity, the budget
represents the legal authority to spend money. Adoption
of a budget in the public sector implies that a set of
decisions has been made by the governing board and
administrators that culminates in matching a

government's resources with the entity's needs. As such,

the budget is a product of the planning process.
The budget also provides an important tool for the
control and evaluation of sources and the uses of
resources. Using the accounting system to enact the will
of the governing body, administrators are able to execute
and control activities that have been authorized by the
budget and to evaluate financial performance on the
basis of comparisons between budgeted and actual
operations. Thus, the budget is implicitly linked to
financial accountability and relates directly to the
financial reporting objectives established by the GASB.

Why is Performance Budgeting Important?

Provides accountability to the public.
In the public sector, resources are borrowed from the
shareholders. As stewards of the resources, governments
are required to deliver some product or result.
Drives redesign of programs (focuses on
Performance supported budgeting can be a driving force
in the redesign of programs and the driving force in
integration within agencies, and across agencies. If it is
focused on improving, there will be a more effective
overall plan.
Helps rationalize budget allocations (uses
performance information as a basis of evidence).
Performance budgeting ensures that performance
information is part of the budget and resource

allocation debate. Performance information needs to

be, in some manner, part of the resource allocation.
Types/ approaches of Performance Budgeting
(1) line-item, or "traditional," budgeting;
(2) Performance budgeting;
(3) Program and planning ("programming") budgeting
(4) Zero-based budgeting (ZBB);
(5) site-based budgeting.

line-item, or "traditional," budgeting;

It is referred to as the "historical" approach because

administrators and chief executives often base their
expenditure requests on historical expenditure and
revenue data.
(2) Performance budgeting;
The performance approach is generally considered
superior to the line-item approach because it provides
more useful information for legislative consideration and
for evaluation by administrators.
Program and planning ("programming") budgeting
Program budgeting refers to a variety of different
budgeting systems that base expenditures primarily on
programs of work and secondarily on objects. It is
considered a transitional form between traditional lineitem and performance approaches, and it may be called
modified program budgeting. Program budgeting refers

to a variety of different budgeting systems that base

expenditures primarily on programs of work and
secondarily on objects. It is considered a transitional form
between traditional line-item and performance
approaches, and it may be called modified program
(4) Zero-based budgeting (ZBB)
The basic tenet of zero-based budgeting (ZBB) is that
program activities and services must be justified annually
during the budget development process. The budget is
prepared by dividing all of a government's operations
into decision units at relatively low levels of the
Zero-base budgeting is a general management tool that
provides a systematic means of evaluating operations
and programs. It refers to a process of
Identifying all substantive aspects of agency

Establishing priorities for funding.

Providing performance measures and need indicator
specific needs of each organization.
Site-Based Budgeting
Site-based budgeting is widely considered the most
practical for budgeting within the school district
environment, by providing greater control and
reporting of school-level data. This budgetary
approach (which may be used in combination with
any of the four discussed above) emphasizes the
decentralization of budgetary decision making. Site-

based budgeting places local managers and other

staff at the center of the budget preparation process,
making them responsible for both the preparation
and the maintenance of the budget.

Issues of the development budgeting

Budgets are time consuming and expensive
Budgets provide poor value to users:
Budgets fail to focus on shareholder value
Budgets are too rigid and prevent fast response
Budgets protect rather than reduce costs
Budgets stifle product and strategy innovation
Budgets focus on sales targets rather than customer
Budgets are divorced from strategy
Budgets reinforce a dependency culture
Budgets lead to unethical behavior
Budgets are time consuming and

Despite the advent of powerful computer networks
and multi-layered models, budgeting remains
protracted and expensive. The average time
consumed is between four and five months. It also
involves many people and absorbs up to 20 to 30
percent of senior executives' and financial managers'

Budgets provide poor value to users:

The perception of the value provided by the
budgeting process varies widely. In one firm it was
apparent that the group board thought the budget
gave them control, whereas operating managers
thought it was completely irrelevant to their needs.
One of the primary reasons that financial directors
rank budgetary reform as their highest priority is that
their staffs spend too little of their time adding value.
Budgets fail to focus on shareholder

Budgets focus on internally negotiated targets which
tend to be incremental changes from the previous
period's outcomes. The result is a target that is
inwardly comfortable to you, yet appears outwardly
difficult to your superior. There is no focus on the
maximization of customer or shareholder value.
Budgets are too rigid and prevent fast
The evidence suggests that only 20 percent of firms
change their budgets within the fiscal cycle. Another
survey result shows that 85 percent of management
teams spend less than one hour per month
discussing strategy
Budgets are divorced from strategy:
According to a recent cover article in Fortune
magazine, around 70 percent of companies surveyed
were poor at executing strategy-a massive
indictment of the performance management
capabilities of budgets.

Budgets reinforce a dependency culture:

The way to survive and prosper in a budgeting
environment is to do what you're told, meet the
budget (but never beat it!).
Budgets lead to unethical behavior
Managing the results (also known as cooking the
books) is a frequent outcome of budgeting. Many
finance managers are well versed in "managing the
slack" and feeding it into the results when needed.
However, as we have seen, this practice can border
on outright fraud.
Budgets protect rather than reduce costs:
"Use it or lose it" is the manager's mantra. Not
spending the budget is a cardinal sin in most
organizations. The result is that superiors invariably
question why the resource is needed and are
understandably reluctant to allow it to pass into the
budget for the next period

Budgets stifle product and strategy innovation.

"Never take risks." It is just not worth it. If it's not in
the budget, you might be exposed. Anyhow, if you
did take a risk and it worked out well, your superior
probably thought of it first! And if it didn't work out,
your job might be on the line.
Budgets focus on sales targets rather than customer
Though everyone wants to satisfy customers, that is
not how they are measured and rewarded. So they

meet the sales target, persuade customers to buy

their products, and convince them that their slowmoving stock really is a great deal!
Resource allocation and budgeting.
The resource allocation and budgeting process is one of
the most powerful stages of planning. Resource
allocation refers to the distribution of resources, and in
particular finance, from the centre to peripheral levels.
Budgeting implies the more detailed determination of
precisely how these funds are to be used. This chapter
first outlines the major types of budget. It then looks at
the main approaches to budgeting and resource
allocation, and lastly discusses financial management
issues relevant to the planner.