Chapter 4

Budgeting and performance reporting

4.1. Budgeting
Budgeting is a process of looking at a business, estimated incomes (the money that comes into
the business from selling products and services), and expenditures (the money that goes out
from paying expenses and bills) over a specific period in the future. It allows a business to see if
it will be able to continue operating at its expected level with these projected incomes and
expenditures.
Budgeting is the process of allocating scarce resources to unlimited demands. More specifically,
it can be defined as a plan of financial operation embodying an estimate of proposed
expenditures for a given time and the proposed means of financing them. A budget is a statement
that shows the financial plan for the accomplishment of an operation. It is a plan stated in terms
of money. When we assign/estimate resources required for a certain task on our plan that is
called budgeting.
We might summarize the process of budgeting into three basic questions.
• Where will we get the money from?
• How much can we send?
• Why will we spend it?
4.2. Uses of Budgets
The purpose of a budget is to plan, organize, track, and improve your financial situation. In
other words, from controlling you are spending to consistently saving and investing a portion of
your income, a budget helps you stay on course in pursuit of your long-term financial goals.
In fp, the primary usefulness of budgets is planning.
In governments management plans and laws
 Control the activities authorized to carry out plans
 Prepare statement that permit comparison of actual results with budget and evaluation
of variances
Planning is a special concern for the following reasons:
1. The type, quantity and quality of governmental goods and services provided are not normally
evaluated and adjusted through the open market mechanism

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 2. Governmental goods/services (education, health, police etc) are often among the most critical
to the public interest
3. The immense scope and diversity of modern government activities make comprehensive,
thoughtful and systematic planning a pre-requisite to orderly decision making
4. Government planning and decision making is generally a joint process involving its citizens
4.3. Classifications of budgets
States and local governments typically prepare and utilize several types of financial plans. It is
therefore important to distinguish among the various types of budgets, to understand the phases
through which each may pass and to be familiar with commonly used budgetary terminology.
There are five classifications of budgets and two types within each classification.
Capital or current
Sound governmental fiscal management requires continual planning for several periods in to the
future. Most governments are involved in programs to provide certain goods and services
continuously and/or for acquisition of capital items. Multi-year schedule for acquisition of capital
items is called capital program. At the beginning of each year the balance that fall in the current
period will be included in the capital budget.
A. Capital budgets: - deal with the acquisition of fixed assets. The legislature will likely approve
the acquisitions one year at a time. But planning for the acquisitions several years in advance
(called the capital program) is very helpful to wise management of resources.
Typically used for acquisitions requiring several years that contains portion for current year
and for future years
B. Current budgets; - are concerned with the current year’s operating expenditures, sometimes
called recurring expenditures, because similar sorts of expenditures are needed year after year.
Also known as operating budget
Contains proposed expenditures for current operations, debt service, & estimates of
expendable resources to be available during the year
Tentative or enacted
One key distinction among budgets is their legal status. Various documents may be called
budgets prior to approval by the legislative body.

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A. Tentative;-as the name implies, the tentative budget is still in process. It has not yet been
officially approved.
B. An enacted budget: - it has been officially approved and is a binding legal document.
General or special
The names of this classification are not quite as they sound. Budgets of governmental activities
commonly financed through the general, special revenue, and debit service funds are referred as
general budges.
A. General budget;- is typically used for general governmental activities financed through
general fund, special revenue funds, & debt service funds a budget prepared for any other
fund is special.
B. Special budgets are commonly limited to capital project funds, though enterprise and
internal service funds do sometimes formally budgeted. Special budget is a budget enacted
for any other type of activity
Fixed or flexible
A. Fixed budgets are for a fixed total dollar (or birr) amount and cannot be exceeded. The
allocated amount should not be exceeded.
B. A flexible budget, on the other hand, fixes the cost per unit of goods and services. If more
units of goods and services are desired because of a change in circumstance or need, the
dollar amount of a flexible budget can increase.
4.4. Approaches to budgeting
There are different types of budgetary approaches which differ to each other in their emphasis on
planning, control and evaluation. These approaches fall in to two categories: modern and
traditional approaches
I. Modern (rational) approaches to budgeting
The modern approaches to budgeting are sometimes called rational. That is because they all
advocate thinking carefully about the relationship of inputs, with a special concern for the
outputs. Outputs are the goods or services actually provided; inputs are the resources that go in
providing those goods or services. Thinking carefully also involves analyzing the costs and
benefits of alternative methods of achieving objectives. The ―big-picture is the idea that
lawmaking bodies should focus on broad policy objectives rather than details of spending for
particular departments is emphasized. Long term, ultimate goals are stressed rather than annual
budget requests.

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Attention is directed to continual evaluation of services which are being performed. The different
modern approaches are considered; each one is explained briefly, below.
A. Performance budgeting
Performance budget is a budget that bases expenditures primarily up on measurable performance
of activities and work programs. It focuses on the outputs generated by the department or
organizational unit, rather than looking primarily at the cost of the inputs. In this type budgets
attempt will be made to relate the input of governmental resources to the output of governmental
services. To provide the legislative body with a reasonable justification for its budget requests,
each department must do some clear thinking about what it is trying to do and how best to do it.
Under, pb, budgeted expenditures are based on a standard cost of inputs multiplied by the
number of units of an activity to be provided in that time period. The total budget for an
organization is the sum of all the standard unit costs multiplied by the units expected to be
provided
The performance budget is mainly concerned with only one year at a time. Basically, the process
of making the budget may be summarized as follows:
 The governmental entity decides what type of services to offer.
 The entity decides how many units of the service to offer.
 The cost of one unit of the service is calculated.
 The budget is determined by multiplying units of service by the cost per unit.
Advantage
 It emphasis on inclusion of narrative description of each proposed activity within the
proposed budget
 Organization of the budget by activities, with requests supported by estimates of costs
and accomplishments in the quantitative terms and
 Its emphasis on the need to measure output and input
Limitations
This approach is fundamentally sound but has the following drawbacks
 Many government services and activities do not appear readily measurable in
meaningful output units or unit cost terms
 This style makes data gathering difficult and impossible
 Need highly qualified skill man power?

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 B. Planning-programming-budgeting (PPB)
Program budgeting refers to a variety of different budgeting systems that base expenditures
primarily on programs of work and secondarily on objects
Ppb emphasizes broad policy goals, strategies and objectives, rather than details of spending. In
looking at these broad goals and objectives, it considers long-range plans. In those long range
plans both ultimate goals and intermediate objectives must be explicitly stated. After formulating
the long-range plans, it then evaluates costs and benefits of different ways of meeting the goals
and objectives. It also emphasized the governments overall program, rather than a specific
department. For instance, both the ministry of health and the ministry of education might have
some sort of aids program one for treatment and one for education. If the idea of ppb were
adopted, both of these programs would be looked at together to see they complemented each
other in meeting the government's overall objectives.
Distinctive characteristics of PPB
 It focuses on identifying the fundamental objectives of the government and then relating all
activities to them
 Future year implications are explicitly identified
 All pertinent costs are considered
 Systematic analysis of alternatives is performed
Advantages
 Unlike performance and traditional budgeting which based principally on historical data and
focus in single period, ppb emphasizes on long range planning in which (i) ultimate goals
and intermediate objectives must be explicitly stated and (ii) the costs and benefits of major
alternative courses to achieve these goals and objectives are to explicitly evaluated
 It assumes that all programs are to be evaluated annually so that poor ones may be weeded
out and new ones added
 It can be adapted to any level
Limitations
 It is quite difficult to formulate a meaningful, explicit statement of government goals and

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 objectives that can be agreed by all the concerned
 Official change matters on its effectiveness

 Need highly qualified personnel

 Objective measurement is difficult
C. Zero-base budgeting (ZBB)
Zbb is one method of continually evaluating programs and services. The primary idea of ZBB is
that each program must justify its existence every year. No program is assumed to be continuing
from one year to the next. In this approach, the starting point for the budget each year is zero.
First the program itself must be justified, then different ways of carrying out the program are
examined, and the best is chosen.
The basic tenet of zero-based budgeting (ZBB) is that program activities and services must be
justified annually during the budget development process. The budget is prepared by dividing all
of a government's operations into decision units at relatively low levels of the organization.
Advantages
It requires annual revision of all programs, activities, and expenditures. This helps to
 Save money by identifying outdated programs and unnecessary high levels of services
 Concentrate the attention of officials on the costs and benefits of services
 Cause a search for new ways of planning and evaluation
 Provide better justification for the budget
 Improve the decisions of executives and legislative bodies
Limitations
 It requires a great deal of paperwork, staff time, and effort to identify and rank decision units
and package
 It is difficult to obtain the data to compute costs of alternative methods of achieving objectives
and of alternative levels of services
II. Traditional approach to budgeting
For the reasons stated above, the modern approaches have not been adopted as widely as might
be expected. The traditional approach, called object-of-expenditure (OOE), is still the most
widely used. The objective of the OOE budget is to have an expenditure control orientation. It is
to simply list expected expenditures and then say how much is required for each one. This
approach involves three facets:

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1. First, subordinate agencies submit budget requests to the chief executive in terms of the type
of expenditures to be made. These requests include the number of people to be hired in each
specified position and salary level and the specific goods or services to be purchased during
the upcoming period.
2. Next, the chief executive compiles and modifies the agency budget requests and submits an
overall request for the organization to the legislature in the same object of expenditure terms
3. Finally, the legislative body usually makes line-item appropriations, possibly after revising the
requests, along object-of-expenditure lines.
Advantages
 It is simple to prepare and understand
 It .allows a great deal of control over expenditure, and
 It fits with practical realities.
Limitations
 It is overly control-centered to the detriment of the planning and evaluation process
 It provides only a list of proposed personnel to be hired or goods to be purchased for decision
makers. It is only decision makers who are familiar with the department's function and
activities who understand the justification
 It is long-range planning, program justification, and outputs achieved are not necessarily
formally considered. In other words, it doesn’t encourage asking of the questions, why are we
really spending this money? Or, what are we getting for the money we are spending? Or,
could this objective be better met by another means?
4.5. Performance budgeting and reporting
A budget performance report is the comparison of planned budget and actual performance. It
allows for the comparison of the actual account transactions in a specific period with the budget
figures for the same periods.
A performance report is a report on the performance of something. They are routinely
produced by government bodies which, being financed by public money, are required to show
that the money was spent efficiently and usefully.

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 A performance report should compare results in relation to prior years' results in order to show
whether performance is stable, improving or declining.

4.6. Budgets and outturn reporting (IPSAS 24)

Outturn is defined as the actual amounts, results etc at the end of a period of activity, usually at
the end of each quarter or year, rather than those that were expected or calculated earlier.
Budgetary outturns are set of operations that lead to the collection of expected income and to the
payment of expenditure set out in the state budget.
The purpose of report budgetary outturn is:
1. To report on the general fund revenue and other funds outturns for the current period and
provide details of significant variations from the revised estimates and consider carry forward
requests.
2. This report includes details of the general fund revenue account and the collection fund
outturns, plus a summary of the general fund and other funds programme. The information in
these reports will then be incorporated into the published statement of accounts.
3. The external audit of the accounts is due to start at the end of the period. The formal published
statement of accounts will be presented to the standards and audit committee for approval at
the end of July on the conclusion of the audit.
4. The strategy also defines how under or overspends should normally be treated at the end of
each financial year:
 Any underspend on the general fund will be transferred to the budget reserve or any
designated fund;
 Any over spend on the general fund will be met from the budget reserve or other
general reserves.
 Surpluses arising in the year that are not required for operational purposes will be
transferred to the general fund.
5. The report also shows the summary revenue account, comparing the outturn with both the
original and revised estimates for the financial year. A summary of the most significant
variances is indicated whether there was surplus or deficit.
 The outturn surplus or deficit is included in the report in the form of an annex

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  Further work will be undertaken to establish which variances are likely to recur in
future years. The results of this exercise will be included in the next budget monitoring
report to cabinet.

As mentioned above, as per ipsas 24, public entities are required by law to make public their
approved budgets while others freely opt to do so to enhance their public accountability and
transparency. A public entity which makes public its approved budget is required by ipsas 1 and
24 to present a comparison of (original or final) budget amount and actual amount in its primary
financial statements
It also demands to provide a note, an explanation of material differences between the budget and
actual amounts, unless such explanation is included in other documents issued with the financial
statements and a cross reference to those documents is made in the notes to the financial statements.
Fiscal transparency is a major contributor to the cause of good governance. It leads to an informed
public debate on the design and results of fiscal policy and makes governments more accountable for
the implementation of fiscal policy. Fiscal transparency requires disclosure of more than just budget
(and actual) figures. It also requires disclosure of information on the macroeconomic assumptions
behind budget figures and f/statements.
The IMF code of good practices on fiscal transparency recommends four key objectives:
1. The roles and responsibilities in government should be clear
2. The public should be provided with full information on past, current, and projected fiscal
activity of government in a timely manner
3. Budget preparation, execution, and reporting should be undertaken in an open manner; and
Fiscal information should attain widely acceptable standards of data quality and be subject to
independent assurances of integrity