The Subtleties of Budgeting

Articles, Management, Uncategorized - Dr. İzel Levi Coşkun - September 4, 2015

When I started the first grade of school, my grandfather wanted to talk to me. He said: “Son, you are now starting school. You have got to learn what it is to save and spend your own money. I will give you some pocket money every week.” I did not understand what he said back then but I have to say that I enjoyed holding my first weekly 5 Lira coin in my hand. Except for the coins I found on the floor, I did not have any savings before that time. I did not know what to do with the 5 Lira, which was half the size of my hand. I thought to myself:” I had better start saving these”, hoping that one day I could be able to buy something bigger than the famous crackers whose jingle I knew by heart…

This is how I was first introduced to the concept of a budget. As I grew up, coupled with the effect of inflation, my weekly pocket money of 5 lira became 150 lira. In the following years I got interested in collecting stamps. I used to choose the stamp that would be good for my collection and save for it from my weekly pocket money. When I finally had the targeted amount of money, I would buy that stamp. The sums I spared for extras would never exceed my weekly limit. The target was to get the stamps so I would never buy anything else, even when I really wanted to. If I was going to buy that one stamp in three weeks time I would keep saving my money to reach my target in the end. Buying that stamp and placing it next to the other ones in my stamp book was quite a unique excitement and joy.

Budgeting is a process that requires planning, coordination and control and almost all enterprises follow these three stages whether they are aware of it or not. These may be income / expense budgets as well as purchasing, general production, investment, spending, cash or even time budgets. However, as I have explained above, budgets are in fact an integral part of our personal lives too.

Budgets can be adapted to anything but in order to be able to do budgeting it is necessary to begin by making projections and undertaking planning to set some goals for the enterprise’s needs. The subtlety here is to make sure that the management acts in communication with the relevant departments. Generally in enterprises, the boss makes the projections for budgeting based on their past experience and without consulting with the department managers, whereas budgeting is really a process that requires not only planning but also coordination. Therefore when determining budget figures and planning for the future, the managers of the relevant departments should be consulted at the planning stage to ensure coordination and harmony between the departments.

Towards the end of the year, budgeting tends to become a nightmare for department managers in most large enterprises. I have seen managers who are trying to balance the budget of the current year and settle the figures for the coming year with swollen eyes from exhaustion and lack of sleep. The subtlety here is not to leave this to the last minute but make necessary revisions in the interim periods…

In one of the companies to which we provided internal auditing services, budgeting was done and controlled annually. Towards the end of every year, all the department managers would go through a budgeting syndrome, with one exception: the purchasing department. Although budgeting was requested to be done annually, the purchasing manager would divide this into months and check the situation monthly. This manager’s budget would generally be quite accurate. As the members of this department had a monthly budgeting and control discipline, they would immediately inform the manager of monthly deviations or price movements in the market to help him take precautions. When it came to the end of the year, they would not be pressed for time and would go about their jobs at their regular pace, whereas everybody else had to stay in the office all night. To me, budgeting is a process that needs to be managed by dividing it into parts. It is possible that not everything will go as planned but if the budget is controlled monthly or in longer intervals to make any necessary revisions, this will lead to a far more realistic result at the end of the year. Another advantage brought about by revising the budget periodically is that it ensures that timely precautions are taken when necessary, which, in my opinion, is far more important than meeting the budget figure.

The second insight comes from my experience with associations. Generally associations make annual budgets and each year the administration revises the budget in line with inflation. The supervisory board usually takes a brief look at the order of the documents, the decision book and the counterfoil books and declares that the income and expenses are consistent with the budget. This is an approach that causes many associations to experience cash flow problems in the long run and even leave them without any targets. In my opinion, the healthy approach is to first determine the targeted number of new members for the coming year. After this, a budget should be made for the income that is expected to be collected from all the members in that year, including the new ones, along with a separate budget that shows the sums that may not be collected. Following this, all the committees within the association should be requested to list their yearly projects and to budget their projected income and expenses. The administrative board should create an expense budget that will list separately, from the largest to the smallest, each item of expenditure that must to be made to keep the association alive. This budget should contain everything from the salaries of the personnel working at the association to rental payments, electricity and travel expenses. Then the budget figures given by the committees should be consolidated. The subtlety here is to add an “others” item at the bottom of the expense budget which consists of 10% of the total expense budget and take this into account as a reserve.

There are 2 main types of budgets in the budget literature. The first one is “Incremental Budgeting” and the second is “0-Based Budgeting”. Briefly speaking, incremental budgeting is based on the previous budget and includes the increases in the new budget. For example, the distribution of income or expenses in the budget is made in line with the previous period. The advantage of using this method is that it is simple and easy to understand but it has a static structure and is not very flexible. Furthermore, it is based on the principle that the budget is fully used so that consistency with the budget is ensured and nothing is carried forward from the end of the period to the coming year. 0-Based Budgeting on the other hand is a different system. As its name suggests, everything is done from scratch. Starting from the bottom, each item is compared to the previous period and studied not only on an increase-basis but also on a reduction-basis. Although it is more complicated compared to the former method, with computer support 0-Based Budgeting is becoming increasingly frequently used as it allows for a more detailed study of causal links.

However, regardless of the method used the main subtlety that lies behind success is controlling the system. I believe that controlling what was budgeted for and what took place in reality, analysing the reasons for any differences and being able to call to account where necessary are the most important factors for success. Controls, which may be carried out by forming a supervisory board or by direct accountability liability to the administrative board, are an integral part of budgeting. If the necessary authorities, or the public, do not ask for accountability when there are deviations from the budget, as in the case of state budgets, it will not be possible to make any progress and all the effort made will unfortunately go down the drain.


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