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Thursday, March 11, 2021

Budget - Different types

 Budget - Different types


Traditional Budget or Incremental Budget


  •  Prepared using a previous period’s budget or actual performance as a base, with incremental amounts added for the new budget period. 


  • The allocation of resources is based upon allocations from the previous period.


  • This approach is not recommended as it fails to take into account changing circumstances. 


  • Moreover, it encourages “spending up to the budget” to ensure a reasonable allocation in the next period.


  •  It leads to a “spend it or lose it” mentality.

Advantages 

  1. The budget is stable and change is gradual.

  2. Managers can operate their departments on a consistent basis.

  3. Simple to operate and easy to understand.

  4. Conflicts are avoided when departments appear to be treated similarly.

  5. Coordination between budgets is easier to achieve.

  6. The impact of change can be seen quickly.

Disadvantages 

  1. No incentive for developing new ideas.

  2. No incentive to reduce costs.

  3. Encourages spending up to the budget so that the budget is maintained next year.

  4. The budget may become out-of-date and no longer relate to the level of activity or type of work being carried out.

  5. The priority for resources may have changed since the budgets were originally set.

  6. There may be budgetary slack built into the budget, which is never reviewed. Managers might have overestimated their requirements in the past in order to obtain a budget which is easier to work within, and which will allow them to achieve favourable results.

Integrated Budget

 

Integrated Budget

=

Revenue Budget

+

Works Budget

+

Earnings Budget

 

·         Source: Para 622 E (Engineering Code)

 

·         Object: In order to co-relate the decisions relating to Investment decisions, a consolidated Budget called Integrated Budget including Revenue Budget, Works Programme and the Machinery and Rolling Stock Programmes should be submitted by the Railways along with the preliminary Works Programme.

 

·         Prepared under the personal guidance of GM and with the assistance of PFA.

 

·          The Integrated Budget includes:

 

1. Projections of Traffic and Earnings

2. Works expenditure

3. Revenue Working Expenses

4. Estimated financial Results for the ensuing/ following year

5. The projected Operating Ratio

6. Rolling stock requirements on account of Replacement and Addition Account

 

·          Covering Note to the Integrated Budget:  Bring out the effect of Budget proposals on the efficiency of operations as indicated by the Operating Ratio and the financial viability of the system as revealed by the financial returns on Capital investment.

 

·         Revised Integrated Budget:  After discussion of the PWP – Preliminary Works Programme, a revised Integrated Budget should be submitted alongwith FWP – Final Works Programme duly taking into account the changes that might have taken place in the meantime.

 

&&&&

 


Outcome Budget

 

Conversion of Financial Outlays into Physical Outcomes

 

Check the Table (end of the article) for clear examples of the conversion

 

Backdrop:

 

●     The existing budget system, although involves proper checks and validations at various levels relies heavily on expenditure figures of previous years which are then incremented as per the revised requirements in the next year.

 

The present system consists of comparison of expenditure incurred viz-a-viz budget estimates/allotment without estimating the final outcome expected to be achieved.

 

●     The Performance Budget was introduced in the year 1969  following the recommendations of the ARC - Administrative Reforms Commission.

 

For long, a need was felt to address certain weaknesses in the performance budgeting system, such as lack of a clear relationship between the financial and performance budgets and inadequate target setting for the ensuing year.

 

To obviate the above lacunae, the Outcome Budget was introduced in the year 2005-06 in the Ministry of Finance.

 

In Indian Railways:

 

●     Implemented from 2006-07 onwards in Indian Railways and other ministries.

 

●     Applicable for all works of Rs. 5 Crores and above

Simply Outcome Budget means  “Converting Financial Outlays into Physical Outcomes”

Mechanism of “Checks & Balances”

It is a Progress Card on what Railways have done with the amount assigned in the previous annual Budget.  


What is:

Measures estimated outcomes of all Govt projects and checks whether money has been spent for the purpose it was sanctioned or not.

 Method:

 ● It is an evolving & dynamic process

The actual physical performance of the Previous Year, Current Year & targeted performance during the Next Year is analysed.

Achieved by defining Intermediate & Final Outcomes, Standardising Unit Costs, Capacity building for needed efficiency, ensuring regularisation & adequate flow of funds.

Reviewing every 3 months, benchmarking, effective monitoring & evaluation, identifying areas where funds to be reallocated.

 Advantages:

 

  1. Outcome of the Projects - Not only in monetary terms, but also physical outcomes

  2. Helps Management to control expenses & introduce discipline in expenditure.

  3. Govt projects become more result oriented

  4. Reduce costs by identifying Projects that do not contribute enough outcomes.

  5. Fixing the accountability.

 








Examples:



Activity

Financial Outlay

Physical Outcome


Earthing of signals to reduce the incidences of failure due to frequent lightning (in nos.)

Rs. 30 Laksh

  1. Substantially reduced rate of signal failure in the section from X to X-A

  2.  Enhanced throughput of section in terms of GTKM and NTKM of freight trains, 

  3. Increased coach kilometres / Passenger kilometres for passenger(PKM) trains 

  4. Saving monetized in Rs …lacs per month


Fitment of fuel efficiency kit in diesel locomotives (in nos.)

45 lacs per kit

  1. Improved specific fuel consumption from F to F- A

  2.   Saving of HSD oil in liters per month

  3.  Saving monetized in Rs …lacs per month

3

Development of Goods shed with state of the art facilities

Rs. 50 lacs

  1. Reduced detention of rake from X to X-A

  2.  Enhanced loading in tons

  3.  Freight revenue expected to be increased by Rs…. lacs per month

4

Road Over Bridge (ROB)/ Road Under Bridge (RUB) - Removal of LC gates

Rs. 200 lacs

  1. Elimination of accident at LC gates.

  2.   Increase in maximum train speed.

  3.  Reduction in train detention.

  4.   Increase throughput.

  5.  Increased GTKM,NTKM &CKM andEnhanced Traffic Earnings

  6.  Revenue expected to be increased by Rs ….lacs per month

 

*****




Z B B – ZERO BASED BUDGETING

 

Salient Features:

ü  A technique of planning and decision making which reverses the working process of traditional budgeting.

ü  In traditional budgeting (incremental budgeting), Managers justify only increases over the previous year’s budget and what has been already spent is automatically sanctioned.  No reference is made to the previous level of expenditure.

ü  By contrast, in Zero-based budgeting, every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases.

ü  Requires the budget request be justified in complete detail by each Manager starting from the Zero-base.

ü  The zero base is indifferent to whether the total budget is increasing or decreasing.

ü  ZBB is especially encouraged for Government budgets because expenditures can easily run out of control if it is automatically assumed what was spent last year must be spent this year.

 

ADVANTAGES:

 

ü  Efficient allocation of resources, as it is based on needs and benefits.

ü  Drives Managers to find cost effective ways to improve operations.

ü  Detects inflated Budgets.

ü  Useful for especially Service Departments like Telecom, Railways etc, where the output is difficult to identify.

ü  Identifies and eliminates wasteful and obsolete operations.

 

ü  Eliminates the “spend it or lose it” mentality of traditional budgets/incremental budgets.

 

DISADVANTAGES:

 

ü  Difficult to define decision units and decision packages.

ü  Time consuming and exhaustive.

ü  Difficult to understand and communicate the budgeting because more managers are involved in the process.

ü  Forced to justify the every detail related to the expenditure.  So not suitable for R & D depts.

&&&&

Performance Budget


Purpose: 


  • To motivate the employees about commitments to produce positive results




Salient features:


  • Cost & Benefit of each activity is analysed regarding allocation of funds.

  • Involves work measures, benchmarking & unit cost.


Consists of: 


  1. Identify the targets and methods of evaluating performance of each unit of an Organization.

  2. Taking into account of Inputs - Resources and Outputs - Services

  3. To be completed within a particular Time frame

  4. Allocation of Funds based on specific goals


Advantages


  1. Improves Performance in continuous manner

  2. Makes clear Program Goals/Objectives/Fixing targets for performance

  3. Justifies - Reallocation of Resources on the basis of Performance.

  4. Higher transparency & accountability to Taxpayers

  5. Better Cost estimation enables to allocate Funds to various projects by their importance.


Limitations: 


  1. Focus more on Targets, not on means of achievement

  2. Focus more on Quantity, not on Quality.

  3. Data may be manipulated to reach targets to get Funds

  4. Becomes ineffective without a Proper system of Accounting & Reporting

  1. In Govt Organizations like Indian Railways with multiple agencies, disagreement may arise on Spending priorities.


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