Question

Provide an example of how an increase in growth can impact budgetary decisions.

Answer 1

Increase in growth can impact budgetary decisions. An important aspect of budgetary decisions is capital budgeting (or strategic asset allocation). Capital budgeting decision involves identification of investment opportunities and then making the investment in the asset which will accrue maximum benefits to a company. For instance a company, during the process of budgetary decisions, will have to select from different type of equipments that it needs to buy. Each equipment will have different initial cost, different revenue generation potential etc.

In this context increase in growth can impact budgetary decisions. Take for example the case of a hospital. The hospital is anticipating a 10 percent CAGR (compounded annual growth rate) over a period of next 10 years. This means that a 10% budgetary increase for the hospital will not be effective. It will have to make a comprehensive overhaul in its budgeted income as well as expenses. It’s labor budget, overheads, materials budget will more likely increase by more than 10%. This is because the impact on cost centers cannot always be in proportion to the increased activity level. Secondly the hospital will have to develop flexible budgets keeping in mind the changes in its activity level. Thirdly the impact on different segments of the hospital may vary. The 10% growth will have different impact on the revenues and costs of oncology department of the hospital when compared to another department say orthopedic department.