Question

What experiences have you had building or trying to stick to budgets in your organization. What issues and challenges have you seen?

I work in a school. What kind of challenges can be faced with building or trying to stick to budgets?

Answer 1

There are a number of serious problems associated with budgeting, which include gamesmanship, excessive time required to create budgets, and budgeting inaccuracy. In more detail, the problems with budgeting include:

    Inaccuracy. A budget is based on a set of assumptions that are generally not too far distant from the operating conditions under which it was formulated. If the business environment changes to any significant degree, the company’s revenues or cost structure may change so radically that actual results will rapidly depart from the expectations delineated in the budget. This condition is a particular problem when there is a sudden economic downturn, since the budget authorizes a certain level of spending that is no longer supportable under a suddenly reduced revenue level. Unless management acts quickly to override the budget, managers will continue to spend under their original budgetary authorizations, thereby rupturing any possibility of earning a profit. Other conditions that can also cause results to vary suddenly from budgeted expectations include changes in interest rates, currency exchange rates, and commodity prices.

    Rigid decision making. The budgeting process only focuses the attention of the management team on strategy during the budget formulation period near the end of the fiscal year.

    Time required. It can be very time-consuming to create a budget, especially in a poorly-organized environment where many iterations of the budget may be required. The time involved is lower if there is a well-designed budgeting procedure in place, employees are accustomed to the process, and the company uses budgeting software.

    Gaming the system. An experienced manager may attempt to introduce budgetary slack, which involves deliberately reducing revenue estimates and increasing expense estimates, so that he can easily achieve favorable variances against the budget.

    Blame for outcomes. If a department does not achieve its budgeted results, the department manager may blame any other departments that provide services to it for not having adequately supported his department.

    Expense allocations. The budget may prescribe that certain amounts of overhead costs be allocated to various departments, and the managers of those departments may take issue with the allocation methods used.

    Use it or lose it. If a department is allowed a certain amount of expenditures and it does not appear that the department will spend all of the funds during the budget period, the department manager may authorize excessive expenditures at the last minute, on the grounds that his budget will be reduced in the next period unless he spends all of the authorized amounts.

    Only considers financial outcomes. The nature of the budget is numeric, so it tends to focus management attention on the quantitative aspects of a business; this usually means an intent focus on improving or maintaining profitability.

The problems noted here are widely prevalent and difficult to overcome.

In School budgeting challenges should be smilier to challenges listed above