Public Finance NotesFinancial Administration In IndiaFor B.Com/BBA/MBA (CBCS and Non CBCS Pattern)
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In
the post I have given a brief introduction to Financial Administration In India.
These notes are useful for the students of B.Com and BA of various
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Table of
Contents |
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1. Meaning of Financial Administration 2. Four Ingredients/Methods/Process of
Financial Administration 3. Scope of Financial Administration 4. Aim of Financial Administration 5. Need and Importance of Financial
Administration 6. Principle of Financial Administration 7. Instruments/Agencies of Financial
Administration 8. Meaning and Definition of budget and
budgetary control 9. Importance of Budget 10. Principles of Budgeting 11. Different Canon of Budget 12. Characteristics or qualities of goods
budget 13. Budgetary Control – Objectives and Requisites 14. Implementation of Budgetary control 15. Advantages and disadvantages of
budgetary control 16. Techniques of Budgetary Control 17. Zero Base Budgeting – Meaning, Advantages
and Limitations, Steps 18. Difference between Traditional budgeting
and ZBB 19. Preconditions of ZBB 20. Performance Budgeting – Meaning,
Features and Importance 21. Balanced and Unbalanced Budget |
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.
PRINCIPLE OF FINANCIAL ADMINISTRATION
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.
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Also Read following notes:
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Also Read:
2. Public Finance Question Papers (Dibrugarh University)
3. Public Finance Solved Question Papers (Dibrugarh University)
5. Public Finance Important Questions for Upcoming Exam
************************************
INSTRUMENTS OF FINANCIAL ADMINISTRATION
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 or 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.
BUDEGETARY CONTROL
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.
**********************************
Also Read following notes:
**********************************
Also Read:
2. Public Finance Question Papers (Dibrugarh University)
3. Public Finance Solved Question Papers (Dibrugarh University)
5. Public Finance Important Questions for Upcoming Exam
************************************
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.
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
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.
LIMITATIONS
OF ZERO BASE BUDGETING
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 Vs. ZERO BASE BUDGETING
|
Basis
|
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.
|
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Also Read following notes:
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Also Read:
2. Public Finance Question Papers (Dibrugarh University)
3. Public Finance Solved Question Papers (Dibrugarh University)
5. Public Finance Important Questions for Upcoming Exam
************************************
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.
PRE-CONDITIONS OF ZERO BASED BUDGETING (ZBB)
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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