Explain the importance of maintenance budgeting.
Discuss the advantages of Zero Based Budget.
Ans :
We often hear the term “budget” in
our day-to-day living. What exactly is it and what is its importance in our
lives? Budget is the systematic allocation of one’s resources or income to the
various requirements, which are nothing but expenses. Though a tedious and
high-maintenance task, budget can help control one’s income. Budgeting can have
different connotations for different people. While for some it is a process of
keeping a track of each source where money is being spent, for others it might
mean keeping the monthly savings aside and then utilizing the leftover amount
for everyday expenses. Budgeting is a prerequisite if one wants to achieve
long-term financial goals
Be it the wholesome nation or a
small nuclear family, budgeting is necessary to make money matters simple and
hence, life easy to handle. Budgeting can be done on a weekly, monthly or
yearly basis. A weekly budget portrays the transactions that took place in the
entire week. Likewise, monthly and yearly budgets showcase the transactions
undertaken in a month or the entire year respectively. Hence, by regulating the
expenses, a budget can contribute towards enhancing profits of the
organization, business or an individual. Given here are the primary things that
one should keep in mind in order to stay within a specific budget.
Significance Of Budget
For Government
In case of an annual budget of a
nation, budgeting is all about making a blueprint of the overall funds that the
concerned government will spend on various sectors, the kinds of taxes that
would be levied and how the prices of essential commodities would increase or
decrease in the months ahead. Like any other budget, a government budget too
relies on revenues and expenses. While the revenues are generated from the
various taxes imposed, expenses usually include the expenditure amount on goods
and services, consumption, investments, retirement benefits, and so on. In the
absence of a good budget, the government officials will have to struggle hard
in developing processes for the same.
For Family
The safety and security is the
foremost concern for a family. Hence, planning a personal family budget is
highly significant. Budgeting in a family is simply done by streamlining the
expenses of every family member in accordance to the overall funds collected by
the earning members of the family. While some people believe the budget to be a
complicated matter of numbers and accounting practices, others assume planning
the budget to prevent them from unforeseen problems, downfalls and financial
losses. The major issue that comes forward with planning a family budget is
that it limits the control of a person over his/her money. However, the fact is
that budget does not restrict anyone. It, instead, only guides people towards
the allocation of money in different sectors, such as food, shelter, clothing,
household expenses, medical care, utilities, etc. on a monthly basis.
For Business Organizations
Business organizations have a
strong reason for planning a budget. It helps them in planning targets for the
future, in terms of laying figures that the organization plans to achieve. It
is of no use to plan a budget with a host of high figures that is practically
unachievable. Similarly, a budget that is too easy to achieve is also pointless
as the business would then not be making enough progress that it should. Hence,
a good budget is one that is achievable in reality with the motive of striving
for the highest profits. While most budgets are planned annually, some can be
set for a prolonged period as well. To put the budget into action, it should be
prepared well in advance before the commencement of the financial year.
advantages
of Zero Based Budget
In zero-based budgeting, a company draws up its budget from
scratch every year, requiring managers to justify every dollar they plan to
spend. Traditional "incremental" budgeting, by contrast, uses the
previous year's budget as a starting point, and managers must explain only why
they need more or less money this year than last. Zero-based budgeting is
time-consuming, but it can produce a wide range of benefits.
Encourages Efficiency
Makes Room for New ProjectsFocuses the MissionEliminates Redundancy- It helps in forming the budget more rationally than traditional budget.
- Since resources are allocated from lower priority area to higher priority area it reduces the surplus expenditure.
- Enables the top management to better evaluate the performance of various department heads.
- It leads to better cost control among the various departments which in turn increases the efficiency of the whole organization as a whole.
- Zero based budgeting increases the overall communication and coordination within the organization and thus create a better environment in the organization.
The chief advantage of zero-based
budgeting is that it promotes efficiency. Incremental budgeting essentially
assumes that the previous year's budget figure was the "correct"
amount, and therefore the budget needs only to be adjusted based on projections
for the coming year. But it never asks whether last year's budget was spent
wisely or effectively. By forcing managers to go back to square one and justify
all their projects as if they were brand new, zero-based budgeting encourages
them to seek the most efficient, most cost-effective solutions.
When a company that uses
traditional budgeting wants to pursue a new initiative -- coming out with
additional products or services, for example, or expanding into a new
geographical location -- it must try to "find money" in the existing
budget. That means fighting with entrenched interests that want to maintain their
slice of the pie. With zero-based budgeting, new projects are placed on par
with old projects and can compete for financing on a more or less equal basis.
Managers of existing projects will want to protect their own funding, of
course, but they will be forced to mount a vigorous defense of their own
merits.
It's not uncommon for a company to
spend money on long-running projects or departments that no longer serve its
core mission and don't contribute to profits in any significant way. When
budgets are prepared incrementally, such spending continues from year to year
through simple inertia -- "We spend money on it because we've always spent
money on it." Zero-based budgeting puts this spending under a microscope,
allowing the company to examine whether it would be better off shutting down
these non-essential operations, selling them off or, in the case of such things
as maintenance or payroll services, outsourcing them.
The larger a company gets, the more
likely it is to experience redundancies -- different departments or people
doing the same job. These redundancies may remain hidden in incremental
budgeting but will become evident during the thorough, top-to-bottom review
that comes with zero-based budgeting. Once management identifies redundant
functions, it can save money through consolidating them. Instead of, say, six
different workers handling purchasing for different departments, the company
may create a separate, centralized purchasing department hat needs only three
workers, cutting labor costs in half.
In Short
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