Question

Both the budget process and budgets themselves can impact management actions, both positively and negatively. For instance, a common practice among not-for-profit organizations and government agencies is for management to spend any amounts remaining in a budget at the end of the budget period, a practice often called “use it or lose it.’’ The view is that if a department manager does not spend the budgeted amount, top management will reduce next year’s budget by the amount not spent. To avoid losing budget dollars, department managers often spend all budgeted amounts regardless of the value added to products or services. All of us pay for the costs associated with this budget system. 1. Write a 1/2 page report to a local not-for-profit organization or government agency offering a solution to the "use it or lose it" budgeting problem. 2. Will your solution be different if this was a personal budget? Explain your response. 3. Do you prepare a personal budget?

Answer 1

1.

The main objective of the not-for-profit organizations and government agencies is to the social development and welfare of the society. In adopting, the “use it or lose it’’ budgeting practice they are defeating their own objective. Also, while spending the money managers should keep in mind the code of ethics as spending without any consideration goes against the moral compass of the society.

The department managers should do a proper planning at the start of the year so that the expenditure can be made throughout the year. Also, along with the timing of the expenditure the managers should consider the various areas where there is need of expenditure and what is the best way to spend the money and get maximum returns. The not-for-profit organizations and government agencies can use Zero Base Budgeting technique to justify the amount spend in each period.

Proper analysis with the help of capital budgeting should be carried on while contemplating a heavy expenditure. Also, in this era of technology,the not-for-profit organizations and government agencies can use various ERPs to help them in the process of effective budget planning.

The key is to effectively plan and then implement the plan.

2. In case of personal budget the answer is different as the personal budget depends on the needs and demands of the individual for whom the budget is prepared. Also, the expenditure incurred by that individual do not impact the society as drastically as the expenditures incurred by not-for-profit organizations and government agencies.

3. Yes, I prepare a personal budge. It helps me keep a track of my income and expenses. One of the most important aspect of the personal budget is prevention of over-spending. Also, a proper budget helps in making investment decisions also.