Budget Cycle and Budget Formats, Essay Example

What is the budget cycle?

A budget cycle refers to the framework on which a businesses’ budget operates. Companies need a way of measuring its performance in relation to available money while creating their financial plans. Businesses store money as assets with high liquidity like cash as well as in non-liquid sources like long-term equipment. The business needs to match liabilities and expenses to the incoming money to operate successfully. Companies are able to do this through the budget, an extremely crucial financial statement. We can define a budget cycle as the period taken by a budget- time between a budget and a succeeding one. This time varies from one company to another. Some may do it yearly while others on a two-year basis.

A budget cycle is crucial for companies when carrying out analysis, predicting future revenues and costs and updating the budget accordingly (Smith & Lynch, 2004). Companies compare their projected budget with the actual budget to see how they progressed when the budget term ends. Companies would be constantly updating budgets without clear endpoint for analysis if budget cycle were not there.

For a country, a budget cycle goes through four stages. These stages include budget formulation, enactment, execution, assessment and auditing. In formulation, the executive branch of government puts the budget plan together. The legislative branch of government undertakes enactment where it may debate and even alter the budget plan. The government executes the policies of the budget. There is also accounting, for the expenditures, to ensure effectiveness. Auditing takes place at the end of the budget cycle. In business companies, this allows employees to examine budget projections versus the actual budget.

What are the three different budget formats?

A budget format refers to the structure of budget information, the information type that justifies budget requests and the questions asked in the process of budget review. The three budget formats include line item, program and performance budgeting.

A line-item budget uses vertical columns to list each source of revenue for the city and each class of items purchased by the city during the year. The line item budgeting is mostly used among all the budgeting systems because of its easiness to prepare (Smith & Lynch, 2004).). It does not need sophisticated financial skills, and it is easy to administer, straightforward, readily understood by employees, city council and citizens.

Program budgeting according to (Smith & Lynch, 2004) shows a mini-budget series, giving the cost of activities, which the city performs. For instance, in the water department, there would be the establishment of a separate mini-budget for water distribution and production, meter reading, water system maintenance and repair. Program budgeting allows administrators and city councils identify the total cost of municipal services and thus enabling them to set priorities and spending levels accordingly. Program budget has a downside in that it requires considerable time in establishing and maintaining the system. We also note that programs may overlap within and between same departments making data collection difficult.

Performance budgeting is like program budgeting, but it has performance component included (Smith & Lynch, 2004). The performance component ties program expenditures to their precise goals. For example, the budget amounts for street sweeping can be tied to performance level expected. When the city council decides to increase street sweeping level to residential street sweeping once in every two weeks instead of once in a month, then the council can relate sweeping cost per mile. The council then multiplies the figure by additional miles required in order to determine new budget figure. Performance budgeting has a negative in that development of measurable performance goals for ordinary programs is difficult. Data collection can also be difficult in performance budgeting.

Reference

Smith, R., & Lynch, T. (2004). Public Budgeting in America. (5th ed.). Upper Saddle River,NJ: Prentice Hall.