Rational Approaches and Incremental Approaches Budgeting, Essay Example

Budgeting marks an essential subject to managing personal finance and on deciding on investments. Companies have various ways to handle budgeting, but the two principal ones are rational approaches and incremental approaches, discussed in this paper.

Rational budgeting is one that employs complex and fact-base budgetary allocations that are useful in the decision-making process. To come up with a rational budget, several aspects taken into account i.e.

1. Recent performance of the company in the job market
2. Existing market trends
3. Any plans and aspirations of having a new product into the market
4. The cost (if there) associated in obtaining the cash needed for budgeting.

In rational budgeting, there is involvement of serious business, where business leaders have to undergo a series of meetings and debates before agreeing on a budget(Smith & Lynch, 2004). The possibilities of making cuts and the allocation of resources within an organization are open. Before agreeing on rational budgets individuals who are directly or indirectly involved have to feel that it is rational, viable and best suited for the business. It is expensive and time consuming as compared to an incremental budgeting. It however, welcomes change, unlike the incremental budgetary.

The incremental budgeting is one that relies on past records to form a new budget. It assumes a slight increment in the budgetary and thus increases the budget by a given percentage. It does not take into consideration that errors could have existed in the previous budget. It takes less time to come up with a budget if at all a company relies on the incremental budgeting. No complex decisions required, as there is the use of previously recent budgets. However, there are many difficulties when new items need an introduction into the budget. The incremental budget tends to be rigid and inflexible.

Challenges of state and local budgeting

The state comprises of learned economists who handle the state budgetary. While one may think the state has an easy time in doing the local budgetary, that is not the case, as it also faces enormous challenges and troubles.

The state faces a challenge in struggling to bring the state and local spending within its revenues. Take, for example, in 2001, the government ran into a deficit of about $30 billion (Smith & Lynch, 2004). This was the leading factor into the difficulties of 2002 and the preceding year.  The budgetary allocations for 2003 had difficulties, as the revenues were far much below the anticipated expenses. The budget leaders had no choice, but to allocate augment programs of temporary fixes. This included deferrals, tapping reserves, fund shifts, and even borrowing. The permanent adjustments were to follow later, and this cause enforcement of slower spending rates and increased taxes, at least to raise the amount reflected in the budget. With this, it is so obvious that budgetary allocations in the years to follow would have problems.

The government is the same one that has to budget for the fiscal health. The same government has to provide tax relief to its citizens, while at the same time it is to accumulate sizeable reserves. Fiscal health consumed the reserves, and thereafter, there were inabilities to contain all its expenses. Balancing all these commitments prove difficult. In 2001, the government ran into a deficit of about $30 billion (Smith & Lynch, 2004). This was the leading factor into the difficulties of 2002 and the preceding year.  Fiscal health consumed the reserves, and thereafter, there were inabilities to contain all its expenses.

To sum up, it is right to admit that the government also has difficulties in stretching to accommodate diversity, and the costs associated with federally mandated programs. Collapse of the stock market not only affects the investors, but also the government, and thus the whole nation in general.

References

http://wiki.fool.com/Rational_%26_Incremental_Budgeting

http://www.frbsf.org/publications/economics/letter/2003/el2003-23.html

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