|Management of agricultural research: A training manual. Module 7: Financial Management (1997)|
|Session 2. Financial management 2: Planning and budgeting|
|Reading note: Financial management 2: Planning and budgeting|
For administrative purposes, the organization is divided into a number of departments. Each department interacts with the others and cannot function independently. The sum total of activities of all departments helps the organization to achieve its objectives and goals. Management may choose to treat all interactions as 'black-box' events and not prepare plans for future activities and programmes. In that case the net results and interrelationships would not be known. The process of bridging the gap, if any, would be done in an ad hoc manner. The process would look like something like Figure 1.
Arbitrary cuts may be imposed on the supposition that there is more scope for improvements and efficiency. In reality, that may not be the case, and services may get affected. The cuts will have an impact on the goals and objectives of the organization.
The organization should react to such shocks and surprises in some systematic manner. Management must have advance information on possible deficits. For this reason it has to plan and prepare budgets. Planning may also help the organization to establish concrete goals for motivating people to perform better, and provide standards for measuring performance. Without planning, the organization is like a black box: not knowing how things are happening and how interrelationships and interdependencies work. Planning alerts management to potential problems, and the result is better management of resources.
Analysis of deficits helps management to identify reasons and take corrective actions. Sometimes it is argued that all non-profit organizations will have deficits. This may be true, but then how much? All organizations incur certain costs in order to perform their activities. To meet these costs, the organization gets funds from government or other agencies. Whatever activity the organization is performing, it has cost implications (Figure 2). Deficits arise because of a number of reasons, including those considered below.
Inefficient utilization of resources Planning can alert management as to whether or not resources are being used effectively and efficiently. If there are inefficiencies, this can be overcome by improving performance. For this the organization requires to:
· clearly state the objectives of the activity or programme;
· prepare budgets for each activity or programme;
· have better communication and coordination of activities; and
· control the performance of activities by providing effective measures for performance.
The scale of activities can be another reason for deficits. This arises when the organization is trying to perform more than it is capable of within the given amount of resources. In such situations, management of deficits becomes difficult. To overcome this problem, the scale and level of activities should be regulated.
Inadequate funding appears usually as the problem of scarcity of resources to perform a given level of activity. Management may be required to identify potential sources of revenue in case financial resources are not adequate. Sometimes, because of seasonal and other constraints, projects have to be initiated. New projects are initiated in anticipation of funds available. Budgeting may help management to explore the possibility of stretching funds from other projects. In cases of non-availability of funds, the project may have to be shelved or the scale of the project reduced. A detailed budgeting exercise may help management to utilizing funds in the most effective manner by synchronizing cash inflows and outflows.