A budget is a document that breaks down the costs of a project or an operation. It may also include an income forecast to replenish the funds to be spent. In a business, that might include an estimate of sales over the next fiscal year. For a governmental body, it could be a projection of tax revenues. Though a budget theoretically allows an organization to run effectively within its means, it also may become a tool for parties with conflicting agendas in either a business, political or a not-for-profit organization.
Recent projections on the cost of entitlements and other federal programs have prompted very different reactions in the U.S. Government. Most politicians agree that government must reduce the deficit. However, their agendas diverge at this point. Some politicians have cited budget projections from the OMB (Office of Management and Budget) as a clarion call to cut or eliminate programs to reduce the federal deficit. At the same time, others have used the OMB’s numbers as a means for justifying the current tax brackets, if not increasing them on wealthy individuals.
Idealism vs. Reality
Many business plans employ optimistic sales forecasts in their budgeting to attract investment. For instance, a web startup claims that it will make a $1 billion profit within five years as long as venture capitalists give it $5 million in funding. These stratospheric numbers may function as a good motivator for the sales team if they receive a percentage of the profits. While a brilliant idea may allow a business to achieve a lofty financial objective, it also creates problems for the financial officer who needs to manage day-to-day operations. For instance, if the company generates $10 million instead of $20 million in revenue, the budget will need to be slashed. The resulting budget cuts will slow company growth, shrink paychecks and demoralize the work force.
Coordination vs. Change
An organization's budget may be an effort to coordinate the operations of its various branches. For instances, the budget defines how a factory purchases certain types raw materials for its labor force to produce widgets. However, if widget sales are in decline, senior management may want to cut funding in that area and reallocate it to design of another product that will increase company income. Unfortunately, the financial implications of this change cannot be estimated accurately. While the widget division has made the same thing for 20 years, the design team only has a vague grasp of the manufacturing cost and potential sales for the new product. Confusion and frustration may result in this scenario. At the same time, the company may only be able to stay in business by getting out of the widget business. While the budget should be a tool for coordination, it also should have the flexibility to adapt to changes in an evolving marketplace.