What Is a Budget Allocation?

Budget allocation is an important part of all business and not-for-profit financial plans. Budgets are typically set annually and involve allocating anticipated income and resources between different departments and business interests. The amount of funding allocated to each area imposes restrictions on the scope of a department’s development. For example, if there is a reduction in funding, then some staff may have to be made redundant.

Budgets are normally reviewed annually and set for a 12- to 24-month period. Budgets are normally set on the basis of the previous year’s expenditures, plus or minus any changes in spending, such as the recruitment of new staff or adjustments in staff salaries. For example, in a university or school, each department or faculty is given a set amount of money to spend over the course of the year. The department head normally takes responsibility for allocating the funding to his staff. A budget aims to take into account all expenditures, including staff salaries, the cost of buying resources as well as miscellaneous expenses for any unforeseen needs. In an educational institution, the expenditure is normally calculated at a cost per child for the purposes of grant writing and funding.

Typically, budgets are divided into allocation components. These are often based on the business' or institution's core priorities. For example, in a university setting, typical components are student enrollment and research. Many institutions also include performance incentives in the budget to boost staff morale. The components are divided into a matrix, and a monetary value is allocated for each component. This is further divided into a value for the subcomponents.

Budgets normally include a percentage rate of adjustment, which is typically between 2 and 5 percent. This allows for unforeseen expenses and under or over estimation of expenditures. Budgets are reviewed and adjusted periodically throughout the year to account for changes in expenditures and income.

If a business or educational institution operates in multiple geographic areas, a geographic location adjustment is included in the budget. This accounts for different living costs and wage levels in different areas, often including a hardship allowance for those living in developing countries. Typically, a cost-of-living index is used to calculate the typical cost in each area and the budget is adjusted accordingly.