Question

What are the three budget-management approaches available to institutions during budget reductions and how these approaches may differ for for-profit, government-subsidized, and endowment-based institutions.

Answer 1

Three budget management approaches available to institutions during budget reductions are:

1. Forecasting

Institutions mainly focus on reducting the expenses and staying within the limit set by the management. In order to reduce the budget, institutions first try to estimate the possible expense during the time period alloted(usually yearly). This time period again varies depending on the institution. Time periods to create budgets can be monthly, biyearly, yearly and so on.

2. Top-down approach:

In top-down approach, the entire budget is considered to be a combination of different expenses. These expenses are then sub divided into smaller sub-groups which contain expenses for similar cause. Further dividing these groups will finally give individual expenses. With this approach, institutions can plan and reduce these individual expenses that may add up to a huge total expenditure. Budget reduction and planning is easier with this approach.

3. Bottom-up approach:

In this approach, institutions list out each individual event/ expenditure that may occur. These small expensees are then grouped into small groups of events that contain similar expenses. Furthur again, smaller groups are combined to form larger groups of events that have expenses for similar causes. This is called bottom up approach where the actual expenses are captured from the root level and hence not many expenses get ignored. With this approach, one can compare the actual expenses with the estimated budget and do necessary corrections.

Other approaches:

• For-profit institutions are those institutions that run with the aim of making profits. These institutions will not necessarilty have intentions of social cause or help to society. This approach is followed by businesses with the aim of making profits. To make profits, they reduce the budget in the intitial years of the business until they reach a break even point.
• Government subsidized institutions are those that run on Government aid. These institutions need not allocate high budget for it's running since they enjoy low subsidized prices from the Government already.
• Endowment-based institutions are those that run on the investable assets from a non-profit institution. These institutions have limited budget and hence needs to give extra care to use minimum from the budget available.