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

Use It or Lose it !

Ans 1 This phrase comes as a false reasoning as to why an organization must exhaust all of its budget at the end of the year. Its not important for the organization(of any type) to utilize the money they have in their budget as it may lead to insufficient funding for the following year or any upcoming year. Their might be times when the company defaults on some huge sum of money and then is unable to meet the defaulted amount with the existing budget balance. There are several ways of solving these problems, some of which are :-

1) The money that is left over in the later months and seems un-utilised can be invested in a particular asset that provides the organization with regular income, adding to the overall sum of budgeted money.

2) Invest in people. This investment can be in the form of investing in a Fund Manger or even extra employees which would help deliver work faster. This shall increase the overall growth rate of the company and reduce the cyclical costs.

3) New features can be added to the workplace that will make work more convenient for the staff, hence improving their productivity.

4) The Top management should take into account the expenditures done in the last few months to analyse the importance of that spending and how much has been spent in terms of investment.

5) Performance audits can be conducted and the efficiency of funds utilization can be assessed.

6) Maximum pool of funds should be incorporated in funding for the ore mission of the organization.

Ans 2 In a personal budget also the way of handling the funds will be somewhat similar as its important for us to set aside the excess of funds for later use, i.e. for the next year.

Unnecessary spending will be pointless and that is why companies should not follow the "'use it or lose it " approach.

Its essential to have funds for rainy days and hence remaining residual funds should be invested and not utilized for no reason.

Ans 3 Yes, preparing a personal budget becomes important as at times the expenditures may differ from year to year wherein the expenses will exceed the income or vice-versa. Maintaining a personal budget becomes convenient to know the rising expenses and in which sector.