Budgets Can Be Important

Very few individuals, corporations, organizations or government entities either prepare or evaluate budgets properly. All too often, budget creators have the attitude that a budget is just something they have to do, and it can easily be changed throughout the year. However, if created and evaluated properly, a budget can be a very important "road map" for fiscal responsibility, financial guidelines, and proper and appropriate spending.

When most entities create a budget, all they do is "work off" the previous year's budget, and then make minor variations either to add a project or program, or to do an "across the board" cost of living increase. Those voters who vote on things like school budgets are often asked to vote on a budget based on the percentage increase and how it might impact real estate taxes. Many organizations have Boards that prepare and approve budgets, simply to haphazardly approve additional expenditures throughout the year, effectively making the budget meaningless.

The first thing to realize regarding a budget is can be the most important financial tool one has, if used appropriately. Budgets should not simply be based on past expenditures, and revenues. Instead, at least every three year, an entity should use a technique known as "Zero Base Budgeting." What that means is that every expenditure line item to evaluate: (a) if it is a proper and needed expenditure; (b) if yes, then is the monies spent being spent most effectively; and (c) if the desired results can be achieved with the same line item monies, or if more or less funds are needed in that area. In preparing a budget this way, one looks for efficiencies, evaluates the needs of the entity, discusses creative ideas, and determines if more or less monies need to be spent, and how is the best way to spend those dollars. Very often, it is not the amount of monies spent that might be the problem, but how those monies are spent. For example, in terms of school budgets, items like: (1) energy costs and potential impact of using alternative energies, changing thermostat settings, etc; (2) class size- the impact and cost factors related to change; (3) individual class lengths, and weather altering length of a period might impact costs by altering staffing needs, etc; (4) creative contract negotiations to optimize results; (5) construction projects - costs of outsourcing versus having staff do project; (6) supplies and furniture purchasing, including joining with other school districts for economies of scale savings, and vendor pricing evaluation; etc.

Another major item that most budget preparers need to rethink is their approach to cost savings. All too often, the attitude that a potential savings is insignificant as related to the overall budget, neglects to understand that in many budgets, there are numerous areas to realize small savings, and that the overall result of all these small savings, is often quite significant. Paying attention to small areas also fosters an overall attitude of making the overall operation far more efficient and effective.

Results- oriented budgeting states that one should always look at the goal or what the desired result might be. By doing that, one can better adapt to "zero base" principles, and ask what this money accomplishes. Many bureaucrats simply act by "throwing money" at an obstactle, rather than spending the time to evaluate the more effective and efficient way to handle the situation.

Budgets are potentially extremely valuable tools. If used properly, a budget has the potential of avoiding pitfalls, identify shortfalls, evaluate policies, and give important guidelines. Anyone with the fiduciary responsibility owes it to both themselves and their organization to adequately and fully evaluate a budget, instead of simply giving it a cursory review.