PERFORMANCE BUDGETING

Concept of Planning:

Planning is the integral part of a progressive organization. It is an activity, which forces the management to look at all aspects as they exist at present or at a foreseeable future date and then make a decision on a line or line of business. It is anticipatory thinking and determining the events of tomorrow. It is translation of knowledge into action. Plan is a scheme for accomplishing a purpose

What is planning?

Planning is an act of formulating a programme for a definite course of action. It is determination of goals and objectives and logical thinking and systematic selection of options of enterprise, its policies, programmes and procedures for achieving them.
Planning is for foreseeing the uncertainties of the future as well as to cope with the complexities, problems and opportunities resulting from change. It is required in performing managerial functions of organising, staffing, leading, and controlling operations
It involves selecting missions and objectives and the actions to achieve them. It is a continuous process of making systematic decisions with greatest knowledge of futurity. It provides a rational approach to pre-selected objectives.
Planning is a coordinated effort towards attainment of predetermined objectives and is the springboard for action. It is a process, which involves selection from among many alternatives. It is a series of logical interrelated procedures. It bridges gap from where we are to where we want to go and helps management to prepare for action. Planning is setting goals on the basis of objectives and keeping in view the resources.

Elements of Planning: -

Planning is a continuous ongoing process for growth and involves following important elements necessary for growth.
1. G= Goal Setting: - Deciding Levels of performance. What should be the out put/ business level.
2. R=Resources:-How the goals be met keeping in view internal and external factors affecting the business.? What resources are required? Men, material and money.
3. O= Opportunity:-What are the new opportunities, avenues available and which one/ all are to be tapped?
4. W= Will: - whether we are really willing /serious.
5. T=time schedule:- Duration of the period chosen. Period for which the plan is to be made.Longrange plan or short range plan? When will it be done?
6. H=Human: - Who will do/ implement it, and monitor the output and guide?

These elements are based on identifying opportunities and threats in the environment as well as internal weakness, setting long-term goals and formulating strategies and action plans.
Thus it would be observed that planning is
· Organization specific
· Future oriented - It is scientific forecasting of future.
· It involves imagination, thinking and judgment
· It is choosing from amongst alternatives
· It is effective utilization of resources

The GOALS should be
· Realistic
· Specific
· Acceptable
· Easily measurable
· To be set by person having authority

Steps in Planning: -

For effective planning and its implementation a series of thought processes are needed. These thought processes are organisational specific. However, the basic steps that are required by any organisation are enumerated below.

1. What are the opportunities available –i.e.
· Economic condition, Government policies.
· Market- what is the demand of the product?
· Who are competitors? How are the doing in the market?
· What are the requirements of customer and their expectations?
· What are the strengths and weaknesses of the organisation?
· What do we expect to gain?

2. What are the objectives i.e.
· What is the mission, organizational philosophy?
· What do we want to accomplish?
· Whether it is a long rage or short range objective
· What is the time frame?
3. Strategies
· What markets are to be tapped?
· What will be the volume of sales?
· What will be the price of the product/ service?
· What will be the cost?
· What will be the cost of labour?
· What is the tax structure?
· What is political/social environment?
· How to meet the resources?

4. Options
· What alternatives are available?
· What are fruitful possibilities?

5. Preparation of budget
· Cash and capital budget
· Income and expenses
· Profit/surplus
· All types of resources- men, material money
6. Monitoring

Budget: -

Budgets are vision of organisation. It is a fundamental planning instrument and an important tool for an organisation to implement strategy. It is the process of translating planning and performing decisions into specific projected financial plans for relatively short period of time. Budget is a statement of expected results expressed in numerical terms It is a road map against which actual performance is assessed .It helps in focusing attention on areas of concern so that necessary corrective actions can be undertaken.
Budgeting helps managers in coordinating their efforts with corporate philosophy and goals. Budgets are the benchmarks against which performance can be evaluated when variations between actual performance and budgeted performance arise.

Why Budgeting?

Creating a budget is important because it;
· Forces an organisation to carefully consider the expected demand for its products and services and resources required to meet the demand.
· Translates the organisations higher priorities into the appropriate resources required to achieving these priorities.
· Highlighting potential problems in sufficient time to take corrective action.
· Create a base line against which actual results cab be compared.

Primary sources for a budget:

There are basically three primary inputs to a typical budgeting process: -

1. Plans- Organisations plans and priorities are the important drive to budgeting process. Budgets should reflect management’s planned change initiatives, related to cash and expected results.
2. Performance- Past and present performance as well as that of similar organisations should contribute to the budgeting process. Due consideration is to be given to uncontrollable external changes that could dramatically affect the operations and its results viz. Change in global market,change in technology, economic slow down etc.,
3. People- Good intra and inter organisational communications are essential to developing both good plans and good budgets.

Process involved in Performance Budgeting:

1. Identification of command area – The area of operation
2. Preparing area profile- business potential in the command area
3. Comparing Past business- Trend
4. Environmental scanning of market segments.-Competitor’s business strategies. Market share, business growth.
5. Internal environment of resources.
6. External sources
4. Identifying and understanding gaps between previously established goals and past performance.
* Evaluate performance in the light of goals and identify gaps.
* Relate gaps to environmental conditions.
* Relate gaps to organizational capabilities
* Identify future goals, given understanding of gaps.
* Describe broad action plans aimed for meeting goals.
*Identifying resources needed to close the gap between current performance and future goals.
* Distributing those resources
* Monitoring their use in moving the organization closer to reaching its goals.

Performance Budgeting in Banks: -

It is budgeting for the performance. It is work plan i.e. target and output. A performance budget is one, which presents the purpose and objectives for which funds are requested, the cost of programmes prepared for achieving these objectives and quantitative data measuring the accomplishments and work performance under each programme. In service industry like banking, performance budgeting plays vital role.
Performance budgeting plays an important role in banks. It is a comprehensive management system, which provides organic link between objectives on one side and physical targets and achievement on the other. It implies planning of bank’s activity either for short term or for long term, keeping in view both external and internal environment. This activity calls upon bank management to look into all aspects for chalking out possible courses of action. Obviously this requires data based study and analysis. It is planned performance. It guides the organization towards achieving the budgeted goals and develops a system of control, review and monitoring an essential ingredient for a systemic growth.
It is a handy monitoring tool to review the performance at a predetermined periodic level by the controlling and supervising authorities. This helps operational units in reviewing their own performance. This is an exercise of self-assessment of self-performance. Per formation budgeting exercise is a scientific guestimation of future performance in a viable environment where changes are taking place frequently. It is an exercise, which takes planning at the level where performance lies i.e. at the branches.

While preparing budget following important dimensions are needed

· Desired Market share and competitive niche
· specific level of production efficiency
· Meeting other strategic goals.
· The level of profit and other indication of financial performance.
· Expected level of worker’s productivity and positive attitudes
· Responsibility towards customers and society

Every bank has its own system for initiating budget exercise .Before initiating budget exercise corporate office of the banks issues Business Policy Guidelines /Plan for the financial year.

1. Policy guidelines Document: - It is the blueprint of future. It contains bank’s business plan for the year for which budget is to be prepared .It quantifies annual goals at the corporate level It also contains future vision, aspirations of the bank and corporate objectives and direction how the goals are to be achieved . While preparing annual goals banks take into account market potentials, growth rate of competitors, trends in the economy, growth in GDP, money supply, rate of inflation, developmental projects launched by the government, etc. The policy document is sent to all the branches and administrative offices.

2. Planning at Controlling Levels: On receipt of the policy guidelines from corporate office the zones prepare their own business plan document for the fiscal in tune with corporate objectives, goals and rate of growth envisaged by the corporate office. However, while preparing zonal guidelines potentials in the geographical area, economic trend in the state, State Government’s development plans, Budget allocations to various developmental schemes, growth rate of competitors, decisions taken in State Level Bankers Committee etc are kept in to consideration. The zonal policy guidelines are then sent to all the regions and the branches working in the zone along with corporate business policy guidelines , with detailed instructions to prepare regional budget.

3. Preparation of Regional Budget: After receiving both corporate business policy document and zonal policy guidelines the regions advise branches under their jurisdiction and supervision to prepare their annual budget. Branches are also advised to go through the growth targets projected in District Credit Plan and Annual Action Plan. Branches are also asked to look into the business growth in their respective districts ,the market share. Detailed guidelines are given to the branches on the methodology for preparing budget. Blank formats are sent to the branches for filling up historical statistical information pertaining to various business parameters. This makes the task of preparing budget easy and branches are in a better position to project future performance. This also gives them insight into their strengths and weakness and helps them in planning strategies improving operations and withstands competition and challenges.

4. Budgeting at branch level: On getting policy guidelines and the blank formats and guidelines , branches scan the external and internal environment in their area of operations and analyze data for preceding years, and then project the various levels of activities keeping in view the priorities of the bank and the potentials in the area of operation, and translate the plan into budget. Branch managers take cognizance of existing or likely competition and make assessment of his internal strengths and weakness comprising the level of skills of the personnel, infrastructural facilities and other support system.

5. Discussions at the Regional level: Once the branches submit budget to their respective regional offices in the prescribed format, the projections made by them are scrutinized .A meeting with the branch managers is held to discuss inconsistency in the figures, mistakes in computing income ,expenses and also to ascertain the reasons for low projections, very high projectio9ns as the case may be, the purpose is to prepare a realistic budget.. It is ensured that economic activities in the geographical area of the region have been taken care and the projections made by them are discussed across the table and amendments if any are made in consultation with them in the draft budget Reasons for low level projections are deliberated and necessary organisational and managerial support is assured in the areas affecting subdued business growth.
6. Submission of Regional budgets: After finalizing the draft budget with the branches, the budgets received from all the branches in the region are consolidated and submitted to the zonal offices for scrutiny and finalisation after mutual discussions

7. Preparation of Zonal Budget: On the basis of draft budget received from the regions, budget for the zone is finalized after detailed deliberations between the Regional heads and Zonal office .The zonal budget thereafter is submitted to corporate office. On the basis of budgets received by corporate office budget for the entire bank is prepared.

8. Finalization of bank’s budget : Before giving final shape to the budget of the bank detailed discussions with Regional and Zonal authorities take place at corporate level to discuss on all the parameters .The budget prepared by the zones in different areas of banks operations are discussed with the concerned monitoring executives in the area of their operations at the corporate level and final touches are given to the budget and a consensus document is prepared after finalizing the budget of each zone and MOU is signed with the respective zonal head . After finalization of the budget at the corporate office the Zonal offices allocate targets to the Regions who in turn allocate budgeted targets to the branches., for achieving the goal.
9. Approval of Board: Since budget is a policy document it requires approval of Board of Directors who ensures that the budget meets corporate vision, meets aspirations of various sections of economy and government directives.

Performance monitoring:

The efficacy of budgeting is lost if the performance is not measured and monitored with the budget. Therefore it has to be checked with budgeted level under each activity and this has to be done at several points of time during the year.
Successful implementation of strategies requires a well-designed control system. Planning and control are inseparable. They are the Siamese twins of management. Any attempt to control without plans is meaningless. Monitoring is:
1. Comparison of performance across various time periods
2. Comparison of performance with industry norms and key competitors
3. Monthly targets for branches fixed on the basis of budgets
4. Monitoring on monthly basis or at pre-decided interval

As whole economic system is dynamic the performance under all heads will not match with the budgeted level there are bound to be variance which can either be positive or negative..

Variance: -

Variance is the difference between the budgeted level of performance and actual performance. Reasons for the variance have to be ascertained for taking corrective measures. The actual performance results vis a vis budget provides the manager a ready opportunity to look at the totality of the branch performance. It also helps in identifying the areas of critical importance, Variance may occur due to

· Preponement or postponement of certain assumed events
· Change in external environment which might have upset the assumption
· The assumption might not have been correct

In a scientific system of budgeting a mere explanation for the shortfall is not adequate unless it is accompanied by suggestions for correction.

The efficiency of a system is measured by the efficiency with which the inputs are transformed into outputs.

Types of Financial and non-financial budgets:

· Revenue and Expenditure Budget: It is the most common budget. It spells out plan for revenues and operating expenditure in monetary terms. This is worked out on the basis of projected business growth,ie deposits and advances and income generated from advances and amount spent towards payment of interest, staff expenses and other expenses,
· Capital Budget: -These budgets outline expenses for fixed assets, plant, machinery equipment, furniture and fixtures etc.
· Staff Budget: With the growth in business, requirement of man power increases. Branches also project their man power requirement in the budget.
· Time. Space, material and product Budgets: - These are the budgets expressed in non-monetary terms viz. quantities, qualities, product innovation, layouts, and time schedule.etc.

Budgets can be prepared in following manner: -

· Variable or Flexible Budgets: - Variable budgeting involves selecting some unit of measure that reflects volume;. The variable budget is based upon an analysis of expense items to determine how individual costs would vary with volume of output. Some costs do not vary with volume, particularly in short period viz. depreciation, property taxes, insurance, maintenance of plant and equipment, cost of supervision, etc. Stand by cost, or period cost such as maintaining a minimum number of key or trained personnel for advertisement or sales promotion and for research. Variable budgets work best when business volume can be reasonably well forecast and when long-range plans are made so that level of expense will not have to be changed.

· Alternative and Supplementary Budget: -This is modification of variable budgeting. Some times budgets for high level of operation, medium level, and a low level are prepared for each organizational segment for 6 or 12 months in advance and at a stated time it is informed which budget is to be used for planning and control. Budget flexibility is also obtained with supplemental budget depending on the business forecast. This budget gives authority for scheduling output and spending funds above the basic budget if, and to the extent that, the short-term plans so justify.
· Zero –Base Budgeting: -This is basically for cost control The idea behind this technique is to divide enterprise programme into packages composed of goals, activities and needed resources and then to calculate costs for each package from the ground up. The costs are calculated a fresh for each budget period, thus avoiding the common tendency in budgeting of looking only at changes from a previous period. The advantage of this technique is that it forces managers to plan each programme package a fresh. This helps in reviewing established programme and their costs in entirety along with newer programmes and their cost.

Strategic Planning: - It is a plan to achieve a vision. It is planning different options .It reflects a path, which will enable an organization to reposition itself as a competitive and progressive organization in future. While making a strategic plan. One would have to assess the organization’s current position and strengths and weaknesses, determine the organization’s future desired position and evaluate the marketplace opportunities. Strategic planning can position an organization to see beyond the present by focusing on what clients will want in the years ahead.