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Friday, September 22, 2017

Financial Administration in India

Unit – 2: Financial Administration in India
Meaning of Financial Administration
In simple words, financial refers to such a system or method by which one can analyse the financial working of the public authority. Thus the focuses on the procedure which ensure the lawful use of public funds. However the concept has been differently defined as under:
Prof .M.S Kenderic, “The financial administration refers to the financial measurement of govt. including the preparation of budget method of administering the various revenue resources the custody of the public fund, procedures in expending money, keeping the financial records and the like. These functions are important to the effective conduct of operation of public finance”
Prof. Dimock, “Financial administration consists of a series of steps whereby funds and made available certain official under procedures which will ensure their lawful and efficient use. The main ingredients are budgeting, accounting, auditing and purchase and supply.”
From these definitions one can easily find four ingredients (Methods/Process) of financial administration:
1)      Budget. The term budget has been derived from the French word “Bougette” which means a leather bag or a wallet. The chancellor of Exchequer in England used to carry his papers in the bag to House of Commons. Prof. Willoughby defined, “Budget-it should be at once a document through which the Chief Executive comes before the fund-raising and fund grading authority and makes full report regarding the manner and which he or his subordination have administered affairs during the last completed year ; in which he or exhibits the present conditions of public treasury and one the basis of such information sets forth his programme of for the year to come and the manner in which the purposes that such work should be financed.” In the word of Prof. Dimock, “Budget is a balanced estimate of expenditure and receipts for a given period of time. In the hands of the administration, the budget is a record of part performance a method of current control and a projection of future planes.”

2)      Accounting. Accounting is the record ingredient of financial administration. It is an art by which the financial effects of executive action are recorded, assembled and finally summarized in the form of the financial reports. A good according system is indispensable for adequate budgeting control. Therefore, there must be harmonious relationship between the goals in budget and financial statements prepared from accounts.
3)      Auditing. Auditing is a considered the final stage. In fact, it is investigation of report and legally, efficiency and accuracy of the financial transactions. Audition is of two types i.e. internal and external. The Chief Motto of audit is only to supervise the manner in which expenditure has been made in order to ascertain whether the executive has spent in accordance with rules and regulations. Auditing is an independent department who points out reregulation and submits its report to the higher authority.
4)      Purchase and Supply. As the name implies, it is the acquisition of the property. In other words, purchasing is a report of large category of supply which covers specialization traffic management, inspection, storage and proper utilization of different resources.
Generally, in democratic set up, there are guiding principles for the operation of financial administration. They are:
a)      Principle of Unity in the organisation: We all know that unity provides strength to all of us. According to this principle, there must be control of central authority on financial administration. However, it does no mean that every work is done by superior authority. It simply means that there must be close coordination between different executives and higher executives should have full control over on the activities of their subordinate executives.
b)      Principle of simplicity and regularity: According to this principle, financial administration should have the quality of simplicity, regularity and promptness. Red tapism should be totally eliminated and the work procedure should be quite simple, clear and easily understandable by the average person.
c)       Principle of Compliance with the will of the legislature: According to this principle, no expenditure out of public revenue is incurred unless it is sanctioned by Parliament. In the constitution of India, it has been mentioned as, “No money out of the consolidated fund of India or the consolidated fund of a state shall be appropriated except in accordance with the law and the purpose and the manner as passed by legislature.
d)      Principle of effective control: According to this principle, it is essential to have effective control at every stage of financial administration. Generally the following agencies are involved in the control of financial administration of the government:
1)      Executive
2)      Legislature
3)      Financial Department of Financial Ministry
4)      Auditing Department
5)      Parliamentary Committees
e)      Principle of Uniformity: According to this principle, there must be uniformity in all departments or sections of the government as to policies of expenditure, revenue and loan etc.
f)       Principle of Authority: According, to this principle, no tax shall be levied or collected unless it is approved by the representatives of the people. In the constitution of India has been mentioned as “No tax shall be levied or collected except by authority of laws.”
g)      Principle of Accountability: According to this principle, Every Government is bound to spend the money granted by the parliament for no purpose other than it was sanctioned by the legislature or parliament. In order to check the abuses of owners on the part of executive, the Auditor-General audits the a/c of the Govt. to place before the legislature a report to show that the executive has spent the money for purposes for which Parliament has sanctioned. Thus the provision for the appointment of comptroller and Auditor-General is laid down in the Indian Constipation to achieve the above objective.
For the success of financial administration of the Government, different constitution play imperative role. These agencies can be grouped as:
a)      Executive
b)      Legislature
c)       Financial Department of Financial Ministry
d)      Auditing Department
a)      Executive. According to Prof. H. M. Grover, “The executive is the best position to the view the financial problem as a whole ant to assume the responsibilities for the success and failure of a financial programme.” Executive is responsible for running the administration, thus it is in the best position to say what funds are required for it. No tax or expenditure can be made without the permission of the executive. It is therefore, the responsibility of the executive to prepare the budget which is stupendous task.
In Parliamentary Government, there is a principle that no demands for grants can be made except on recommendation of the executive. It is therefore In India; executive refers to the Central Government. Since, Finance Ministry is responsible for the administration of the finance of the Central Government, even then it performs the policy making function and tries its best to get the final approval of the legislature.
b)      Legislature. In democratic parliamentary system, it is the legislature or parliament which is the time representation of the people. In India, under the constitution there is special provision to control the finances:
1.       Controller over Taxation. Indian constitution under Article 265 provides that no tax shall be levied or collected except the permission of law. Thus, The Government has to present all tax proposals before parliament in the form of a Bill to be passed into law and unless no art is passed, no tax can be levied. Similarly U.S.A constitution under article one mentions, “The congress shall have to levy and collect tax.”Therefore under, we can conclude that the power of taxation always vests with literature.
2.       Control over Public Expenditure. In Indian constitution states. “All revenues received of all loans by the union or state shall be paid into in the consolidated funds of the union or state, as case may be ad that no money can be written out of  the fund except in accordance with the law and for the purpose and in the manner provided for in the constitution.”

3.       Enforcement of Financial Accountability. Every Government is bound to spend the money granted by the parliament for no purpose other than it was sanctioned by the legislature or parliament. This function is performed by the Comptroller and Audit-General of India. In this way, one can say that Parliament is the supreme in Finance matters.
c)       Financial Ministry: This Finance Ministry plays significant role in financial administration as it ensure that proper use of public funds. It controls the both before the presentation of budget to parliament to and in it executive after approval by the parliament. The Finance Ministry possesses the expert knowledge in financial matters. It considers all proposals to each ministry in the perspective of the government as whole.
The various scheme and proposals of the different ministries are included in the budget after consultations and discussions with the finance ministry. After the final approval of the budget by the parliament, it seeks to ensure that the amounts are properly spent in accordance with the provision of budget. Therefore, it is the finance ministry which frames rules and regulations about the preparation and executive of the budget. The ministry of finance has been divided into four departments, viz
1.       Department of Economic Affairs.
2.       Department of Revenue and Insurance.
3.       Department of Expenditure.
4.       Department of Co-ordination.
d)      Auditing. Auditing is the most important ingredients of parliamentary control over the finances of country as a hole. In a democratic form of government, the supreme authority with the regard to financial policy is vested in legislature. This is ensured by the provision of audit of public expenditure by an independent statutory authority i.e. Comptroller and Audit-General. Therefore, audit supplies an essential link between the executive and parliament and helps in interpreting the action in so as the have a finance bearing of the former on the latter.
Meaning and Definitions of Budget
The term ‘Budget’ is said to have its origin from the French word ‘Bougettee’ which means ‘a small leather bag’. The bag itself is not important today. The thing the bag contains is an economic bill which is presented by the Finance Minister in the parliament every year. In this way, budget is the annual financial statement of the estimated receipts and expenditure of the government for a given period.
Different experts have defined budget in different words. Among them, the main definitions are given below:
According to C. L. King, “The budget is a fiscal plan by which expenditure may be balance against income.”
According to Rene Stourn, “The budget is a document containing a preliminary approval plan of public revenue and expenditure.”
According to P. L. Beaulieu, “It is a statement of the estimated receipts and expenses during a fixed period; it is a comparative table giving the amounts of the receipts to be realised and of the expenses to be incurred.”
According to P. F. Taylor, “Budget is the master financial plan of government. It brings together estimates of anticipated revenue and proposed expenditure for the budget years.”
In the Indian Constitution, “A budget has been referred to as the annual financial statement of the estimated receipts and expenditure of the Government of India or of a State Government in respect of a financial year.”
According to Prof. Dimock, “A budget is a balance estimate of expenditures and receipts for a given period of time. In the hands of the administration, the budget is the record of past performance, a method of current control and a projection of future plans.

From the above, we conclude that as per the Indian reference, “the budget is the annual financial statement of the estimated receipts and expenditure of the Government of India or of a State Government in respect of a financial year. It contains three sets of figures, the ‘accounts or the actual for the preceding year, the ‘revised estimates’ of the current year and the ‘budget estimate for the following year. The budget in India is divided into two parts, the revenue budget and capital budget. The revenue budget deals with the receipts from taxation, public enterprises etc. and the expenditure incurred from them. The capital budget is the statement of all capital expenditure and the borrowings to meet it.” In short, the budget reveals the basic character of the fiscal policy of the government.
Importance of the Budget – Pivot of Financial Administration
Budget is an important tool and pivot of financial administration as well as an effective means of enforcing fiscal policies. Budget occupies an important place in the modern economy of a country. The economic, social and political progress of a country depends upon the success of the budget which is based on sound principles. In the words of Findlay Shirras, “the budget is undoubtedly the pivot of the administration and without a budget based on sound principles, financial disorder with all its attendant consequences takes place as surely as night follows day.” The budget is the basis of orderly finance and it is through the budget that the legislature controls the activities of and the policy laid down by the executive. The inequalities in income and wealth can be reduced through proper budgeting. It aims at increasing the national dividend to augment economic welfare of a country. According to Dalton, “We now think of the budget as a powerful instrument for achieving certain aims – (i) full employment, (ii) high level of investment, and (iii) a better distribution.” Thus, the importance of the budget may be studies under the following heads:
1)      Tool of Administrative Efficiency: Budget is a tool of administrative efficiency. It is the barometer of administrative machinery. The administrative machinery is said to be efficient if the expenditure is incurred in accordance with the sanctioned budget and the objective is achieved. On the contrary, if the actual expenditure exceeds the sanctioned budget or the budget remains unutilized, it is treated as an act of inefficiency on the part of the administrative machinery. Budget serves as a powerful tool of coordination and an effective device of eliminating duplication and wastage.
2)      Fulfillment of the Objective of Accountability: In a democratic country like India, accountability of the government towards the public is that the public money is utilized strictly in accordance with the laid-down canons and for the welfare of the society. The objective can be achieved through budget.
3)      Tool of Fiscal Policies: the budget is an instrument of fiscal policy, i.e. a fiscal tool for consciously influencing the operations and directions of an economy. The structure and levels of taxation and public expenditure along with conscious management of public debt which are operated through the budgetary process are among the main devices for pursuing economic objectives such as maintenance of full employment and reasonable growth possibilities in the economically developed countries, and an accelerated rate of economic growth with stability in underdeveloped economies like India.
4)      Legislative Control on Public Funds: Budget is means through which parliament in case of central government and Vidhan Sabha in case of a state government exercise control over receipt and use of public funds.
5)      Basis of Public Welfare: A well-planned budget is the basis of public welfare. It can reduce inequalities in the distribution of income and wealth. The imposition of progressive taxation and death duties would secure funds for the state which can be utilized for providing social and cultural amenities for the poor. Housing, health, education, unemployment, social security schemes, development of backward areas, other welfare activities can be undertaken through budget.
6)      Increase in Production: It is through the budget based on sound principles that the government can help an increase in production. It can subsidies agriculture and industry and can make provision for agricultural and industrial research. Various incentives can be given through taxation policy so that surplus funds and profits are invested in industry and in private enterprises which are the backbone of industrial prosperity in a country.
7)      Determination of the Area of Operating of the Executives: Budget is a tool of determining and controlling the area of operation of the governments’ executives. It is an effective device of controlling the activities of the executives of the government.
8)      Tool of Bringing Economic Stability: Budget can be used as an effective tool for bringing economic stability in a country. The economy of a country may be stabilized through a surplus budget in boom period and deficit budget in depression period.
9)      Evaluation of Economic Activities: Budgeting presents an opportunity for evaluating the economic activities and policies of the government, both state and central, such as, rate of increase in national income, capital formation, economic development etc. Budgeting is helpful in identifying obsolete or unnecessary economic activities and policies and policies and also in giving a call for their discontinuance.
10)   Miscellaneous: (i) Budgeting includes the feeling of cost consciousness. (ii) It serves as a powerful tool of coordination. (iii) Budgeting is the heart of administrative management, (iv) It is pre-audit. (v) Budget is an exhaustive plan of public finance of the government. (vi)Budget provides an estimation of economic and social progress of country. (vii) It is a means of providing direction to the revenue and expenditure activities of a State.
Principles of Budgeting
a)      Executive Programming: As a matter of fact, the budget is the programme of the chief executive. As soon as the budget is ready, it becomes the work programme of the government concerned. This budgeting and programming are two sides of the same coin. The principle holds true for all governments, Central, States or Local.
b)      Executive Responsibility: It is the responsibility of the chief executive of seeing that the departmental programmes are brought into accord with legislative intention and greatest possible economy is observed in the execution of the programmes.
c)       Reporting: The third principle of budgeting is the reporting. There must be full and operating reports coming from various administrative units of the government. Budgeting without such reporting is blind and arbitrary.
d)      Adequate Tools: The chief executive should have adequate administrative tools to fulfill his budgetary responsibilities, such as, well equipped offices and sufficient powers so as to execute the intent of the legislature in the most economical way.
e)      Executive Directions: The Budget document must contain a great amount of detail for the information of the legislature and guidance of the executive. Proper appropriation should be made in the budget for well-defined functions of the department concerned.
f)       Multiple Procedure: The budget should contain multiple procedure for performing different types of government activities.
g)      Flexibility In Timing: The budget should have flexibility in timing so as to adjust in accordance with the changing conditions. For instance, the period of the completion of programme may be increased or decreased by the executive.
h)      Two-way Budget Organization: There should be two-way organization, i.e. in each department there must be a budget officer with functions similar to those of the government budget office. Traffic between the central office and the departmental offices responsible for budgeting and programming should move on a two-way rather than one-way street. Besides the above principles, the following principles of budget making, in the context of Indian economy, are also important and thus should be kept in mind while preparing the budget.
i)        Balanced: As for as possible, the budget should be balanced. A balanced budget is that in which over a period of time revenue does not fall short of expenditure.
j)        Gross: Budgeting should be gross or not net. It means that the transactions both the receipts and expenditure should be fully shown.
k)      Close Estimates: The different estimates shown in the budget should be close, i.e. as for as possible most accurate in order to increase their reliability.
l)        Separate Portions of Capital and Revenue: The revenue and capital portions should be shown separately. A distinction between recurring expenditure and income on the one side, and capital payments on the other, should be maintained.
m)    The estimate should be on cash basis: It means that the estimates of revenue and expenditures should relate to what is expected to be actually received or actually spent during the budget year.
n)      The rule of lapse should be followed: It means that if sanctioned amount for the scheme or department is not utilized by the close of the relevant financial year, the unspent sum lapses.
o)      Annual Basis: The budget should be prepared on annual basis, i.e. for one year only.
Different Canons of Budget
The following canons of budgeting should be kept in mind while making, adopting and implementing the budgeting:
1)      Canon of Comprehensiveness: The budget should be comprehensive. By comprehensiveness is meant that the budget should have full and detailed information as to income and expenditure of the government, whether these requirements and facts relate to the experience of the past or the problem of the present or the estimates of the future.
2)      Cannon of Unity: The following provisions should be made in the budget with reference to cannon of unity – (i) All the incomes of the government should be kept under a single ‘general fund’. (ii) Gross income and gross expenditure should be shown in the budget. (iii) All the items of the budget should be presented in a logical, unified and systematic way.
3)      Canon of Exclusiveness: It means that the budget should be exclusively related with the financial matters of the government only.
4)      Canon of Accuracy: It means that the estimates given in the budget should as for as possible be most accurate based on the reliable figures, data, experience and facts so as to increase their reliability.
5)      Canon of Balanced Budget: As for as possible, the budget should be balanced one.
6)      Canon of Specification: It means that all the items of income and expenditure should be shown separately and clearly in the budget.
7)      Canon of Annuality: Ordinarily, the budget should be prepared for one year only.
8)      Cannon of Flexibility: According to this canon, the budget should be flexible so that adjustment can be made easily to changing economic conditions.
9)      Cannon of Operational Adequacy: According to this cannon, the budget should be in accordance with the economic policy and plans of the government. It must have the capacity of solving different burning economic problems of the government.
10)   Canon of Publicity: In a democratic country wide publicity should be given among the public regarding budget proposals and outline of the budget.
11)   Canon of Lapse: The canon of lapse should be followed. It means that if sanctioned amount for a particular scheme or department is not utilized by the close of the financial year, the unspent sum should lapse.
12)   Cannon of Responsibility: Preparation of the budget should be the responsibility of the well-defined authority. For example, in India the budget is prepared by the Finance Minister, but the cabinet as a whole is responsible.
13)   Integrity: It means that the budget should involve the assurance that fiscal programmes s enacted will be carried out substantially and as intended.

Characteristics of Qualities of a Good Budget
The main characteristics or qualities of a good budget are as follows:
a)      Comprehensive: The budget should be comprehensive, i.e. it should show the entire position of the enterprise in broad details and all sorts of explanatory should be given so that the total picture may be seen at a glance.
b)      Balanced: The budget should be balanced, i.e. receipts and expenditure should be equal.
c)       Flexibility: The budget should have a certain degree of flexibility and should avoid too much rigidity with regard to its detailed allocations so that in its implementation the concerned authorities may have some latitude for the use of its discretion.
d)      Objectivity: Every budget is prepared keeping in view certain definite objectives. Hence, the budget should be based on the underlying objectives.
e)      Reliability: The information on which budget estimates are based should be as must as possible reliable not imaginary.
f)       Responsibility: Preparing of budget should be the responsibility of some well defined authority. It must be prepared by some senior authority. For example, in India the budget of the central government is prepared by the Finance Minister, but cabinet as whole is responsible.
g)      Integrity: The budget should involve the assurance that the fiscal programme as enacted will be carried out substantially and as intended without any if and but.
h)      Definite Period: The budget should be prepared for a definite period usually for a complete year.
Budgeting control is the process of determining various budgeting figures for the enterprises for the further period and then comparing the budgeted figures with the actual performance for calculating variances. First of all budgets are prepared and then actual results are recorded. The comparison of budgeted and actual figures will enable the management to find out discrepancies and take remedial measures at a proper time. The budgetary control is the continuous process which helps in planning and co-ordination. It provides a method of control too. A budget is a means and budgetary control is the end result.
According to Brown and Howard, “Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating and department and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability.
Wheldon characteristics budgetary control as “planning in advance of the various functions of a business so that the business as a whole is controlled”
J. Batty defines it as “A system which uses budgets as a mean of planning and controlling all aspects of producing and/or selling commodities and services”.
Objectives of Budgetary Control: The main objectives of budgetary control are as under:
1.       To ensure planning future by setting up various budgets. The requirements and expected performance of the enterprise are anticipated.
2.       To co-ordinate the activities of different departments.
3.       To operate various cost centres and departments with efficiency and economy.
4.       Elimination of wastes and increase in profitability.
5.       To anticipate capital expenditures for future.
6.       To centralize the control system.
7.       Correction of deviations from the established standards.
8.       Fixation of responsibility of various individuals in the organization.
Requisites for successful Budgetary Control
Prof. Harold D. Smith set out eight principles of budgeting. These principles have been stated as below:
1)      Executive Programme: The foremost principle of budgeting is the executive programming. It is the work programme of the govt. to reflect all govt. responsibilities and activities. Thus, formulation of budget must be under the direct supervision of the chief executive. Budgeting and programming are the two sides of the same coin. These sides must be under the direct supervision of the chief executive.
2)      Executive Responsibility: Chief Executive must see that departmental programmes fulfill the intention of the legislature. The economy as a whole is observed in the execution of the programme.
3)      Executive Directions: The budget document must contain detailed information of the legislature and guidance of the executive. If the functions for which the amount is appropriated are too narrowly defined, it may hinder the economical and effective management.
4)      Reporting: Budget legislative action and budget execution must be based on full financial and operation reports. Current information regarding the progress of the work with respect to various programmes and project expenditure made etc. must be furnished to the executive as well as to the legislature branch.
5)      Flexibility in Timing: The budget must have the provision of the immediate adjustment of the changing economic conditions. For instance, flexibility in timing can be accomplished if the legislature appropriates funds for certain construction and development programmes. Timing of the programmes can then be adjusted in accordance with the economic necessities.
6)      Multiple Procedure: In the modern era, govt. have multiple functions to perform. Though, it is necessary that all functions of the govt. should be reflected in the budget, the methods of budgeting may vary far different types of govt. activities. For example, budgeting of quasi-commercial may differ from the budgeting of administrative.
7)      Adequate Tools: To fulfill the budgetary responsibilities, the chief executive must possess adequate administrative tools. Sufficient powers must be available to the chief executive so that it may execute the intent of the legislative in most economical way.
8)      Two-way Budget Organization: In this regard, there must be a budget office in each department with similar function as that of the govt. budget office. Budgeting is most important function of the central govt. It is a process which permeates the entire administrative structure. Traffic between the central office and the departmental offices responsible for budgeting and programming should move on a two way.
Implementation of Budgetary Control
There are certain steps which are necessary for the successful implementation of a budgetary control system. They are as follows:
1.       Organization for Budgetary Control: The proper organization is essential for the successful preparation, maintenance and administration of budgets. A budgetary committee is formed which comprises the departmental heads of various departments. All the functional heads of various departments are entrusted with the responsibility of ensuring proper implementation of their respective departmental budgets. This has been shown in the following chart.

Chief Executive

Budget Officer

Budget Committee

        Production  Sales                      Finance                                Agreements       Personnel                           Research &
        Manager      Manager              Manager              Manager              Manager                              Development
2.       Budget Centres: A budget centre is that part of the organization for which the budget is prepared. A budget centre may be a department, section of a department or any other part of the department. The establishment of budget centres is essential for covering all parts of the organization. The budget centres are also necessary for cost control purposes. The appraisal of performance of different parts of the organization becomes easy when different centres are established.
3.       Budget Manual: A budget manual is a document which tells out the duties and also responsibilities of various executives concerns with the budgets. It specifies the relation among various functionaries. A budget manual covers the following:
1)      A budget manual clearly defines the objectives of budgetary control system. It also gives the benefits and principles of this system.
2)      The duties and responsibilities of various persons dealing with preparation and execution of budgets are also given in a budget manual. It enables the management to know of persons dealing with various aspects of budgets and clarify their duties and responsibilities.
3)      It gives information about the sanctioning authorities of various budgets. The financial powers of different managers are given in the manual for enabling the spending of amount on various expenses.
4)      A proper table for budgets including the sending of performance reports is drawn so that every work starts in time and a systematic control is exercised.
5)      The specimen forms and number of copies to be used for preparing budget reports will also be stated. Budget centres involved should be clearly stated.
6)      The length of various budget periods and control points be clearly given.
7)      The procedure to be followed in the entire system should be clearly stated.
8)      A method of accounting to be used for various expenditures should also be stated in the manual.
4.       Budget Officers: The chief executive who is at the top of the organization appoints some person as budget officer. The budget officer is empowered to scrutinize the budgets prepared by different functional heads and to make changes in them, if the situation so demands. The actual performance of department is communicated to the budget officer. He determines the deviation in the budgets and takes necessary steps to rectify the deficiencies.
5.       Budget Committee: In small scale concerns, the accountant is made responsible for preparation and implementation of budgets. In large scale concerns a committee known as budget committee is formed. The heads of all departments are made members of this committee. The committee is responsible for preparation and execution of budgets. The members of this committee put up the case of their respective departments and help the committee to take collective discussions. The budget office acts as coordinator of this committee.
6.       Budget Period: A budget period is the length of time for which a budget is prepared. The budget period depends upon a number of factors. It may be different for different industries or even it may be different in the same industry or business.
7.       Determination of Key Factors: The budgets are prepared for all functional areas. These budgets are inter-departmental and inter-related. A proper coordination amount different budget is necessary for making the budgetary control a success. The constraints on some budgets may have an effect on other budgets too. A factor which influences all other budgets is known as Key Factor or Principal Factor. There may be a limitation on the quality of goods a concern may sell. In this case, sales will be a key factor and all other budgets will be prepared by keeping in view the amount of goods the concern will be able to sell. The raw material supply may be limited; so production, sales and cash budgets will be decided according to raw materials budget. Similarly, plant capacity may be key factor if the supply of other factor is easily available.
Advantages of Budgetary Control
In the present world, every Govt. prepares/maintains budget for the welfare activities of the economy. Its advantages are highlighted below:
1.       Maximization of Profit: The budgetary control aims at the maximization of profits of the entrepreneur. To achieve this aim, a proper planning and coordination of different functions is undertaken.
2.       Coordination: The working of different departments and sectors is properly coordinated. The budgets of different departments have a bearing on one another. The coordination of various executive and subordinates is necessary for achieving budgeted targets.
3.       Corrective Action: The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary control system the deviations can be determined only at the end of the financial period.

4.       Consciousness: It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.
5.       Reduces Costs: In the present day competitive world budgetary control has a significant role to play. Every businessman tries to reduce the cost of production for increasing sales. He tries to have those combinations of products where profitability is more.
6.       Introduction of Incentive Schemes: Budgetary control system also enables the introduction of incentive schemes of remuneration. The comparison of budgeted and actual performance will enable the use of such schemes.
7.       Determining Weaknesses: The deviations in the budgeted and actual performance will enable the determination of weak sports. Efforts are concentrated on those aspects where performance is less than stipulated.
Limitations of Budget Control
Despite many favours of budget control, it has certain limitations, as stated below:
1)      Conflict among Different Departments: Budgetary control may lead to conflicts amount functional departments. Every departmental head worries for his department goals without thinking of business goal. Every department tries to get maximum allocations of funds and this raises a conflict amount different departments.
2)      Depends upon Support of Top Management: Budgetary control system depends upon the support of top management. The management should be enthusiastic for the success of this system and should give full support for it. If at any time there is a lack of support from top management then this system will collapse.
3)      Discourages Efficient Persons: Under budgetary control system the targets are given to every person in the organization. The common tendency of people is to achieve the targets only. There may be some efficient persons who can exceed the targets but they will also feel contented by reaching the targets. So budgets may serve as constraints on managerial initiatives.
4)      Problem of Coordination: The success of budgetary control depends upon the coordination among different departments. The performance of one department.
5)      Uncertain Future: The budgets are prepared for the future period. Despite best estimates made for the future, the predictions may not always come true. The future is always uncertain and the situation which is presumed to prevail in future may change. The change in future conditions upsets the budgets which have to be prepared on the basis of certain assumptions. The future uncertainties reduce the utility of budgetary control system.
6)      Budgetary Revisions Required: Budgets are prepared on the assumptions that certain conditions will prevail. Because of future uncertainties, assumed conditions may not prevail necessitating the revision of budgetary targets. The frequent revision of targets will reduce the value of budgets and revisions involve huge expenditures too.
Techniques of Budgetary Control
a)      Zero Based Budgeting
b)      Performance Budgeting
Zero Based Budgeting
Zero Base Budgeting is a new technique for the preparation of budgets. It involves fresh evaluation of every item of expenditure as if it were a new item. It is reconsideration of each item of expenditure from the very beginning. It is like assuming that a zero expenditure has been incurred on a project at the time of its review, although the project may be in existence from a long time and may have involved some expenditure also. The review is meant to provide a justification or otherwise of the project as a whole in the light of objectives set for it and priorities of the society. The procedure is altogether different from the usual procedure followed in India.
Peter A. Phyrr describes, the concept of zero base budgeting as an operating, planning and budgeting process that requires each manager to justify a budget request in detail from scratch…….” It means, the budget as a whole is considered rather than to examine incremental change only.
According to Prof. R. A. Musgrave, “the idea of zero base budgeting is to consider the budget as a whole, rather than to examine incremental changes only.”
Essentially, the concept of zero base budgeting is that all the financial requirements of a budget unit are analyzed, evaluated and justifies annually and not just the increased or additional requirements. In more practical way, zero base budgeting means the evaluation and prioritization of all programmes at different levels of effects. To be simpler, under zero base budgeting, each department ministry is required to justify its budget requests from the bottom up, evaluating alternative programme packages and ranking programmes so as to select the best alternative and allocate resources accordingly. The budget is considered as a whole and a fresh one, i.e. from zero base.
Benefits and Limitations of Zero Base Budgeting
Zero-base budgeting is revolutionary concept and is relatively a new management tool for planning and control of activities. It involves people at all levels in the organization and promotes team sprit. The plans and budgets based upon ZBB are much improved than shoes based upon traditional budgeting. There are a number of benefits that arise from zero-base budgeting. Some of the important advantages of ZBB are enumerated below:
1.       Proper Allocation of Funds: It enables management to allocate funds according to the jurisdictions of the programme. The priority can be fixed for various activities and their implementation will be in the same order.
2.       It improves Efficiency: Zero-base budgeting improves efficiency of the management. Every manager will have to justify the demand for resources. Only those activities will be undertaken which will have justification and will be essential for the business.
3.       Identification of Economical Areas: Zero-base budgeting will help in identifying economical and wasteful areas. Emphasis will be given to economical activities and alternative courses of action will also be studies.
4.       Optimum use of Resources: The management will be able to make optimum use of resources. The expenditures will be undertaken only when it will have justification. A list of priorities is prepared and cost-benefit analysis will be the guiding principle in fixing the priority.
5.       Determining of Utility: Zero-base budgeting will be appropriate for those areas whose output is not related to production. It becomes difficult to evaluate the performance of those sides which are not directly related to production but undertaken other activities. This technique will be helpful in determining the utility of each and every activity of the business.
6.       Useful of Attain organizational Goals: Budgeting will be related to organizational goals. Something will not be allowed the plea that it was done in the past. Only those things will be allowed which will help in realizing organizational goals.
7.       Job Satisfaction: ZBB ensures greater participation of personnel in formulation and ranking processes. This helps in promoting level of job satisfaction and thus resulting in better control and operational efficiency in the organisation. 
8.       Applied to priority areas: Zero base budgeting is a flexible tool that can be applied on a selective basis. It does not have to be applied throughout the entire organisation or even in all the service departments. Keeping in view the limitations of time, money and persons available to install, operate and monitor it the management thus can select priority areas to which zero base budgeting may be applied. 
In spite of many advantages, there are a number of limitations arising mainly from difficulties in operation of ZBB. Some of the important limitations are as below:
1)      Bureaucratic and Time Consuming: Though zero-based budgeting proved to be a useful budgeting process to review discretionary overheads but the process was so bureaucratic and time consuming that the organisations got discouraged to use it again. Moreover, like traditional budgeting, it was based on the organisational hierarchy. It thus reinforced functional barriers and failed to focus on the opportunities for improving business processes.
2)      Incorrect Assumptions: Although budgeting depends on many assumptions as a basis, organisations use the previous year’s assumption as a basis only. Each assumption has to be determined without looking at the previous year’s budget. If the assumptions are incorrect, then the budget will not be accurate and will be of little help to the organisation.
3)      Threat felt by bureaucrats: The major problem is the threat that many bureaucrats feel towards a process which evaluates the effectiveness of their programs.
4)      Lacking in Programs: For many programs, workload and performance measures may be lacking or the cause/effect and program impact may not be well defined so that the analysis will be less than perfect.
5)      Based on organisation hierarchy: Like traditional budgeting, it was based on the organisational hierarchy. It thus reinforces functional barriers and fails to focus on the opportunities for improving business processes.
6)      Too much paper work: A major reason for failure of ZBB has been too much of paper work involved in the process which was found unmanageable by the organisation concerned. Also, the reviews and analysis required to be carried out could not be handled within the normal cycle of the budget process spreads over a few months.
7)      Difficulties in ranking of decisions: Difficulties in formulation and ranking of decisions packages as every manager may not have been necessary expertise.
8)      No flexible budgeting: The system of zero base budgeting has no scope to adjust for the changes and thus, flexible budgeting is not possible. 
Traditional Budgeting
Zero-Base Budgeting
1. Emphasis
It is more accounting oriented than decision oriented. Depends upon past data and lays emphasis on ‘how much’.
It is decision oriented lays emphasis on ‘why’.
2. Approach
Its approach is monitoring toward expenditures.
Its approach is towards achievement of objectives.
3. Focus
Its focus is on increase or decrease in expenditure over the past.
Its focus is on cost benefit analysis.
4. Communication
In traditional budgeting communication is usually vertical.
It encourages communication both vertically and horizontally.
5. Method
The method preparation of the traditional budget is based upon extrapolation.
Its preparation is based upon selection of decision package in view of cost-benefit analysis.
Steps in Zero-Base Budgeting
a)      Objective: The objective of budgeting should be determined. When the objective is clear, then efforts will be made to achieve that objective. Different organizations may have different objectives. One concern may try to reduce the expenditure on staff, another may try to discontinue one project in preference to another. So the first step will decide about the object and then other steps will be possible.
b)      Decision for operation: The extent to which zero base budgeting is to be applied should be decided. Whether it should be used for all operational areas or it should be applied in some areas only should be decided beforehand.
c)       Decision Package: The next step in ZBB is developing of ‘decision packages’. A decision package is “a document that identifies a specific activity in such a manner that management can evaluate and rank it against other activities competing for limited resources, and decide whether to approve or disapprove it.”
d)      Cost and Benefit: Cost and benefit analysis should be undertaken. We should consider the cost involved and the likely benefits to accrue. Only those projects should be taken first where benefit is more as compared to the cost involved. Cost benefit analysis will help in fixing priority for various projects on the basis of their utility or ranking of decision packages. It provides answers to the following questions.
1.       Is it necessary to perform the activity at all? If the answer is in the negative, there is no need for proceeding further.
2.       How much is the actual cost and what is the actual benefit of the activity?
3.       What is the estimated cost and estimated benefit of the activity?
4.       If the unit is dropped, can the unit be replaced by outside agency?
e)      Preparation of budgets: The activities and projects for which benefit is more than the cost are ranked. Priority is accorded to the most profitable projects/activities, in the allocation of funds.
f)       Selection and Approval: The final step involved in zero-base budgeting is concerned with selecting, approving decisions packages and finalizing the budget.
The introduction of Zero Base Budgeting (ZBB) is not as easy as it appears. It requires a tremendous paper-work and detailed analysis. Thus, the organization should be able to provide all information including the cost data necessary for introducing ZBB. Moreover, the successful implementation of the zero base budgeting also depends upon the availability acceptability of the concept in letter and spirit. Obviously, this acceptance would be associated with the organization where the new system has to be implemented. It is so because any apathy on the part of the people could lead to a situation in which priorities relating to the existing schemes may not be assessed accurately. In short, it requires the following pre-conditions:
1. Committed Management: The top management must be committed as well as have a participatory role.
2. Fixed goals: Organisational goals must be fixed. As ZBB is not an end product itself but a means to achieve targets, goal setting must not be vague and ambiguous.
3. Identification of weakness: Weakness of an organisation must be perceived and strengths enumerated so that identified weak areas can be worked upon.
4. Trained staff: ZBB requires staff to be trained for its procedures to be implemented properly.
5. Elimination of doubts: All levels of management must cooperate with each other by eliminating all doubts regarding the ZBB procedure.

6. Review: Decision packages must be reviewed periodically.
7. Brainstorming Session: There must be brainstorming sessions at all hierarchical levels to get proper and timely feedback.
Performance Budgeting
Performance budgeting is generally understood as a system or technique of presentation of public expenditure in terms of functions, programmes, performance units, i.e. activities, projects etc, reflecting primarily the government output and its cost. The focus in a performance budgeting is basically different from that in the conventional budgets. The two approaches differ in their scope and context. Under the performance budgeting, emphasis is shifted from the budget as a means of accomplishment to the accomplishment itself. If concerns itself primarily with the objectives aimed at by the government rather than with the outlays incurred on several projects. According to U. S. Bureau of Budget, “A performance is one which presents the purpose the objectives for which funds are required, the cost of the programmes proposed for achieving those objectives and quantitative data measuring the accomplishment and work performed under each programme.”
Under performance budgeting system, the overall budget is divided into functions based on the major purpose of government and then subdivided into programme and activities, funds being granted for doing a specific quantity of work. Performance budgeting implies that the budget statement should indicate the actual achievements expected by a Ministry over a period of time from certain amount of expenditure. It forces attention on the size and cost of programme to be implemented.
Procedure for Performance Budgeting
Objectives of each program are ascertained clearly and then the resources are applied after specifying them clearly. The results expected from such activities are also laid down. Annual, quarterly and monthly targets are determined for the entire organization. These targets are broken down for each activity center. The next step is to set up various productivity or performance ratios and finally target for each program activity is fixed. The targets are compared with the actual results achieved. Thus the procedure for the performance budgets include allocation of resources, execution of the budget and periodic reporting at regular intervals.
The budgets are initially compiled by the various agencies such as Government Department, public undertakings etc. Thereafter these budgets move on to the authorities responsible for reviewing the performance budgets. Once the higher authorities decide about the funds, the amount sanctioned are communicated and the work is started. It is the duty of these agencies to start the work in time, to ensure the regular flow of expenditure, against the physical targets, prevent over runs under spending and furnish report to the higher authorities regarding the physical progress achieved.
In the final phase of performance budgetary process, progress reports are to be submitted periodically to higher authorities to indicate broadly, the physical performance to be achieved, the expenditure incurred and the variances together with explanations for the variances.
The main features of performance budgeting are as follows
1. It helps the management to regulate its each and every activity according to predetermined standards of performance, targets and objectives.
2. It is not only an estimate of future needs but goes beyond that and- includes functions, programmes, activity schemes and time schedules to help effective and economic allocation for the programmes.
3. It lays great stress on the management of organisational structural and overall policy, personnel, financial, etc. from traditional to dynamic one.
4. It is not merely a projection of trends and targets but planning the business from grass root level to top level on rational thinking and forecasting.
Conditions for Success of Performance Budgeting
The main conditions for success of performance budgeting are given below:
1)      Work Measurement and Application of Performance Standards: The first and the foremost condition for the performance budgeting is the installation of work measurement and the application of performance standards within the administrative machinery. Determination of suitable standard should be based on a complete understand of the nature of the work and past records of similar work. Any standard so derived should be quite tentative, allowing for deviation.
2)      Record Keeping along Functional Lines: The second condition for the performance budgeting is the establishment of record keeping along functional lines. Such reports would indicate the variance between budgeted and actual cost.
3)      Integration of Budgeting and Accounting Classification: The third condition for the success of performance budgeting is an adequate and proper accounting support. Basically, there must be integration of budgeting and accounting classifications.
4)      Proper Classification of Public Expenditure: The fourth condition for the success of performance budgeting is the proper classification of public expenditure. There are two types of cost: (i) Capital cost, and (ii) Operating cost. A capital cost is an expenditure for the acquisition, construction or improvement of fixed assets, such as, land, building, plant, machinery etc. On the other hand, an operation cost is an expenditure other than capital cost which is incurred in carrying out a specific programme or activity.
5)      Organization of Programme Management: The fifth and final condition for the success of performance budgeting is the establishment of improved organization and programme management so as to take full advantage of the data made available through performance reporting.
Scope of Performance Budgeting In India
The pattern of existing budgetary system in India has been designed mainly to ensure legislative accountability and accounting scrutiny. Its main object is to ensure that the moneys are raised and disbursements made by the public authorities in accordance with the schemes duly sanctioned by the respective legislatures. The conventional budgets are framed by the respective ministries/departments. The conventional budget is accountability-oriented and is intended primarily to facilitate itemized financial control. However, it is not sufficient. The budget should also reflect and reveal as to what was planned and to be done in terms of physical targets, the output to be aimed at or services to be provided as envisage in the development plan and what has actually been achieved both in financial and physical terms. More specifically, by having a common classification for both the plan as well as the budget, the instrument of budget could be made an operational document for carrying out the plan objectives. The adoption of performance budgeting in India will help in placing in the proper perspective the cost and benefit of development schemes like River Valley Projects, Rail, and Roads Development, Industrial Development Schemes etc. Thus, there is full justification and scope of performance budgeting in India. The administrative Reforms Commission’s Study Team on Financial Administration has also recommended the implementation of the system of performance budgeting in India. The Estimates Committee in its 20th Report suggested that “the performance-cum-programme system of budgeting would be ideal for a proper appreciation of the scheme and outlays included in the budget, especially in the large development activities.”

Balance Budget and Unbalanced Budget
A government budget is said to be balanced when the proposed expenditure and anticipated revenue both are equal. According to Prof. Dalton, “A balance budget is that, when over a period of time, revenue does not fall short of expenditure.” In a balanced budget there is neither any deficit nor any surplus. However, the balanced budget is an accounting concept only. It is simply a balance sheet approach. In practice, it is rather most difficult, if not impossible, to have a balance budget. At the initial stage we may have a balanced budget but later on as per the prevailing circumstances and in course of time, it is bound to be either a deficit budget or a surplus budget. Thus, a balanced budget is a theoretical concept only. However, it does not mean one should not try to have a balanced budget. While framing the budget, every possible effort should be made to have a balanced budget.
When a budget shows that the government proposed expenditure and anticipated revenue are not equal, it is said to be an unbalanced budget. The imbalance may be due to excess of expenditure over income or an excess of income over expenditure. In the former case, it results in a deficit budget, in the latter a surplus budget. According to Prof. Dalton, “If over a period of time, expenditure exceeds revenue, the budget is said to be unbalanced.”

In the case of a deficit, the amount of deficit is covered either through public borrowing or withdrawing money from accumulated surplus with government. Thus, a deficit budget increases the liability of the government or decreases its reserve. In the case of a surplus budget, the amount of surplus goes to decrease public debt or increases the accumulated surplus income of the government. In other words, a surplus budget decreases the liabilities of the government or increases its reserve. 

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