TYPES OF BUDGET

1.1. Budget in general

1.1.1. Strategic planning and its implementation

Strategic planning is the process of defining an organization's direction and making decisions on
allocating its resources to pursue this direction. It involves assessing an organization's current
situation, defining its mission, setting goals and objectives, developing strategies to achieve
those goals, and implementing plans to execute those strategies.
Implementation is the process of putting plans and strategies into action. It involves putting
resources, structures, and systems in place to achieve the desired outcomes. Successful
implementation requires effective communication, leadership, management, and coordination
among all stakeholders involved.
In order for strategic planning to be successful, it must be effectively implemented. This requires
careful consideration of the organization's culture, capacity, and resources. It also requires a
commitment to continuous monitoring, evaluation, and adjustment of the plan as needed.
Overall, strategic planning and implementation are critical components of organizational success.
They help ensure that an organization is focused on its mission and goals, and that it has the
resources and capabilities necessary to achieve them. Strategic Planning is systematic procedure
to establish the long term objectives of an organization and the policies and strategies that
oversee the achievement, use and disposition of resources to accomplish the vision and mission
of firms. It is basically the responsibility of senior management. Strategic planning is the
problem-solving process of establishing strategic objectives and devising strategic plans to
realize those objectives. The goals of strategic planning including understanding the benefits of
strategic planning; understanding the products of strategic planning; and learning the keys to
successful planning and implementation.
Many theorists explained that Strategic planning is a well-organized process to make major
decisions and agreeing on actions that shapes and guide what an organisation is, what it does,
and why it does it.
The Strategic planning mainly assists to organization for:
1. Setting up of goals or objectives;
 2. The analysis of the environment and the resources of the organization;
3. The generation of strategic options and their evaluation; and
4. The planning of implementation of the design of control systems or monitoring mechanisms.
The particular steps for Strategic Planning
This planning comprises of six identifiable stages that fulfil the requirements of the management
thinkers:
1 Environmental scanning. 2 Evaluation of issues. 3 Forecasting.
4 Goal setting. 5 Implementation, and 6 Monitoring.

A written strategic plan might include the following headings:

I. Executive summary
II. Vision statement
III. Mandate and scope of work
IV. Summary analysis of external and internal environment
V. Main strategic issues
VI. Four or five aims that accompany strategies
VII. Assessment of human resource needs
VIII. Budget protection
Importance of Strategic Planning
The significance of strategic planning in any business organization cannot be exaggerated.
Majority of top performing companies have identified the role of strategic planning for long term
growth and continued existence of their business organization. Most of the managers have
observed that through defining the mission of their organization, they are better able to give it
direction and focus its activities. Planning is major process for organization's success because
without proper planning, there may be confusion and unethical practices can occur. Currently,
researchers are more interested to study strategic management. Adeyemi (1992) stated that there
is a positive correlation between strategic management and organizational performance in some
Nigeria banks in his study.
It is well established in management studies that the success or failure of strategic planning is
determined by a number of components which include the environment, organization structure
and strategic decision making. Ansoff (1979) said that when these three components are
appropriately matched, the performance of any organization is optimised. Lorange (1979)
hypothesized that the significance of strategic planning is to achieve a sufficient process of
modernism to support and augment the planning process. He further argues that effective
strategic planning does not have to be detailed or complicated but must be rational and focused
on strategic decisions to be carry out.
Implementation
Implementation is the process of turning strategies and plans into actions to achieve strategic
objectives and goals. Implementation is important part of the strategic planning process, and
organizations that develop strategic plans must incorporate a process for applying the plan. The
particular implementation process can differ from organization to organization. Strategy will
tend to be formulated at high level, mainly if it follows a common strategy of value discipline
and it can only be successfully implemented if it can be expressed in more detailed policies and
communications that are directed at workforce throughout the organisation. Strategic alteration
can only be successful if it has the support of the employees who have to deal with the
customers, suppliers and organisational resources that of the strategy is targeted at.
Consequently, when representing the strategy at a lower organisational level, it also helps to
ensure that the strategy is practicable and addresses any realistic issues which may arise.
Particularly, a strategy needs to be implemented in the marketing, research and development,
procurement, HR, production and IT departments in order to be triumphant. Implementation
must also recognize any resources and capabilities required to support the new strategy, and any
organisational change which will have to take place. In implementation process, the strategy also
needs to be controlled and revised to make certain that it is being implemented accurately and
fruitfully. This needs appraisal and feedback procedures as well as control systems to observe the
important characteristics of the strategy.
Senior management commitment is significant factor for the implementation of a strategy.
Research has revealed that senior management's commitment is certainly a requirement for
strategy implementation. Therefore, they must show their keenness to give energy and
faithfulness to the implementation process. Senior executives must discard the notion that lower
level managers have the same perceptions of the strategy and its implementation, of its
underlying rationale, and its urgency (Dahlgaard, and Martensen, 1998). Another aspect of
implementation of strategic plan is involvement of middle manager's valuable knowledge. The
success of any implementation attempt depends on the level of involvement of middle managers.
 To generate the required acceptance for the implementation as a whole, the affected middle
managers' knowledge, which is often underestimated, must already be accounted for in the
formulation of the strategy. After that, it is to make sure that these managers are a part of the
strategy process, their motivation towards the project will increase and they will see themselves
as an important part in the process (Rps, 2005).
Effective communication should be emphasized in the implementation process. Many theorists
have designated that communication is a major success factor within strategy implementation
(Prahalad, and Hamel, 1990). Research has shown that an organization introduce a two-way
communication program that allows and solicits questions from employees about issues
regarding the formulated strategy. Additionally, the communications should inform employees
about their new requirements, tasks and activities to be performed by the affected employees,
and furthermore, cover the reason behind changed circumstances ( Alexander, 1995).
There are few basic steps that can assist in the process and guarantee success of implementation:
1. Evaluate the strategic plan: This is the first step in the implementation process. It states that
managers must know what the strategic plan is. They must review it carefully, and highlight any
elements of the plan that might be especially challenging. It is necessary to identify any part of
the plan that might be unrealistic or excessive in cost, either of time or money and emphasize
these, and be sure to keep them in mind to begin implementing the strategic plan.
2. Create a vision for implementing the strategic plan: This vision might be a series of goals to be
reached, step by step, or an outline of items that need to be completed. It is imperative that
everybody must know what the end result should be and why it is important and establish a clear
image of what the strategic plan is intended to accomplish.
3. Select team members to help to implement the strategic plan: Management must develop
competent team that support management to implement strategies. They must establish a team
leader who can encourage the team and field questions or address problems as they arise.
4. Schedule meetings to talk about progress reports: Organize meetings and present the list of goals
or objectives, and let the strategic planning team know what has been accomplished. Whether the
implementation is on schedule, ahead of schedule, or behind schedule, evaluate the current
schedule regularly to discuss any changes that need to be made. Management must establish a
rewards system that recognizes success throughout the process of implementation.
 5. Involve the upper management where appropriate: It is good to inform all activities to the
organization's executives and provide progress reports on the implementation of the plan. Letting
an organization's management know about the progress of implementation makes them a part of
the process, and, should problems arise, the management will be better able to address concerns
or probable changes.
1.1.2. Budget and the budget Cycle
A budget is a financial plan that outlines an organization's expected revenues, expenses, and cash
flows for a specific period, usually a fiscal year. It is an essential tool for financial management
and helps organizations to allocate resources effectively and make informed decisions about their
financial activities.
The budget cycle typically involves four stages:
Planning: In this stage, an organization sets its financial goals and objectives for the upcoming
fiscal year. This involves reviewing historical financial data, forecasting revenues and expenses,
and determining priorities for resource allocation.
Preparation: During this stage, the budget is developed based on the goals and objectives set in
the planning stage. This involves developing detailed revenue and expense budgets and creating
a budget proposal that outlines the organization's financial plan for the upcoming year.
Approval: In this stage, the budget proposal is presented to the organization's decision-makers,
such as a board of directors or executive management team, for approval. The proposal is
typically reviewed and revised before it is approved and adopted.
Implementation and Monitoring: Once the budget is approved, the organization implements its
financial plan, tracking actual revenue and expenses against budgeted amounts. Any variances
are analyzed and appropriate actions are taken to keep the organization on track to meet its
financial goals.
The budget cycle is a continuous process, with each stage informing the next. As the
organization learns more about its financial performance throughout the year, it can adjust its
budget to reflect new information and changing circumstances. This flexibility is important for
organizations to remain agile and adapt to changes in their business environment.

1.1.3. Purpose of budget

 The purpose of a budget is to plan and allocate financial resources in a structured and organized
manner, to achieve specific goals and objectives within a given time frame. A budget helps
individuals, businesses, and organizations to manage their finances effectively by identifying
their sources of income and expenses, and then prioritizing their spending accordingly.
In general, the purpose of a budget includes the following:
Planning: A budget helps to identify and plan for future expenses and income, and to establish
financial goals and objectives.
Control: A budget provides a framework for monitoring and controlling expenses, and helps to
identify areas where costs can be reduced or eliminated.
Communication: A budget can be used to communicate financial plans and goals to stakeholders,
such as investors, creditors, and employees.
Evaluation: A budget enables individuals and organizations to evaluate their financial
performance over time, and to make adjustments to their spending and investment strategies as
necessary.
Overall, the purpose of a budget is to provide a roadmap for managing financial resources and
achieving financial objectives.
1.1.4. Types of budget and Budgeting techniques
There are several types of budgets and budgeting techniques used by organizations to plan and
manage their finances. Some of the common types of budgets and budgeting techniques are:
Operating Budget: This is the most common type of budget and is used to plan the day-to-day
operations of the organization. It includes expenses such as salaries, rent, utilities, and other
overhead costs.
Capital Budget: This type of budget is used to plan for long-term investments in assets such as
equipment, buildings, and technology.
Cash Budget: This type of budget is used to forecast the organization's cash inflows and
outflows. It is essential for ensuring that the organization has enough cash to meet its obligations.
Project Budget: This type of budget is used for specific projects and includes all the costs
associated with completing the project.
Zero-Based Budgeting: In this technique, the organization starts each budgeting cycle from
scratch and justifies every expense. This technique is useful in identifying and eliminating
unnecessary expenses.
 Incremental Budgeting: This technique involves using the previous year's budget as a starting
point and making adjustments based on changes in the organization's needs.
Activity-Based Budgeting: This technique involves identifying the activities that consume
resources and allocating resources based on the organization's priorities.
Rolling Budgeting: This technique involves updating the budget on a regular basis, such as
monthly or quarterly, to reflect changes in the organization's financial situation.
Each of these types of budgets and budgeting techniques has its own strengths and weaknesses,
and organizations need to choose the most appropriate one based on their specific needs and
circumstances.
1.2. Budget in business organization
1.2.1. Process of developing a master budget
Process of developing an operating budget
Developing an operating budget involves several steps, which may vary depending on the
organization's size, industry, and complexity. However, some common steps involved in the
process are:
Set goals: The first step in developing an operating budget is to determine the organization's
financial goals and objectives for the upcoming period. This step involves reviewing the
organization's mission and strategic plans to identify the financial targets.
Gather data: The next step is to collect data on past financial performance, industry trends, and
other relevant factors that could impact the organization's financial performance. This
information will help to create realistic revenue and expense estimates.
Identify revenue sources: Based on the organization's goals and the data gathered, the next step is
to identify potential sources of revenue, such as sales, grants, donations, and other funding
sources.
Estimate revenue: After identifying the revenue sources, the organization needs to estimate the
amount of revenue that can be generated from each source. This involves analyzing past
performance, market trends, and other relevant factors that could impact revenue.
Forecast expenses: Once the revenue estimates are determined, the organization needs to forecast
its expenses for the upcoming period. This includes fixed expenses such as salaries, rent, and
utilities, as well as variable expenses such as marketing and supplies.
 Allocate resources: After estimating revenue and expenses, the organization needs to allocate
resources to various programs, departments, and activities. This involves prioritizing spending
based on the organization's goals and objectives.
Monitor and adjust: The final step in the process is to monitor actual financial performance
against the budget and make adjustments as necessary. This involves regular financial reporting,
analyzing variances, and making changes to the budget as needed to stay on track towards
achieving the organization's financial goals
1.2.1.1. Financial budget
A financial budget is a plan that outlines the expected income and expenses of an individual,
organization, or government for a specific period, usually a year. It is a crucial tool in financial
management that helps in tracking and controlling expenses, maximizing revenue, and achieving
financial goals.
A financial budget typically includes several components, such as:
Revenue: This includes all expected income, such as sales revenue, interest income, dividends,
and any other sources of income.
Expenses: This covers all the expected costs, such as salaries, rent, utilities, supplies, marketing,
and other operational expenses.
Capital expenditures: This includes all investments in assets that are expected to last for more
than one year, such as property, plant, and equipment.
Financing activities: This covers all the expected cash inflows and outflows related to borrowing
and lending activities, such as interest payments, principal repayments, and new borrowings.
Cash flow statement: This shows the expected inflows and outflows of cash during the budget
period, indicating the overall cash position of the entity.
By creating a financial budget, an individual or organization can identify potential financial
problems before they occur and take proactive steps to mitigate them. It can also help in making
informed financial decisions, such as allocating resources efficiently, managing debt, and
investing in profitable opportunities

1.3. Responsibility Accounting

Responsibility accounting is a system of management accounting that focuses on assigning
responsibility for costs and revenues to specific individuals or departments within an
 organization. This allows managers to evaluate the performance of each area of the business and
to hold individuals accountable for their contributions.
Responsibility accounting involves the use of various techniques to measure the performance of
different areas of the business. These techniques can include cost accounting, budgeting,
variance analysis, and performance reporting.
One of the key benefits of responsibility accounting is that it allows managers to make more
informed decisions about resource allocation. By understanding the costs and revenues
associated with different areas of the business, managers can make better decisions about how to
allocate resources to maximize profitability.
Responsibility accounting also helps to promote accountability within an organization. By
assigning responsibility for costs and revenues to specific individuals or departments, managers
can hold employees accountable for their contributions to the overall success of the business.
Overall, responsibility accounting is an important tool for managers to use in order to better
understand the performance of their organization and to make informed decisions about resource
allocation.
1.4. Budget Administration
1.4.1. Budget Manual
A budget manual is a document that outlines the policies, procedures, and guidelines for
developing and managing a budget within an organization. The manual typically includes
instructions on how to prepare and submit budget proposals, as well as guidelines for monitoring
and controlling budgetary expenses.
The budget manual serves as a reference tool for budget managers and other personnel involved
in the budget process. It provides a clear understanding of the organization's budgetary
procedures and helps ensure consistency and accuracy in budget preparation and execution.
The budget manual may include the following sections:
Introduction: This section provides an overview of the purpose and scope of the budget manual.
Budgetary Policies and Procedures: This section outlines the organization's budgetary policies
and procedures, including budget development, approval, and implementation.
Budget Preparation: This section provides instructions on how to prepare a budget proposal,
including budget assumptions, revenue projections, and expense estimates.
 Budget Submission and Approval: This section outlines the process for submitting and approving
budget proposals.
Budget Execution: This section describes how to monitor and control budgetary expenses,
including the use of budget controls, reporting requirements, and budget adjustments.
Budget Reporting: This section outlines the requirements for reporting on budget performance,
including financial reports and variance analysis.
Glossary: This section provides definitions of budgetary terms and concepts used throughout the
budget manual.
The budget manual should be regularly reviewed and updated to ensure it remains current and
relevant to the organization's budgetary practices.
1.4.2. Behavioral Implication of Budget
Behavioural Implications of Budgeting (6 Implications)
(1) Dysfunctional Behaviour:
Budgets can bring positive behaviour among the people when the goals of individual managers
are found in conformity with the goals of the organisation. The perfect matching (or near perfect
matching) between the organizational and managerial goals is often referred to as goal
congruence. The managers who participate in the budget making process may feel happy in
producing a fair budget in terms of organisational goals and objectives.
Such a budget may induce and motivate others to bring excellence in their performance. But
sometimes, due to improper implementation of the budget and unrealistic management
expectations, the reaction of subordinate managers are found to be negative, which in turn has
adverse impact on achieving the organizational goals. Such a negative behavior is known as
dysfunctional behavior which is defined as an individual behavior that is in basic conflict with
the goals of the organization.
(2) Participative Budgeting:
Budgeting processes are either top down or bottom up. In a top-down budgeting process, top
management prepares budgets for the entire organization, including those for lower-level
operations. This process often is referred to as authoritative budgeting. A participative budgeting
process, on the other hand, is a bottom-up approach that involves the people affected by the
budget, including lower-level employees, in the budget preparation process.
Participation by employees in the budget preparation can provide them the feeling that “this is
our budget,” rather than the feeling generally noticed among employees that “this is the budget
imposed by the top on us.”
Participation by the subordinate managers in preparing the budget is considered to increase
employee motivation and reduce organizational conflict. One indication that an organisation
encourages active employee participation is the existence of good superior-subordinate
relationships fostered by (i) frequent person-to-person contact (ii) the use of results in
performance appraisal (iii) the use of departmental meetings to review actual results and (iv) the
creation of a “game” spirit (margin for error, tolerance and slack).
(3) Excessive Pressure Created by Budgets:
Budgets are used in to direct control and coordinate all activities in the organisation. In this task,
budgets should not generate excessive pressure and stress on the subordinate managers,
supervisors and the people working in the organisation. In order to eliminate undesirable
pressure, the budget goals and standards should be set which are neither too high (tight) nor too
low (loose). If the standards and the budgeted goals are too high, motivation becomes poor and
failing to achieve them may frustrate the managers and in turn, this frustration can result into
poorer performance.
Similarly, if the goals and standards are too easily achieved, a manager may lose interest and his
performance may decline. As goals and standards are tightened (but not made too tight),
motivation will increase. In fact, the objective should be to get subordinate managers in a
participative setting to set high but achievable goals and standards. This is one that is tight
enough to motivate, yet still realistic. Supervisors and upper level managers must make careful
judgments about how tight the budget goals and standards should be for each manager. Further,
direct, clear feedback allows the employee to adjust aspiration levels and strive to achieve
desired rewards.
It can be concluded that no budget can be successful as long as people are unwilling to accept it.
The problem of motivating a company’s personnel, however, is difficult to solve.
(4) Budgetary Slack (Cushion):
Budgetary slack, also known as padding the budget, takes place when a manager deliberately
underestimates revenues, overestimates costs and requests more funds than needed to support the
budgeted level of activities. The difference between the revenue or cost projections that a person
provides and a realistic estimate of the revenue or cost is called budgetary slack.
In all organizations, there is a tendency to introduce slack or a cushion in the budget. For
instance, subordinate managers can know on the basis of past experiences that their budget
proposals will be cut by senior managers and therefore will be tempted to pad certain expenses or
make low-revenue estimates. On the contrary, the senior managers knowing the padding habits
of their subordinate managers may be tempted to increase the level of expected revenues and
reduce the budgeted expenses.
Similarly, the sales managers underestimate their sales projections; the controller introduces
slack by maintaining excessive cash balances, etc. The degree of slack tends to grow in good
years, when satisfactory profits are easily attainable, in bad years slack is voluntarily decreased
throughout the organization.
(5) Top Management Support:
The attainment of budget goals and standards at the lower and middle level management depends
to a large extent on the support, participation and cooperation extended by top management in
the preparation and execution of budgets. Top managers by their actions should create an
environment and give impression to the subordinate managers about their commitment and
support to the budget goals and objectives. Otherwise, the planning and control function will be
damaged in case subordinate managers think that their top managers are not sincere while
preparing and using the budgets.
(6) Inter-Departmental Conflict:
The budgeting process is rightly considered a technical and formal one. However, in reality, the
budgeting process becomes most often an informal bargaining process or wherein managers of
different departments compete for organisation scarce resources. According to Hopwood this can
lead to a dilution of original goals, as managers try (and fight) for power and recognition.
Departmental conflict or conflict between the managers are also due to the fact that different
departments are found blaming each other when they fail to achieve their targets.
Budgets can have significant behavioral implications on individuals and organizations. Here are
some of the behavioral implications of budgets:
Goal setting: A budget sets goals for individuals and organizations. This can motivate them to
work harder and achieve their targets.
 Prioritization: Budgets require individuals and organizations to prioritize their spending. This can
lead to more efficient allocation of resources.
Accountability: A budget creates accountability for individuals and organizations. They are
responsible for achieving their targets and staying within their budget.
Planning: Budgets require planning and forecasting. This can help individuals and organizations
to anticipate future challenges and opportunities.
Decision making: Budgets provide information that can help individuals and organizations to
make better decisions. For example, a budget may reveal areas of overspending that need to be
addressed.
Control: Budgets provide a tool for controlling spending. Individuals and organizations can
compare actual spending to their budget and take corrective action if necessary.
Communication: Budgets can facilitate communication within organizations. By sharing budget
information, individuals and teams can better understand their role in achieving organizational
goals.
Overall, budgets can have positive behavioral implications by encouraging individuals and
organizations to set goals, prioritize spending, be accountable, plan for the future, make better
decisions, and communicate effectively.
1.4.3. Budgetary Slack
Budgetary slack refers to intentionally overestimating expenses or underestimating revenues in a
budget. It is often done by managers to create a cushion in the budget that can be used to cover
unexpected costs, take advantage of new opportunities, or improve performance without
exceeding the budget.
Budgetary slack can be seen as a form of manipulation or deception, as it can mislead
stakeholders about the true financial position of an organization. However, some managers argue
that it is necessary to create a margin of safety in the budget, especially in uncertain or volatile
environments.
The use of budgetary slack should be balanced with the need for accurate financial reporting and
accountability to stakeholders. It is important for managers to communicate clearly and
transparently about the use of slack in the budget and to ensure that it is not used to cover up
poor performance or to justify unnecessary expenditures.