SEC370 Operating Budgets Paper

Operating Budgets

Operating Budgets Paper

Name

SEC370

Date

Professor

Operating Budgets Paper

Operating budgets are an essential aspect of any organization. The operating budget provides an overview for the costs that will be expended and will provide a detailed description of the sources of revenue. In order for any company to be successful the organization must know where and how their money is being spent as well as the expected revenue they will receive. Through the operating budget the organization will have an in-depth understanding of their financial situation. Budgets allow the organization to determine were resources should be expended, recognize any adjustments that need to be made, and prioritize how resources will be used in the future.

The type of budget that is used by the organization will depend on the organizations needs. Two types of budgets that can be employed by the organization include the line item budgets and performance based budgeting. Line item budgeting is the most commonly used type of budgeting because it is simple and will provide the organization with a detailed outline of expense and resources. Performance budgeting approach refers to a budgeting approach that gives a meaningful indication of how the dollars are expected to turn into results (Johnson, 2004). This approach outlines the expenses and expenditures but is designed to generate a general chain of cause and effect.

Line item budgets provide the organization with a line by line breakdown of the income and expenses associated with the organization. The line item budget will be established based on the previous year’s budget and any increases in the budget will need to be justified by showing the additional expenditures and there necessity to the project. The line item budget provides a list of expenditures that are group in categories as well as a list of the resources that are available to the organization.

Line item budgets provide a place, or a line, for every expense and resource of the company making it easier for the management of the organization to understand where the company’s money is being spent. For example there will a line category for expenses due to travel. The category would include subcategories that include the expensive involved in travel, such as food, gas, and lodging. Through the different categories and subcategories the line item budget provides and in-depth and detailed description of what is being spent in order for the organization to have better control of the money being spent on operational functions.

The line item budget provides many benefits to the organization. The line item budget provides the organization with enough data to make decisions concerning how much funds should be received in the different categories located on the budget and allows for changes to be made to the budget. The line item budget will provide a picture of items on the line budget should be eliminated and what items will need to be adjusted up or down. This would include making cuts to certain expenditures or increasing the budget in areas where it is needed. Line-item budgeting can give a large organization flexible use of budgetary control, giving flexibility to some programs and not others based on defined criteria (Bianca, 2007).

The primary goal of a line-item budget is to provide a vehicle of controlling what is spent by a department or organization and who is accountable for the expenditure (Johnson, 2004). The potential challenges of the line item budget is the categories do not provide a detailed explanation of what each department will spend the money on and the organizational members are dependent on the allotted funding because the budget does not take into account potential needs for increases in the budget.

Another type of budget that would benefit the organization is the performance based budget. The performance based budget is focused on standard cost of inputs which are multiplied by the number of units during a specific time period. The performance based budget employs is based on performance or historical expenditures. This approach is similar to the line item approach in that line items are used to record the expenditures and resources but provides more in depth information that can be by administrators to evaluate the effectiveness of the budget compared to current performance measurements.

Performance based budgets provide the organization with narrative descriptions of each activity, service, or program displayed in the budget. The budget is organized by estimates of the cost of the operational needs of the organization against the financial health of the organization through measuring and evaluating outcomes that inform the administration on the performance level of each department. Lastly using the performance based budget the organization the levels of quality service being provided to the customer and program activities may be budgeted on the basis of standard cost inputs.

The advantages of employing the performance based budget approach is it ensures better accountability and makes sure budget requests are approved based on performance measurements. The performance based budget ensures there are enough funds to cover any expenses that arise and is fairly simple to use (Robinson, 2009). This budget will provide information on the objectives and purposes of expenditures and assist in budget funding decisions. The organization can make systematic decisions concerning current and future expenditures and compare the costs and benefits of potential organizational expenditures.

The potential disadvantages are that the different departments in the organization compete for the funds they will be provided through measurements of previous performance reviews. In order to get an accurate picture of the company’s financial picture and in order to develop the performance based budget a great deal of data must be collected concerning past budgets and performance assessments and reviews. Another disadvantage to the performance based budget is it does not provide for the individual actions of organizational members but instead is focused on broader aspect of organizational spending.

In order for any organization to be successful they will need to create a budget that serves the specific needs of the organization. For small businesses or organizations that requires a simplified budget proves the line item budget may be more beneficial but with the organization that has a vision to provide quality services to customers and improve sales the performance based budget may be more beneficial. The budget assist in the organization in spending only the resources available to the organization and provides an outline of what should be spent and where. Through the budget the company has a better idea of their financial picture as well as he necessary information to make future decisions.

References

Bianca, A. (2007).The Advantages of a Line-Item Budget. Retrieved June 3, 2012 from

http://smallbusiness.chron.com/advantages-lineitem-budget-10404.html

Johnson F. (2004). Chapter Three: Budgeting. National Center for Education Statistics.

Retrieved June 3, 2012 from http://nces.ed.gov/pubs2004/h2r2/ch_3.asp

Robinson, M. (2009). A Basic Model of Performance-Based Budgeting. Retrieved June 3, 2012

from http://blog-pfm.imf.org/files/fad-technical-manual-1.pdf