Question.3219 - The budgeting process and budgets themselves have significant impacts on management actions and performance, in both positive and negative ways. It is common at many local, state, or national governmental agencies, and nonprofit organizations, and even in some for-profit enterprises for managers to increase spending at the end of the budget cycle. This process, usually referred to as “use it or lose it" can be harmful to objectives of any organization. Managers do this, as they often feel that if they don't spend the amount that was budgeted this year, next year their supervisors will reduce their budget by the amount not spent in the current year. So, to avoid having their budget dollars reduced, managers often increase spending at the end of the year to ensure all budgeted amounts are spent even if items are not necessarily needed. This is more common in government and nonprofit organizations, but can be found in for-profit enterprises as well. Requirement: Write a memo to the budget managers in an organization, assuming you are the CEO. Your memo should direct budget managers not to utilize this approach, but also offer a logical rationale, and perhaps an alternative solution.
Answer Below:
To Budget Managers From CEO Date 1 March 2013 Subject Budget expenditure It has come to my attention that generally speaking, organizations tend to spend their expiring budget on unnecessary items in an effort to avoid a decrease in the following year budget’s amount. This is due to lack of knowledge where the budget can be used or managers do not know how to manage money properly. Using budget on low quality project, useless equipment’s services leads to loss of money and manpower thus leading to disturbances in an organisation. It is not the right approach and I personally not prefer that my managers adopt this approach of “use it or lose it.” This type of practices sends the wrong message within our organization and can lead to a decline in our productivity and quality. Therefore I personally do not condone and will not allow such type of wasteful expenditures. To avoid this type of approach it is better to either make policy of keeping the extra amount in reserve for any emergency or to use it in better areas rather than using it in low quality projects or useless equipment’s and services. As an option to this “use it or lose it” approach, we will invest our remaining funds at the end of the fiscal year only necessary projects that add value to our company Apart from this best solution for avoiding wasteful spending at the end of the year is using the software to audit your budget for whole year which will help you to manage your budget properly and responsibly and let your budget cycle go smooth as they use various accounting strategies to reach desired results. Implementing a technological solution that not only keeps track on our company’s budget but most importantly it audits our expenditures throughout the year. This measure will generate a proper and responsible spending behaviour among our employees while keeping us focused on our business strategies. Policy of carry forward can also be implemented in the organisation so that the excess amount of budget left can be carried forward for next year and can be used in next year on some important projects rather than wasteful spending of it here and there Hope this all help you to take better decisions and to prepare a better budgeting process.More Articles From Accounting
.ico)
.ico)
.ico)
.ico)
