Business

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In the business field, a budget is defined as a plan for an organization’s activities on expenses and revenues for a particular period (Bouckaert, Peters & Verhoest, 2016). A budget, therefore, is the primary tool in business for planning, controlling and tracking spending of an organization. The main purpose of the budget is to ensure that spending follows a plan, support the business objectives and stays within the present limits as well as does not exceed the available funds.

Incremental budgeting refers to the traditional method of budgeting whereby the budget is prepared by taking the current period’s budget or the actual performance as the base where the incremental amounts will include the adjustments for such things as inflation or the planned increases in the sales prices and the costs (Sridhar, 2017). The incremental type of budgeting is based on slight changes from the preceding periods budgeted results or either the actual results. It is a common approach in businesses where the management does not intend to spend a great deal of time in the budgets formulations or in the instances the organization does not perceive any significant need in conducting a thorough re-evaluation of the business. The particular mindset often occurs in times when there is not great deal of competition in an industry such that the profits tend to be perpetuated from one year to the next.

There are several advantages that arise from the use of the incremental budgeting (Wildavsky, 2017). Simplicity is one of the advantages as the budget is based on either the recent financial results or a recent budget to which can be readily verified. If a program requires funding for multiple so that it can achieve a certain outcome, the incremental budgeting is therefore structured to ensure that the funds have a continuous flow of the program thus ensuring funding stability. Operational stability is an approach to which ensures the departments get operated in a manner that is consistent and stable for long durations of time.

Anything that has an advantage has, however, possess some downsides as well. Similarly, the incremental budgeting is faced with several disadvantages. The incremental nature of the incremental budget assumes that there are only minor changes from the preceding period, when in fact there might be major structural changes in the business or its environment that call for more significant budget allocations. The incremental budget is known to foster overspending, it facilitates an attitude of use it or loses it in the regards to the budgeted expenditures since a drop in the expenditures in one period will be reflected in the future periods as well. Managers tend to build too little revenue growth and excessive expenses into the incremental budgets such that they can always have favorable variances thereby creating a budgetary slack.

In the incidences to which the budget is carried forward with minor changes, there tend to be little incentives to conducting a comprehensive review of the budget, such that the inefficiencies, as well as the budget slack, get to be automatically rolled into new budgets. Also, when the incremental budget is based on a previous budget, there always tend to be an increasing disconnect between the budget and actual results thus creating a variance from the actual budget. If a certain amount of funds get allocated to specific business areas in a previous budget, then the incremental budget assures that funding will be allocated in the same use in the future. Even if it no doesn’t need as much funding or if other areas require more funding and thus perpetuates resource allocation. Furthermore, since the incremental budgeting allocates most of the funds to the same use each consecutive year, it is difficult to get a huge funding allocation to direct a new activity. Thus, the incremental budgeting tends to foster the conservative maintenance of the status quo and thus does not encourage risk-taking.

Shortly, the incremental budgeting results in such a conservative mindset in a business that it might be a noticeable driver in destroying a company over the long term. One should instead engage in a thorough strategic re-assessment of the premises when preparing a budget as well as a detailed search of expenditures. Therefore, there should be significant changes in the allocation of funds from duration to duration as well as the targeted operational changes to which are intended to improve the competitive positions of a business.

Public budgeting is both a technical and a political process, and thus the approaches to public budgeting can thereby influence the extent and exercise of political power by the appointed professionals as well as the elected officials in governance (Simonsen, 2018). According to major critics, public budgeting has contributed to political power and bureaucratic growth. The budgetary process can also act as the arena in which the elected political officials demonstrate as well as enhance their power.

The main objectives of a government’s budget include reallocation of resources, reducing inequalities in the income and wealth, management of public enterprises, economic stability, reducing regional disparities as well as enhancing economic growth. The government prepares the budget for fulfilling certain objectives to which are direct outcomes of the government’s economic, political and social policies. Just like the other type of budgets, the incremental budgeting is not an exception and therefore tends to cover the same purpose just like the other budgeting types.

Reallocation of resources is among the main function of the budget to which the government and the public institutions use for the incremental type (Barr, 2018). Through the budgetary policy, the government reallocates resources by the economic; profit maximization and the social; public welfare priorities of the country. The government can influence the allocation of the resources through Tax concessions or subsidies to encourage investments to the producers. In one such an example is when the government discourages the production of harmful consumption of goods such as cigarettes and liquor through heavy taxes. The government may encourage the use khaki products through the provision of subsidies to the production and manufacturing sectors. The government can as well influence the allocation of resources through direct production of goods and services that is especially when the private sector does not have interest in a particular sector or in the case to which the private sector has assumed monopoly in production. Through allocation of resources, the government is capable of reviving all the falling projects in a country by using the incremental budget, which is adding an extra amount to the previous allocation such that the preferred projects attain the required stature. Therefore, the incremental budget is an important factor in the allocation of resources especially financial assistance to the crippling fields or those that need the government’s assistance.

The government uses budgeting as means of reducing the inequalities in income and wealth (Rubin, 2016). The economic inequality is an inherent part of every economic system in a country. The government aims at the reduction of such inequalities of income and wealth via its budgetary policy. The government further aims to influence the distribution of income through the imposition of taxes on the wealthy and spending more on the welfare of the poor people within its boundaries. The government will reduce the income of the rich and raise the standard of living of the poor and thus reduce the inequalities in the distribution of income. The main reason for the use of the incremental budgeting by the government to reduce inequalities in the income and wealth is because the incremental budgeting carries forward all the previous allocations of the budget to the next year. Thus it’s more influential in the wealth distribution and ensuring justice among the rich and the poor. Poor individuals have a bigger advantage with the use of the incremental budgeting as the budget favoring their side continues to be added and no matter how much it has previously been allocated.

Budgets are mainly prepared to ensure economic stability, and that’s why the core purpose of the budget is planning (Lorain, García Domonte & Sastre Peláez, 2015). The government uses the budget to prevent business fluctuations of inflations or deflation to achieve the objective of economic stability. The government is aimed at controlling the different phases of business fluctuations through its budgetary policies. The policies of surplus budgeting during the inflation as well as deficit budgeting during deflation aids in the maintaining of stability of prices in the economy. In the same case, the incremental budgeting is used by the government to reduce inflation through controlling the different phases of the business by allocating more funds to the times where there is monetary issues or deficit that need to be corrected putting the business in line again.

The government is mandated with the responsibility for the management of public enterprises through budgetary allocations and control (LÊgreid, 2017). There exist large numbers of the public sector industries especially the natural monopolies that are established and managed for the social welfare of the public. The budget is prepared with the main objective of making the various provisions for the managing of such enterprises and providing for the financial assistance to them. The incremental budgeting is thus of great importance to this sector of public welfare as it ensures that the public enterprises are continually allocated the funds that ensure their sound running thus preventing collapsing. The government is the sole proprietor of the public enterprises is mandated to ensure their smooth running, and thus the decision to use the incremental budget is more than suitable as the institutions serve the public interests.

Planning and budgeting go a long way to ensuring the economic growth of a country. Budgetary allocations contribute further to the growth of the economy that is influenced by proper planning. The growth rate of a country much depends on the rate of savings and investments (Brys et al. 2016). For this reason, the budgetary policies aim to mobilize sufficient funds and resources for the investments in the public sector. Therefore, the government is mandated to making various provisions in the budget to raise the overall rate of growth of the savings and investments in the economy. It is evident that for the country to grow economically sound, proper budgeting and planning are essential. The government uses the incremental budget to facilitate the growth of the economy via injecting a lump sum of finance into the required sector. The constant increment of the budget facilitates the growth and expansion of the targeted business and therefore. As a result, the gross domestic product of a country is targeted to rise improving the economy of the country.

Reducing regional disparities is another way to which the incremental budget is aimed at improving. The government’s budget is aimed at reducing the regional disparities through taxation and expenditure policies for promoting the setup of production units in economically backward regions. For this purpose, the incremental budget is used to inject funds on the neglected regions aiding in their resuscitation to reach the rest of the regions even if not fully but at least reach an average level. The budget furthermore is used to assist the individuals with low incomes by availing more job opportunities that are eventually aimed at raising the living standards of the people in the region.

There are three values that are used during the planning and budgeting and they include efficiency, efficacy and accountability (Bryson, 2018). Efficiency focusses on the process of the system of the program and its conversion of the inputs or the resources into the outputs making the value appropriate for the performance budgets and most in line with the management and the steering functions. Efficacy focusses on the outputs and the outcomes and thus measures the impact of the policies. Accountability refers to being open for scrutiny and thus it focuses on the inputs that are injected into the system or the program in action and therefore it is best characterized by the line item budgeting approach and best suited for the control and monitoring of a budget. Incremental budgeting is therefore of much importance to the government despite the drawbacks that it assumes in accomplishing the task of proper budgeting. The government has for years used the incremental budgeting to improve their economies as well as boost certain investments in their region. In case there is a negative flow in productivity especially the public sector, the government may inject more resources in addition to the previous allocated in order to make up the mess and keep things working out well. Therefore, the incremental budget has for decades been used by the governments in the public sector aimed at safeguarding the public from private exploitation and monopoly thereby serving the public in the best way. Despite the fact that most governments use the incremental budget to amass political power and support, the incremental budget has been of great value to many.

References

Barr, M. J. (2018). Budgets and financial management in higher education. John Wiley & Sons.

Bouckaert, G., Peters, B. G., & Verhoest, K. (2016). Coordination of Public Sector Organizations. Palgrave Macmillan.

Brys, B., Perret, S., Thomas, A., & O’Reilly, P. (2016). Tax design for inclusive economic growth. OECD Taxation Working Papers, (26), 0_1.

Bryson, J. M. (2018). Strategic planning for public and nonprofit organizations: A guide to strengthening and sustaining organizational achievement. John Wiley & Sons.

LÊgreid, P. (2017). Transcending new public management: the transformation of public sector reforms. Routledge.

Lorain, M. A., García Domonte, A., & Sastre Peláez, F. (2015). Traditional budgeting during financial crisis. Cuadernos de Gestión, 15(2).

Simonsen, W. (2018). Citizen participation in resource allocation. Routledge.

Sridhar, M. S. (2017). Unit-11 Budgeting Techniques. IGNOU.

Wildavsky, A. (2017). Budgeting and governing. Routledge.