Budgeting can be defined in several ways on a financial and non-financial basis. The simplest of the budgeting definition is to allocate resources and compare the results against the allocations. The traditional line-item budgeting focuses on cost items and reducing the cost per item basis. Modern budgeting requirements call for activity-based resource allocations. One of the different types of budgeting is program budgeting.
What is Program Budgeting?
Program budgeting is a method of allocating budgets for a specific program or event. The event can be a commercial project or non-commercial event. Under this method, all expenses and revenue streams should be linked only with the defined project or program. The program nature can further define the budgeting goals in financial or non-financial terms such as achieving profits or objectives.
This type of budgeting by definition is the identification of expenses and revenues linked with the program or project. In practice, the method differs from traditional budgeting with a focus on achieving the end results of the program efficiently rather than cost reductions.
Defining the Program Budget
The broader definition of this budgeting remains the same. However, the prime difference in the program based budgeting will arise from the objectives of the program. A commercial project would set the target profit and revenue as a target. A community project or event would set the effective achievement of services offered through the program. Thus, its evaluation will heavily depend on clearly defining the program objectives.
Creating the Program Budget
Organizations can take a formal step-by-step approach for creating program budgets. The focus of the program based budgeting should be to take into account only program relevant activities and resources.
- Identification and Planning: as with any budgetary method, the first step should be to clearly define and identify the budget activities. The detailed plan should include the program objectives, tasks, activities, and milestones for the program.
- Estimating Activity Costs: All costs must be estimated for the activities and resources related to the program only. The organization may incur several overlapping expenses and activities at the same time, but it must only include the program-related costs.
- Program Execution and Resource Allocation: A flexible and modernized method for budgeting will be to allocate the resource on an on-going basis. Each activity must be allocated resources accordingly. A zero-based budgeting or activity-based budgeting technique may come in handy with program-based budgeting.
- Variance and Controls: All budgets present variances inevitably. The variance and control measure help bridge the gap between the standard and actual costs. The program organizers can take reconciliation measures in this step. The revised budgets can then be compared with the final results.
- Planning for Contingency: Contingency planning mitigates the risk of program failures and mishaps. As the budgetary process is forecasting, it saves time and costs for the organizers should any unwanted event happens during the program execution.
If the organizers are running a for-profit program such as a commercial project, they should add the profit targets in the estimation process. For not-for-profit events, the organizers can define the program objectives on service and other CSF basis.
Working Example – Program Budget
Let us consider an organization Star Green builds a private educational campus set up in a community. The organization aims to make surplus cash from the program, so that it may continue with its revenue stream.
The organization estimates the building set up, procurement of equipment, furniture, staffing, marketing, and other expenses in details as below. In addition, the organization also sets a membership registration fee for participating students.
| Expense Items | Cost Estimated | Cost Actual | Variance |
|---|---|---|---|
| Rooms and Halls Lease | $ 5,000 | ||
| Teaching Staff | $ 17,000 | ||
| Support Staff | $ 8,000 | ||
| Supplies | $ 5,000 | ||
| Furniture and fixture’s | $ 15,000 | ||
| Marketing Expenses | $ 5,000 | ||
| Other Expenses | $ 3,000 | ||
| Total Expenses | $ 58,000 | ||
| Revenue | |||
| Student Membership @ $25 | $ 35,000 | ||
| Online Course income @ 15 | $ 25,000 | ||
| Expected Surplus | $ 2,000 |
The program budget for the educational campus can provide the management with a starting point for the cost and revenue linked with the campus program. The organizer can then compare the estimated costs with actual results. The variance analyses can reveal the difference between actual and estimated targets for costs and revenues.
Important Considerations
Program or project budgeting can adopt any of the budgeting techniques. For example, the organizers of a program or event may choose zero-based budgeting or an Activity-based budgeting method. The only caution is to include expenses and revenue streams related to the program or event under consideration. For example, in our working example, the company should not include the costs incurred other than the educational campus.
Advantages of Program Budgeting
The foremost advantage of program-based budgeting is that it is focused on a particular event. It helps organizers identify the costs related to the project or program only, rather than unrelated cost drivers. In a sense, it focuses on achieving program efficiency rather than reducing the input costs.
Some advantages of program budgeting are:
- It helps organizations compare different events and projects to prioritize
- As with any budgeting, it improves productivity and services efficiency
- It helps in forecasting and planning for the organization
- Variance analysis can reveal the shortcomings in the project or event management
- It allocates resources and responsibilities on a program basis, which increases the performance of the organization
- Top management can appraise the staff performance on a project to project basis
- It identifies the project actual costs and revenues that only relate to the project
Disadvantages of Program Budgeting
As with any budgeting philosophy, the program budgets also come with some shortcomings.
- For large organizations, it’s inevitable to spend overlapping expenses on similar projects simultaneously
- Identification of project-specific costs and revenue may require substantial skills and time
- It may increase the total budget to operate under the strict programming budget methodology
- Overlapping activities and costs may make it difficult to appraise staff performance objectively
- It may produce wrong financial cost estimation and hence wrong project pricing
Identifying program activities and allocating objective responsibilities may prove a gigantic task in program based budgeting.
Conclusion
Program budgeting focuses on specific activities and resource allocation relating to the program or an event. Its emphasis on generating program efficiency rather than reducing the input costs of the program.