Budgeting: An Analysis of the Basic Key Concepts

A budget is normally defined as the amount of money in a given year that an organization is allocated to spend. However, the budgeting process runs much deeper than this superficial explanation. If done properly, the process of budgeting can be one of the most powerful tools utilized to ensure the continued viability of your department in a time of increasing demand for efficiency by those bodies responsible for allocation of funds. Having a basic understanding of what a budget is and the process that occurs over a budget period is important even for managers who are not directly responsible for the budget itself.

What Is a Budget?

A budget can be defined as a planning and control system: a financial action plan that the organization intends to follow for a specific period of time. Notice that this is an action plan that the organization intends to follow for a specific period of time. This indicates that a budget is part of a process that is initially developed, then continuously monitored over time, and is a monetary declaration of action for that period. Your department’s budget will consist of several different components:

• Goals and objectives

What you hope to achieve with the funds during the upcoming budget period

• Justification

Information that supports any requested increases in funding

• Operating budget

What most of us are familiar with—the daily expenses

• Capital needs assessment

Replacement of items like vehicles and building new stations

• Cash-flow report

A statement of the timing of cash inflows and outflows.

Reasons for Budgeting

There are several important reasons for the development of budgets:

Budgets compel planning

Budgeting will move your department from a reactive style to a proactive style of management by allowing the management team to spend more time on preventive measures rather than spending time solving unanticipated problems.

Improved communication and coordination

The process of formulating a budget forces management to communicate their individual plans and coordinate activities. Ultimately, this communication and coordination should also be filtered down to your employees in order to provide direction to your field staff.

A guide to action

The budget provides clear direction to your key officers, supervisors and employees concerning expectations of performance during the period.

Budgets provide a basis of performance evaluation

This process is an important part of what is termed as management by exception, where you are able, as the person responsible for the budget, to direct your attention to only those activities not proceeding according to plan.

During the Budget Period

The budget is completed and approved—so what now? More important than preparing the budget is maintaining it over its life cycle. The budget must be monitored on a regular basis. This entails the concept mentioned above: management by exception. Another term for this is variance analysis. No budget cycle is perfect—anticipated revenues and expenses will rarely match their actual counterparts exactly. The various accounts must be monitored for differences deemed significant and proper action taken to correct any deviations, if possible. An important concept here is that what is deemed as a significant amount for one budget may not be as important for another. The amount of tolerance in account deviations can depend on several factors, as set by that budget’s management team. These factors should be agreed to in advance of any discovered deviations during the budget cycle.

An example of this process is a department’s fuel accounts. Let’s say that this department operates on a biennual budget cycle, meaning that the budget is set for two years. During the second year of this cycle, there are sharp increases noted in the amounts spent on fuel. This particular account is at 110% of its budgeted amount based on comparative historical figures with eight months left in the budget cycle. This deviation is obviously a cause for concern and needs correction. But is it correctible?

In analyzing this deviation, the management team needs to determine if it is related to a controllable factor or a non-controllable factor. This entails an analysis of the root of the problem—has this occurred because the crews are responding to a higher than anticipated call volume, producing more vehicle mileage; is the fleet maintenance program in need of modification to assist in increases in vehicle operating efficiency; or, as is currently the case, have fuel costs increased due to external economic factors beyond the control of management?

Planning for the Next Cycle

The above noted example provides the basis for forecast analysis of future expenditures as part of upcoming budget cycles in the justification documentation. For instance, the mentioned fuel costs were determined to be due to external economic factors beyond the direct control of the management team. Thus, if economic reports project continued higher fuel costs, a forecast indicating this should be included in the next budgetary cycle. Such forecasts should be prepared for all aspects of operations and should detail specific reasons for requested funding increases. This information should include both a detailed analysis of historical costs of operations in addition to any related external economic analysis of related current and future business costs.

Summary

The process of budgeting can be the most important tool available to an EMS department management team. The person(s) responsible for the oversight of the department should have a working knowledge of both the budget numbers themselves and, more important, the process of working through a budgetary cycle. This should include members of the management team who do not have direct responsibility for preparation and presentation of the budget, as they will often be the persons who assist the preparer in budgetary maintenance over its life cycle. A working knowledge of basic financial concepts by all members of the management team is paramount to the continued viability and success of any proactive EMS department.