Budgeting Purposes
Typically, budgets serve three major purposes
• planning
• coordinating
• controlling.
Performance budgeting is a system of planning, budgeting, and evaluation that emphasizes the
relationship between money budgeted and results expected.
Performance budgeting:
· Focuses on results. Departments are held accountable to certain performance standards. There
is a greater awareness of what services taxpayers are receiving for their tax dollars.
· Is flexible. Money is often allocated in lump sums rather than line-item budgets, giving
managers the flexibility to determine how best to achieve results.
· Is inclusive. It involves policymakers, managers, and often citizens in the budget “discussion”
through the development of strategic plans, identification of spending priorities, and evaluation
of performance. 3
· Has a long-term perspective. By recognizing the relationship between strategic planning and
resource
Common characteristics of performance budgets include:
· Agency identification of mission, goals, and objectives;
· Linkage of strategic planning information with the budget;
· Development and integration of performance measures into the budget; and
· Disaggregation of expenditures into very broad areas (such as personnel, operating expenses,
and capital outlays) rather than more specific line-items.
A line-item budget is primarily a tool for controlling expenditures. As shown in Figure 2, a lineitem budget typically spells out the level of spending allowed for specific purposes. As the fiscal
year progresses, departmental spending must be within these amounts unless formal budget
amendments are approved. Underspending in one category cannot automatically be used to
supplement another category.
While line-items can be useful in helping managers with internal control, they are not as useful
as a policy or decision making tool. They assure elected and administrative officials that money
is being spent only for approved purposes, but they do not show what is being accomplished with
the money.
Other major drawbacks of line-item budgets include:
· They promote “inertia,” with the focus being on making marginal changes from year to year.
· They can result in inefficient and uneconomical activities because management is not permitted
enough flexibility to address changing situations and often must “use it or lose it” at the end of
the year.
· They invite micromanagement, encouraging questions such as “why are we spending so much
on supplies?”rather than “how have our efforts increased manufacturing exports this year?”
In contrast, performance budgeting has more of a policymaking orientation. It:
· Connects plans, measures, and budgets;
· Forces departments and policymakers to think about the big picture;
· Provides better information about the impact of budget decisions on people;
· Gives departments increased budgetary flexibility and incentives for generating budget savings;
· Allows for ongoing monitoring to see if agencies are moving in the right direction;
· Strengthens legislative decision making and oversight;
· Enhances financial accountability to citizens, decision makers, and governmental monitoring
agencies; and
· Supports better management and evaluation.
· The Planning-Programming-Budgeting system (PPBS), which was applied initially at the
federal level and became more widely popular in the 1960s, strengthened and institutionalized
program analysis, multi-year planning, and rolling multi-year budgets;8
· Management by objectives (MBO), a technique that requires regular reports on departmental
progress toward achieving agreed-upon objectives, became popular in the 1970s-though
primarily as a management, rather than budgeting, tool; and
· Zero-based budgeting (ZBB), introduced at the U.S federal level in the 1970s, emphasized
evaluating all programs each year rather than “concentrating on budgetary changes at the
margin.” ZBB attempted to analyze the incremental change in a program’s output at different
levels of funding.
Budgeting Trends: a need for innovation, change and the adoption of new strategies for leisure
service programmers in the financing area.
accountability: (performance budget) results oriented.
equity: (social and economic concerns about the distribution of fiscal resources).
increased productivity / decreased budget: Doing more with less.
target zero: to create a totally self-sustaining program (100% cost recovery).
pricing policies: creating a value-added image with program consumers.
social vs economic costs: evaluating the impact of social and economic impacts from the
programs.
maximizing resources: through partnerships and collaboration with other organizations.
risk management & liability concerns: the impact of increased litigation and insurance costs.
technology: improved financial tracking and forecasting.
Expenditures (costs): the costs involved in running an activity (i.e. supplies, personnel)
Revenue: income that can be generated from a variety of sources.
Operating Expenses: expenditures which occur on a regular basis (i.e. utilities, insurance).
Capital Expenditures: funds for permanent facilities or major pieces of equipment.
Direct Costs: those expenses that must be made to produce a specific program (not shared).
Indirect Costs: services that are provided or exist within the organization that cannot be
directly traced to a specific program (also known as overhead costs).
Revenues:
1) compulsory resources: cash and non cash revenues that result from tax support, usually
a property or sales tax.
2) earned income: cash generated from program fees and charges.
entrance fees
admission fees
rental fees
user fees
sales revenue
license/permit fees
special service fees
3) contractual receipts: revenues from legal agreements (concessions).
4) financial assistance: funds from grants, donations, gifts and entitlements.
Types of Budgets:
1. Line-item budget: identifying the cost of a particular function and then associating
it with a budget classification (categories). The line-item budget is also know as
object classification. It can be combined with other types of budgets such as the
program budget.
supplies (items that are entirely consumed)
contractual services
personnel services
materials (items that are of a longer lasting type)
current obligations (payroll taxes and bank debt)
current charges (utilities)
properties
debt payment
2. Program Budget: a way of clustering costs that are necessary for starting a specific
program. This uses the line-item budget to be used for individual programs, i.e. each
program has a separate budget.
3. Performance Budget: attempts to link the amount of resources that are consumed in
producing a program with its output.
++++Performance budgets share characteristics with program budgets, but performance
budgets focus primarily on what functions are performed. Tasks rather than programs are
highlighted. Among the functions displayed within a performance budget are technical
services (i.e., cataloging, materials processing); planning (budgeting, automation,
employee selection, interviewing, development; patron contact (circulation desk, email &
telephone contacts).
workload measures: the volume of work that is completed. How many hours or participants
are being served?
efficiency measures: How well the agency resources are used.
effectiveness measures (total hours available divided by program cost): the extent to which a
program meets its stated goals and objectives.
4. Zero Based Budget: forces an organization to re-justify its expenses on a year-toyear basis. Helps programmers stay up-to-date on costs.
establish program decision-making: identifying activities to be offered.
analyze program decision-making: evaluating the benefits of each program as related to
potential funding.
evaluate and rank programs: determines which programs will be funded.
prepare a financial plan: establish a budget for programs identified for funding.
Types of Alternate Resources
In-kind contributions: resources offered to individuals or organizations that require no
financial transaction, usually labor, materials or supplies.
Sponsorship: direct funding in return for promotional recognition.
Scrounging: adapting or recycling materials.
Partnerships: when two or more organizations cooperate to provide a program or activity.
Volunteers: a critical component of any large leisure service program.
Pricing: the price that is established not only reflects the direct and indirect costs of the
program but also reflects the extent to which the service is sought by individuals.Pricing
Factors Used to Determine the Actual Cost of a Program
fixed direct costs: expenses incurred regardless of the number of participants (insurance,
utilities).
fixed indirect costs
variable direct costs: expenses which fluctuate depending on the number of participants (food,
t-shirts).
market demand: availability of similar services and actual customer demand for those services.