A budget is a plan or a forecast prepared by a business for a specific amount of time expressed in financial terms. Businesses make budgets for their routine accounting period, which is usually equal to one year.
There are many reasons why businesses prepare budgets. Budgets are mainly a planning and control tool; however, they can be used as a communication, coordination, and evaluation tools as well.
Budgets can also help in motivating the employees of a business and defining authorization channels within the business.
There are many types of budgets, such as incremental budgets, zero-based budgets, rolling budgets, activity-based budgets, top-down budgets, bottom-up budgets, etc. Similarly, a type of budget that is most commonly used by nonprofit organizations is a program budget.
A program is generally a project taken for a longer period, for example, over a season, over a year, or several years. Nonprofits obtain these programs from different sources with the goal of completing specific tasks.
Typically, the program contract specifies all the tasks that the organization must perform along with other terms of the contract.
A program budget is a budget set for a specific program. The program budget is a framework through which organizations allocate different resources to different departments or teams for a program.
It can assist a business manage the cash flows of a program. A program budget will generally contain the revenues, often received as donations, and expenses of the program. Every program undertaken by an organization will have a separate specific budget.
A program budget, unlike other types of budgets, is a much stricter budget. This is because the donors of the program set the budget and the organization must strictly adhere to it.
Sometimes the program agreement or contract will have specific instructions regarding the program budget and terms regarding any consequences if the organization does not follow the budget.
Nonprofit organizations may also have more than one program running at the same time. For some programs, the donor of the program provides their desired budget to the organization.
However, some times the organization that receives the donation will be asked by the donor to prepare a program budget which will then be approved by the donor.
Either way, the organization needs to separate its budgets for all its undertaken programs.
While program budgets are most commonly used by nonprofit organizations, as mentioned above, other types of businesses can still make use of them. For example, a business can use program budgets to budget for specific projects received from a big client.
This budget will consist of all revenues earned from that specific client and all expenses borne on the client’s orders or project. Shared expenses will need to be apportioned to the project using a valid basis.
Advantages of Program Budget
Program budgets have several advantages for nonprofit organizations and businesses. The first advantage of program budgets is that these budgets can act as a monitor and control tool within a business. The performance of the actual program can easily be monitored and controlled against the budget after its finalization.
Program budgets also help the business identify any areas where costs are exceedingly high and, thus, assist the business control these costs. This can result in savings for the business. It also helps the business set standards to measure actual performance against in the future.
Similarly, program budgets can assist the business in determining the priority of different projects and dedicate resources to the programs accordingly. Once a business prioritizes its programs using the budget, it can allocate resources to the programs accordingly, thus, also helping the business with effective resource allocation.
Disadvantages of Program Budget
While there are many advantages of program budgets, these come with their disadvantages. One of the drawbacks of a program budget is that it requires accurate and complete data for its proper preparation.
If the data used to create the budget is incomplete or inaccurate, it can result in an unreliable budget that is not effective. These inaccuracies can also further the costs of the program and the business as a whole.
Similarly, if there are any unexpected changes in the actual performance of the business due to any reason, it can throw the budget off the path. This is because, businesses with many projects, need to allocate resources need to a specific project at a particular time.
Any changes within the resource allocation schedule can not only affect one project but all other projects that depend on these resources.
Finally, program budgets need to be governed by many departments within the business. This makes it difficult for the business to trace any budgetary issues to a specific area of the business for a particular program.
A budget is a tool used to plan or forecast the future performance of a business. The type of budget used to plan specific programs is known as a program budget.
Program budgets are more commonly used within nonprofit organizations, although, other types of businesses can also benefit from them. There are many advantages of program budgets, for example, usage as a monitor and control tool, used to identify high-cost areas, or used to prioritize the allocation of resources.
However, these budgets may also have some disadvantages, for instance, inaccuracies within the budget can be costly, unexpected events can disturb the allocation of resources and it makes tracing issues difficult.