BUDGET

Budget derived (from French bougette, purse) generally refers to a list of all planned
expenses and revenues. It is a plan for saving and spending.

A budget is an important concept in microeconomics, which uses a budget line to

illustrate the trade-offs between two or more goods. In other terms, a budget is an
organizational plan stated in monetary terms.
A Budget is a plan expressed in financial terms. C.I.M.A. defines a budget as 'A plan
quantified in monetary terms, prepared prior to a defined period of time... to attain a
given objective’; A budget is normally for a relatively short period, e.g. 1 year.

Budget is a detailed schedule of planned financial activities over a specific time period.
Another way of expressing this is that budgeting is basically a system that allows
business to achieve its objectives and goals from time to time.

A budget is a plan for the implementation of a program or activity within a specific

period of time (fiscal year), including an estimate of both revenue and expenditures.
A budget is a plan that identifies the financial resources required to achieve
programmatic objective

Function
Budgets help businesses and families keep track of their finances. Budgets help to
allocate funds to various areas where they are needed, and help to keep spending under
control. Budgets can allow a business to predict the financial outcome for a period of
time if they undertake a certain project or plan, which can aid in decision making

Different between Budget & Budgeting:

Budgeting: is Planning the financial operations of a business is called budgeting

Or referred to the preparation of budget or drawing up financial plan

Budget: is a written financial organizational plan of activities or program over a specific

period of time stated in monetary terms that identifies the required resources to achieve
programmatic objectives & goals.

Budgets set out the cost and revenue or expense and income that are expected to be
incurred or earned in future period.

According to Government point of view The Budget is the central instrument of the
government to implement policies at the national and provincial levels

Budget is a financial plan and a major policy instrument of the government attempting to
establish macro economic stability, a locative efficiency and fair income distribution in
the country. More precisely, budget is the policy making tool of government used to
translate its strategic objectives into programs and services to meet the socio-economic
needs of its people. It contains overview of the economy; annual revenue and expenditure
plan; information on assets and liabilities; and appropriations with their corresponding
purposes.

The Ministry of Finance (MoF) is specifically responsible for the management and
execution of budget, collection of taxes, organization and control of public expenditures
and payments to the government and finally the management of Custom Affairs. Every
government has to know the status of its revenues and expenditures, the management of
its financial resources and to allocate them effectively.

The main provision of a successful government is to prevent budget deficits. In order to

achieve this goal the organization and proportion of revenues & expenditures should be
taken in to consideration, also urgent measures must be taken to increase revenue
collection, prevent unnecessary expenditures and organize their management.

Why do we need budget? –

Gap between needs and availability

Namely, needs of the community (in any country not only Afghanistan) are always much
bigger than the available resources. If we say this big blue circle represents needs of the
community budget can, unfortunately finance this small part in the middle. Budget grows
each year, but still it’ll never be enough to finance all the needs, as they grow in time as
well. And gap between needs and availability will always be there.

This is why it is necessary to make choices, prioritize which needs are the most important
to be financed with the scarce available resources.

OBJECTIVES OF BUDGETARY CONTROL

Budgetary control is the process of ascertaining several budgeted figures for the future of a
business enterprise and then making comparison of these budgeted figures with the actual
results for finding out discrepancies, if any. The comparison of budgeted and actual figures will
allow the management to take curative actions at a proper time.

Budgetary control can be defined as, “A means of achieving the financial control of an entity
whereby the actual results for a defined period of time are compared with the budgeted results,
any differences (or variances) being noted, and some corrective action taken to bring the actual
activities back into line with the budgeted ones if such variances need to be dealt with.”
The budgetary control is a continuous process that helps in planning, coordination and controlling
of business decisions. A budget is a means and budgetary control is the end-result. The
budgetary control system assists an organization in setting up the goals and efforts are made for
its achievements. It enables economies in the enterprise. The main objectives of budgetary
control are as follows:
- It is essential for planning, controlling and also acts as an instrument of coordination.
- It coordinates the actions of various departments.
- Budgetary control helps in eliminating wastes and raises the profitability position of a business
enterprise.
- It makes a prediction about capital expenditure for future.
- It helps in amending deviations from the established standards.
- It centralizes the control system.
- Budgetary control operates various cost centres and departments with efficiency and economy.
Budgetary control compels business administration to think about the future that is most likely the
crucial characteristic of this system. It coerces management to look into future, to outline
thorough plans for attaining the objectives for each department, operation and each manager, to
predict and grant the organization purpose and direction
Purposes of Budgeting

Business budgeting is a basic and essential process that allows businesses to attain many
goals in one course of action. There are several goals that many businesses seek to
achieve (or should be trying to work toward) when they create and implement a budget.
These goals include control and evaluation, planning, communication, motivation & etc.

The main aims & objective of budgeting as follows:

1. Planning for future.

2. Resource Allocation

3. Co-ordination.

4. Communication.

5. Control.

6. Motivation.

7. Performance Evaluation

8. Authorization

Planning:

A budget is ultimately the plan for the operations of an organization for a period of time.
Many decisions are involved, and many questions must be answered. Old plans and
processes are questioned as well as new plans and processes. Managers decide the most
effective ways to perform each task. They ask whether a particular activity should still be
performed and, if so, how. Managers ask what resources are available and what
additional resources will be needed.

Planning is the most important purpose of budgeting, and is arguably its primary purpose.
Budgeting allows a business to take stock of revenue and expenses from the previous
period, and judge where the business will be in future periods. It also allows the
organization to add and remove products and services from its plan for the future period.
In larger organizations, the budgeting process may be completed by individual business
units and compiled to form a master budget for the organization. This allows top
management to get a picture of the entire business so they are able to better plan
accordingly.
COORDINATION

Different units in the company must also coordinate the many different tasks they
perform. For example, the number and types of products to be marketed must be
coordinated with the purchasing and manufacturing departments to ensure goods are
available. Equipment may have to be purchased and installed. Advertising promotions
may need to be planned and implemented. And all tasks have to be performed at the
appropriate times.
Communication and Motivation

In the budgeting process, managers in every department justify the resources they need to
achieve their goals. They explain to their superiors the scope and volume of their
activities as well as how their tasks will be performed. The communication between
superiors and subordinates helps affirm their mutual commitment to company goals. In
addition, different departments and units must communicate with each other during the
budget process to coordinate their plans and efforts. For example, the MIS department
and the marketing department have to agree on how to coordinate their efforts about the
need for services and the resources required.

Other goals that an organization may use its budget to achieve that are less obvious
include communication and motivation. Budgets allow management to communicate
goals and to promote goal congruence so resources can be coordinated and focused in key
areas. Budgets also allow a company to motivate its employees by involving them in the
budget. While top-down budgeting does not accomplish this goal very effectively,
participative budgeting can be motivating. When an employee is involved in creating his
or her department’s budget, that person will be more likely to strive to achieve that
budget.

Control and Evaluation

Once a budget is finalized, it is the plan for the operations of the organization. Managers
have authority to spend within the budget and responsibility to achieve revenues specified
within the budget. Budgets and actual revenues and expenditures are monitored
constantly for variations and to determine whether the organization is on target. If
performance does not meet the budget, action can be taken immediately to adjust
activities. Without constant monitoring, a company does not realize it is not on target
until it is too late to make adjustments

Perhaps the most obvious of budgeting goals is that of control and evaluation. Budgeting
allows a company to have a certain degree of control over costs, such as not allowing
many types of expenses to take place if they were not budgeted for, or assigning
responsibility for these expenses. A budget also gives a company a benchmark by which
to evaluate business units, departments, and even individual managers.
Unfortunately this purpose of budgeting can cause employees to have negative feelings
about the budgeting process because their compensation and, in certain cases, their jobs,
may be dependent on meeting certain budgeting goals. This is especially true in companies that
focus on the evaluation purpose of budgeting and when the budgeting is a top-down process, rather than a
participative one.

One way to evaluate a manager is to compare the budget with actual performance.Did the
manager reach the target revenue within the constraints ofthe targeted expenditures? Of
course, other factors, such as market and generaleconomic conditions, affect a manager’s
performance. Whether a manager achieves targeted goals is an important part of
managerial responsibility.
What is a Government Budget?

INTRODUCTION:

The Budget is the central instrument of the government to implement policies at the
national and provincial levels

The Budget consists of:

- Domestic Government revenues such as taxes
– External revenues in the form of grants and loans from donors
– Government expenditures for all ministries and provinces.

Budget should link government policies and resources in a medium term context (3-4
years)

Government budgeting is like how you run your budget at home.

If you have to determine how much your family is going to earn in the next year,
and how much you want to spend. If you spend more then you earn, you must find
the extra money through loans from banks or friends. If you spend less than you
earn you will save money. The savings in Government budget terms is called a
‘surplus’ and the borrowing is called a ‘deficit’. Governments must monitor their
deficits in particular as they could put the country in a bad position where it has too
many loans and not enough money coming in to pay for them

Three Basic Rules for An Effective Budget

– Control of aggregate expenditure to ensure affordability

– Resource allocation that reflects strategic priorities e.g. ANDS

 Efficient and effective service delivery

Government budgeting theory and practice dictates that there are 3 requirements to
maintain fiscal discipline.

Firstly you need to control aggregate spending. If you spend more than you earn
and can feasibly pay back if you borrow, you will go bankrupt.
Secondly, the money that you do earn, you want to ensure that you spend it on what
is most important first. For example, a family member might be very sick and you
have to buy medicines. This spending may be seen as of more important then
buying a new rug.

Lastly, efficient and effective service delivery means that when you buy those
medicines, you want to get them at the cheapest cost while still ensuring that they
treat the sickness. For example if you had the choice to buy the same medicine for
50 Afs or 500 Afs and they both worked, of course you would choose the medicines
costing 50Afs. The lowest cost while still ensuring the medicines work is an example
of the term efficiency whereas ensuring the medicines achieve the objective of fixing
the illness is an example of effectiveness.
Another example of effectiveness - the Government may build a road that is very
efficient – good quality at the cheapest possible cost. However, if that road was
originally intended to ease traffic congestion from one place to another and it does
not do that, we call that an ineffective result as it didn’t achieve what it was
originally suppose to achieve.

• The budget should be the financial mirror of society’s economic and social
choices.
• A good budget must fulfill four objectives:
• Fiscal discipline/expend.control
• Allocative efficiency (strategy)
• Operational efficiency
• Equity….

Common problems in Government Budget

• Low execution rates for development budget

• Lack of clear provincial participation

• Lack of clear links between policy and budgeting

• Weak service delivery in some areas of the country

OBSTACLES CAUSING SLOW EXPENDITURES

• Low capacity in most of the ministries

• Poor coordination among ministries

• Between ministries and donors

• Security and domestic conditions

Types of Budgets

Several types of budget can be found in the literatures of economics

1. Line item budget is the most common one often labelled as ‘incremental’, where
certain amount is added to the last year’s figures. It is traditional way of estimating the
expenditures that hardly allows new items. Unlike the incremental one,
2. Zero base budgets disregards the amount allocated in the past. It calls for an activity to
be started from scratch i.e., zero-base. It links budgeting to evaluation because each
prioritization requires a thorough analysis, re-examination, review and justification of the
decisions made.
3. Program budget is a result-oriented budgeting system that specifies the programs
/activities and seeks to relate costs to outputs. It is linked to planning quantifying the
expected outcomes.
3. Performance budget focuses to improve the efficiency of programs and functions. It
quantifies the entire result-based chain as inputs, outputs, outcomes, and impacts to the common
people; yields useful indicators1 of the efficiency and quality of government operations; allows for
more flexible use of resources and enhanced accountability for results; attempts to achieve
specific service delivery objectives and facilitates informed budgetary decision making; increases
managerial flexibility to project/ program managers to achieve results; relies on measurement,
evaluation and performance reporting, which help citizens assess government performance,
influence budgetary decision making and hold government accountable.
Other types of budgets include: voted and non-voted2; capital and operating; discretionary and
non-discretionary3; development and ordinary; participatory and non-participatory4; core,
external and I/NGOs budget5; and central, provincial and local budget. Central budget is
allocated to and spent by the central government institutions. Provincial budget is the
budget of the sub-national entities allocated to and spent by the local governments within
their territorial jurisdictions.
The Government of Afghanistan is integrating ordinary and development budget and
adopting program and provincial budgeting to accelerate the country’s socio-economic
development process across the provinces.
Program Budgeting
Program budgeting is simply grouping of similar and inter-related activities/services
performed by the budgetary units in order to achieve a desired outcome. It attempts to
achieve the governmental expectations with its available resources and methods to
achieve the objectives. As program budgeting is a policy action of poverty reduction and
growth facilitation (PRGF) and an indicator of Afghanistan National Development
Strategy (ANDS) objective, it is a fiscal as well as political commitment of the
government.

Budgetary control.

This is the process by which financial control are exercise whiten on organization

Methodical control of an organization's operations through establishment of standards

and targets regarding income and expenditure, and a continuous monitoring and
adjustment of performance against them is called Budgetary control.

Budgetary control is defined by the Institute of Cost and Management Accountants

(CIMA) as:

"The establishment of budgets relating the responsibilities of executives to the

requirements of a policy, and the continuous comparison of actual with budgeted results,
either to secure by individual action the objective of that policy, or to provide a basis for
its revision".
 Program Budget

Program budget is a modern tool for preparation and planning of budget, introduced first
time in 1960’s in the USA and until now adopted in all developed and most developing
countries in the world. As you all know MoF has initiated last year implementation of the
programme budget in Afghanistan, as well, by introducing it in three pilot ministries –
MoE, MoPH and MoRRD. This year pilots have been extended to four more ministries –
MoF, MoAg, MoWaE and MoPW, with the plan to roll it out to all budget units over the
next few years.

Since MoF is the initiator and leader of the program budgeting implementation process in
Afghanistan, we thought it would be very useful or better say necessary for the Budget
sector employees, more than anyone else, to be fully inform of this reform

Why program budgeting?

Well there are several reasons for introducing program budgeting not only in
Afghanistan, but in any other country in the world. Namely, traditional approach to
budget planning, so called incremental or line item budgeting that has been so far used
has several main weaknesses program budgeting is trying to address. Some of these
weaknesses are:
Budget preparation is focused on inputs (such as expenditures for salaries, goods and
services or capital purchases) and very little attention is paid to results of these
expenditures
Current and capital budgeting (or operational and development budget) not integrated
No clear link between the government policy priorities and budget spending
Lack of performance measurement – what has been achieved with spent money

All these characteristics result in inefficient and ineffective use of public resources.
Program budget is very important and valuable tool for all stakeholders in the budget
process – public, parliament, government, ministry of finance, and of course line
ministries.

Information provided through the program budget should be used to:

To ensure budget allocations are consistent with and based on the communities priorities
set by the government and parliament in ANDS
To ensure that budget decisions are transparent
To ensure Government is accountable for those decisions and the effectiveness of its
programs – results the programs are supposed to achieve
To review program performance
are programs achieving objectives?
are there better (more efficient or effective) ways of delivering the service?
To assess performance of the line ministries. Staff/manager/budget user
What exactly is this program budgeting?
Simply - Program budget is a tool for translating Government’s sector strategies and policy
priorities into activities and services that will address the needs of the citizens

Program is created by grouping of all similar activities with same policy objective, regardless of
fund source, which means one program may and usually does includes activities financed from
both operating and development budget. This is why budget integration is one of the main
preconditions for successful implementation of the program budget.

Two most important benefits of the program budget therefore are: first it enables us make budget
decision (or put an end to the struggle from the illustration we saw few minutes ago) based on the
policy priorities – by asking line ministries simple question - how your spending is going to help us
achieve government priorities set in the strategic document?

And than by focusing on the results of the line ministries spending – have they really achieved
what they said they would with the money they spent.

Basically, in program budget it is not any more only important whether line ministries spent their
budget according to financial rules – how much money their were approved to spent on salaries
or goods and services or if they have both 2 or 3 cars. This is still important, off course, but more
important is what results have line ministries achieved with the money they have spent and have
they realized or came any closer to realizing their priorities.

Principles of Effective Budgeting

Key principles of effective and budget planning and preparation:

1. Establish a budget that is affordable

2. Allocate scarce resources to the most important economic and social policy priorities – IN
ACCORDANCE WITH ANDS

3. Focus on the results of Government activity

But there is a solution to this problem and it consists of three main steps:

Establish a budget that is affordable – calculate hoe much revenues we will have available in
the next period and limit our expenditures to this level

Determine what are the most important economic, strategic objectives and social policy
priorities for the country (as identified in the Development Strategy, such as ANDS) and
allocate budget resources accordingly

Focus on the results of Government activity – are ministries achieving these objectives or not

What is Program?
  A program is simply grouping of similar activities or services performed by a budget user
to achieve strategic objective(s) and a specific objective.
 A number of Programs may collectively contribute towards the achievement of a strategic
objective.

Summary:
Program Budgeting:

 means making choices, priorities among competing demand for resources based
on the priorities
 grouping scattered activities toward one objective
 emphasizes the results of government activity and budgets

 improves transparency and accountability of the budget

 will lead to a more effective budget process and public spending in Afghanistan
So, to conclude that what is program budget and why should we introduce it:

Program budget is a good tool for making budget more efficient by ensuring the resources are
allocated in accordance with country most important priorities, as identified in ANDS,
To ensure budget decisions are made transparently
And to enable us to focus on the results of the government activities and review whether
ministries activities and programs are achieving objectives they are supposed to achieve, and
who is responsible if they are not.

This way, if properly introduced program budget will lead, hopefully, to more effective
budget process and more efficient public spending in Afghanistan.

Distributed authority, responsibility and accountability

Bottom-up establishment of priorities

Collaborative, consultative decision making

Clear, concise performance expectations

Continuous, effective communication

5 STEPS TO BUDGETING SUCCESS

Successful budgeting is key to good financial health.

And it really isn’t hard. It just takes some thought and time.

These five steps will help create a budget that’s not only realistic, but
is successful

List your expenses

Make a list of your fixed expenses such as mortgage or rent payments,
car payments, insurance payments, etc. After that, make a list of your
fluctuating expenses. These include expenses for dining out, dry
cleaning, hobbies, and other bills or expenses that don’t have a
consistent payment. Take the time to review old bank statements and
check registries to help you calculate estimated figures for these
expenses. This is vital successful budgeting.

Separate your wants and needs

After you have made your lists and can see where you’re spending
your money, check those lists for places you can curb costs or
eliminate them entirely. This is especially important to successfully
budgeting to eliminate debt or save money toward a specific goal. And
any place where you see you’re clearly wasting money, get rid of it.

Make sure your expectations are realistic

The objective of a successful budgeting is to help you plan for actual
expenses while at the same time setting goals for spending that will
allow you to save money.

Consider buying budgeting software

Part of the reason you do this is, of course, for guidance in successful
budgeting. It helps you understand the expenses categories and helps
you map out strategies for successful budgeting. Another part of it,
though, is psychological. By investing in budgeting software, you mean
business when it comes to your budget and saving goals.

Get your family on board

For the most successful budgeting possible, everyone in your family
needs to know and understand the budget. It won’t do any good to
create a budget if your husband or wife isn’t aware of it and continues
to spend money in ways you haven’t planned for or on things you
haven’t made allowances for in your budget. And it’s never too early
for kids to develop money skills and to know that there are limits to
how much money you can or will spend. So the earlier you get them
started, the better!

Elements of Successful Budgets

Anyone can create and manage a useful budget. Here are the factors that will ensure your
success.

Budget success depends on several different elements. Including the information

provided by each of these elements will help entrepreneurs to create a successful budget:

• Time horizon
• Goals
• Data
• History
• Forecasts
• Variables
Time horizon

The time horizon is the real-time measure of a budget cycle. The time horizon for many
budgets is one year. Periods from one week to ten years are used, depending on the nature
of the industry, the complexity of the operation, and the degree of risk.

Goals

A budget should outline the specific goals to be achieved. Goals provide benchmarks for
accountability and should be specific and measurable. Creating specific goals will guide
and focus the entrepreneur’s attention throughout the budgeted period.

Data

Using good data in the formulation of a budget will lead to sound assumptions. If data is
not reliable, it will be impossible to accurately predict the coming year. Careful
entrepreneurs create a reference notebook to organize the data on which assumptions
were based. Doing so will enable data to be referenced easily during budget reviews and
revisions.

History

History is an important feature in a budget. A company’s past performance should be

used to understand market trends, to establish historical strengths and weaknesses, and to
provide a starting point for a new budget.

Forecast

A budget document is a compilation of forecasts. Forecasts should represent achievable,

yet motivating, goals. Additionally, forecasts should take into consideration the effects of
increased expectations. For example, a forecasted sales increase of twenty-five percent
statewide might affect mileage and other travel costs, telephone expenses, and
advertising.

Variables

Variables are the factors that influence the success or failure of a forecasted goal. An
entrepreneur with a growing business might budget for an increase in revenue, for which
she is planning to use more advertising than in previous years. If complications arise in
the new budget period, and the revenue increase is no longer reasonable, the advertising
budget will be affected and should be immediately adjusted. Include connections between
variables in your budget to remind yourself of the dependencies between your various
expectations.
*****************************************************

Once you have developed your budget and ensured that it includes all of the success
factors listed above it’s time for implementation. Use your budget as a tool to dictate
when and how projects and activities will be carried out. Commit to managing your
business to correspond with your budget unless your situation changes drastically. If your
situation does change drastically, revise your budget and adjust your expectations.

During budget implementation, insightful entrepreneurs who regularly work with

employees and contractors allow adequate time for people to adjust to changes brought
about by budget decisions. Business owners who are patient during periods of transition,
providing proper support and adequate access to resources, quickly succeed at leading the
members of their various work and project teams through the implementation of a new
budget.

The last, yet possibly most important, element of successful budgets is regular review and
analysis. At the completion of each measurable time segment, each month for most
businesses, budgeted numbers should be compared to actual results. If a significant
variance occurs, it will be necessary to identify what caused the variance and to describe
how this variance will be managed in the future. Regular analysis of your documented
expectations and rapid resolution of unexpected realities will facilitate and support your
success.

WHAT IS “REFORM”?

Reform is not revolution, but “a process of improvements in the existing system rather
than a replacement of the system itself”.

By any definition, what matters is that the improvements be effectively implemented.

“Reform” without implementation is no reform at all.

The best designed reform cannot be implemented unless it defines realistically the
questions of how it is to be executed; by whom; when; with what resources; by which
incentives; and through what process of management of change.

Provincial budget is the budget of the States/ Provinces/ Sub-national entities in

federal (Australia, India, Nigeria) as well as unitary countries (Afghanistan, Nepal). The
Government of Islamic Republic of Afghanistan has been attempting to integrate the
Ordinary and Development budget and embark on Program budgeting system in order to
accelerate the process of development. Meanwhile, Provincial Budgeting system has also
been attempted to adopt in pilot basis to empower the Provincial authorities to shape the
destiny of the people of that province. Piloting of program and provincial budgeting has
been initiated in quite a few Ministries and Provinces. It is hoped that all the Ministries
would implement the program and provincial budgeting system across the sectors and
provinces within