Approaches to budgeting
Budget described as the projection of the financial position of a company for one or more periods in the future. Budget is used for planning and performance measurement for all business activities, while budgeting is a process of preparing the budget or identified quantified resource requirements for the business (Mell, and Grance, 2009, Pg50).
Approaches to budgeting
There are various approaches to budgeting, these includes;
- Zero-based budgeting
- Incremental budgeting
- Performance-based budgeting
- Activity-based budgeting
Zero-based budgeting
The clean slate or zero-based budgeting approach is a process of creating the budget from scratch, that is, considers only future figures. Data for this approach made according to the objectives and the goals of the business (Wichowski, 1979, pp 24-26). Each activity is weighted separately.
Zero-based budgeting has the following advantages and disadvantages
Advantages
- Efficiency – it involves actual numbers, not historical numbers, and therefore resource allocation is efficient
- Accuracy – this makes every concerned party relook in every item of the cash flow and calculates their operation cost
- It helps in reduction of the redundant activities by identifying more cost-effective activities and doing the allocation.
- It helps to improve the coordination and communication within the business sectors and involves employees in making the decision.
Disadvantages
- Requires more time to do every time budget which is very costly
- It needs high workforce capacity in making the entire budget from scratch, and many departments may lack enough employees and know how.
- Requires expertise which may be not there in the organization.
Incremental budgeting
- This involves creating the budget based on previous data. Thesefigures are adjusted to meet the current situation or forecast. The advantages of the incremental budgeting are as follows;
- Simplicity – It is simple to prepare since the figures based on the previous data/information.
- Operational stability –This approach allows the department to operate consistently and stable in the long run.
- Funding stability – It is structured to ensure the funds keep flowing into the program. It also requires constant funding
The following are drawbacks associated with incremental budgeting approach
- Risk-taking – it does not encourage risk-taking since tends to foster the conservative maintenance of the status quo. Also, with incremental budgeting, it becomes difficult to obtain large funding allocation for the new project since the fund allocation is the same throughout the period
- The incremental budget approach assumes no changes or only minor changes from the preceding period
- Perpetuates resource allocations – It assures funding is allocated in a specific project been previously assigned even if no more funds are needed in that project.
Activity-based budgeting
Under this approach, the cost is associated with activities, and then, the budget expenditure is compiled based on the expected activity level (Brimson, Antos, and Collins, 1999 Vol.1). This mean, the cost drivers are identified first.
Advantages
- It gives a high-level degree in the refinement in the cost planning, and mostly focuses on the types of activities within the business operation.
- It acts as a competitive edge, that is, helps to remove all sorts of unnecessary activities which help the business to save its cost. As a result, it lowers the product cost, which gives a competitive edge to the company.
- It helps to remove unnecessary business costs which are expensive for the business since it is prepared after in-depth research and analysis.
Disadvantages
- It requires an expert, and if the person preparing the budget is incapable of understanding and evaluating, it may lead to inaccuracy.
- It is a short-term and does not take accounts for an extended scene of the business. On focusing on a short term goal can prove to be fatal for the company.
- It is complex and therefore requires a lot of research and analysis. This means, more resources like labor input is needed for the budgeting process.
- Performance-based budgeting
It is the result oriented approach that allocates funds as per business goal and objective. It focuses on changes in funding rather than on the previous allocations. It allocates money on merits (Kordbache, 2007, pp 3-31)
Advantages
- It helps in bringing the transparency in the budget preparation since the performance budget assist in making sound financial resource allocation decision.
- Performance-based budgeting helps to increase the accountability in both public and for not for profit organization since the employee has to quantify a particular goal based on the allocation.
- It also indicates a clear purpose for the allocation.
Disadvantages
- Since it is based on performance, the concerned party or person may manipulate the data during the presentation.
- It requires a reliable system evaluation which is expensive to install and employ.
- It is subjective and may create disagreement amongst management. It is also difficult to quantify in money terms.
The form of budgeting is used in Australian Property Management (APM)
APM is a leading property management service provider in Melbourne, Australia. Their services range from residential property management, building facility management, retail leasing and management, concierge services among others (www.auspm.com).
APM uses Activity-based budgeting approach.
Yes, this is the appropriate approach to be used by the Australia Property Management because of the following;
- Unpredictable business expenses, for instance, cost for acquiring new clients, the cost of doing building repair and maintenance, the cost for waste collection and many more. APM incurs these costs day by day to meet the clients’ satisfaction (see screenshot).
- Different service line offered by APM which requires different cost activity level at a different time during the accounting period, such as building regulation cost, repairs, levies among others.
- Competitive edge- it helps Australian Property Management in costing their services to remain competitive in the market in quantifying the taxation rates.
Contingency planning is a way or an approach to identify what can go wrong rather than imagining every will be okay (Honig, 2004 pp 258 – 273).
Planning for contingencies in staffing in your team
Planning for contingency in staffing is very critical, and companies like APM should have strategies in place in case of any unforeseen situations. Following is ways to plan for contingencies in staffing;
- Consider possibilities – Consider what can happen and the probability of occurring, this can enable you to figure out the second possible alternative in case of any staff needs.
- Have a sequence staffing model to align with the company needs- that is, to have minimum staff ratio equivalent to the number of clients you are serving. The increase of clients will automatically dictate additional staff.
- Have reserves ready – This can be achieved by keeping the database for the unemployed employees who’s previously, the company was unable to accommodate. Also outsourcing from recruiting firm or contracting can serve the urgency purpose.
- Having continuous volunteer engagement – They help to provide alternative support when needs arise. This can be done by having minimum constant vacancies for trainees at any time throughout the year.
- Prioritizing – To always engage in severe duties with available staff to mitigate any risk.
- Discontinuing some services offered to be able to meet the urgency. In case of staff shortage, some services can be postponed to a further date.
- Introducing restructuring program plan by a company, in case it wants to lay off some employees –this can help to minimize legal obligation against the company by an employee.
- How would (or do) you plan for contingencies in delivering the services of the facilities management work area within your budget?
- By providing the provision in and within the budget for unforeseen situations
- By ensuring all the services of the facilities management with insurance companies, that is diversified the risk.
Describe the impact this has on your budget and financial plan.
As mentioned earlier, contingency is an unexpected/unplanned occurrence which requires urgent fund action. Contingency has the following impact on the budget;
- Contingency can make the budget not to achieve the planned result since the amount budgeted will be diversified to meet the urgent need
- Contingency can make financial planning complicated since not sure on what to consider for provision
Asset register is the list of company fixed assets. It is used to keep track of the book value of assets and their depreciation.
How you use asset registers to assist you in managing the budget and financial plan for your area.
- Asset register helps the company plan on the acquisition of the fixed asset – This can be anticipated in acquisition part of the budget
- Asset register helps the management to predict which asset to dispose of, which can be included in the budget as a provision.
- Asset register provides the budget for depreciation which is useful for financial planning
Could the process you currently use be improved? Explain how, or why not.
The electronic process used in APM is suitable, because of types of the business which requires regular adjustments.
Expenses/trading expenditure:
This is the amount paid for services and goods which may be currently tax deductible
The more common expenses incurred in running your facilities management work area
As earlier mentioned, facilities management incorporate multiple fields to ensure comfort, functionality, safety and the efficiency of the built environment by integrating people, places, and technology. Australian Property Management commonly incurs the following expenses;
- Building maintenance and repair cost – This includes paying external design consultants, suppliers and contractors
- Construction cost – this includes labor, equipment, materials, contractors among others.
- Design cost which ranges from 12% – 15% of the total project
- Contingency – money outside the budget which paid unexpectedly
- Project management fee and cost – Paid to relevant construction authorities to ensure compliance
- Other costs include; security cost, levies among others
How do you track these, and ensure they are accounted?
There are various methods employed by the Australia Property Management in tracking their expenses. These include;
- Creating ledger accounts to records all costs
- Maintaining the daily spending limit
- Making payments through banks’ account
- Using cash accounting method to record expenses when incurred
- Using accounting software such as Sherlock software for real estate and property management to post daily expenses
- Scanning and saving receipts in the system to the right business category.
- Understanding the expenses if expense deductible or not for correct records
How doyou use records of this expenditure to plan for future budgeting/financial planning?
- With ledger balances, you can compare them, analyze and then create the budget from their historical data.
- From the spending limit, you can be able and precisely project for future budget
- Using correct cash accounting standard for reporting the expenditures, can guide on budget planning
- Accounting software such as Sherlock gives the best procedural method for the future budget estimate from available records.
References
Brimson, J.A., Antos, J. and Collins, J., 1999. Driving value using activity-based budgeting (Vol. 1).Wiley.
French, N., 1994. Asset registers and asset rents for local authorities: a viable property management tool. Property Management, 12(3), pp.15-23.
Honig, B., 2004. Entrepreneurship education: Toward a model of contingency-based business planning. Academy of Management Learning & Education, 3(3), pp.258-273.
Kordbache, M., 2007. Performance-based budgeting. The Journal of Planning and Budgeting, 11(6), pp.3-31.
Madanipour, A., 2010. Connectivity and contingency in planning. Planning Theory, 9(4), pp.351-368.
Mell, P. and Grance, T., 2009. The NIST definition of cloud computing. National Institute of standards and technology, 53(6), p.50.
Packin, N.G., 2012. The Case against the Dodd-Frank Act’s Living Wills: Contingency Planning following the Financial Crisis. Berkeley Bus. LJ, 9, p.29.
Steiner, G.A., 2010. Strategic planning. Simon and Schuster.
Ten Brinke, W.B.M., Kolen, B., Dollee, A., Van Waveren, H. and Wouters, K., 2010. Contingency planning for large?scale floods in the Netherlands. Journal of Contingencies and Crisis Management, 18(1), pp.55-69.
Tompkins, J.A., White, J.A., Bozer, Y.A. and Tanchoco, J.M.A., 2010. Facilities planning. John Wiley & Sons.
Treasury, H.M., 2001. National Asset Register. Her Majesty’s Treasury London.
Wichowski, C., 1979. Zero-Based Budgeting. Florida Vocational Journal, 4(6), pp.24-26.
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