In this assignment, the discussion will start with the concept of budgeting, preparation of budgets and Macroeconomic Factors. Critically examining the necessary procedure adopted during the budget preparation is carried out along with discussion over the importance of the planning phase. All the above discussion will be carried out while keeping the public sector under review. Assessment analysis is adopted to consider the effects of macroeconomic factors, which become the challenges and opportunities during negotiations over the financial funding and allotment from the senior management.
1. Definition of Budgeting
A concept of budgeting is defined as a series of action plans adopted by the firm or public sector organization for the upcoming or next period, usually for the next fiscal year. The methods of adoption vary from sector to sector, depending upon the suitability of the economic environment that prevails at the workplace. The preparation of budgetary figures helps to identify the firm in advance regarding the sufficient amount required to do the planned activities. Such a planning phase prioritizes the expenditure and focuses on the task, which is more important. The objective of budgeting is to plan and prepare for achieving organizational objectives through compilation and communication of plans and ideas (Rebrowa et al., 2020). In such a way, the system for control and motivation is implemented to complete the assigned work.
Critical Steps of Budgeting
Stage # 1 Review and critical examination of past performance
Reviewing the firm’s past performance is a concept that critically analysis and examines the gaps between the budgetary figures and actual results. This gap analysis provides the details of the reasons due to which such a gap has been arising. The reduction in gaps can efficiently be handled in the next financial period provided that the firm knows the reasons for the deviation of results from actual once. Such examination becomes the basis on which budget has been prepared for the next year keeping in view these under and overestimation of budgetary targets (Adafin et al., 2020).
Public sector firms such as Central Bank of Malta carry out an annual detailed review of the expenditure and report to the Ministry of Finance. Analysis of the deviation against the planned budgetary discussed at a meeting conducted by a board member to discuss it for approval.
Stage # 2 Planning for allocation of resources.
Planning is considered as the core of budgeting. After the compilation of historical data and benchmarking exercised for budgetary preparation, a framework is prepared. Such a framework consists of the availability of financial and non-financial resources and job responsibility of each senior management for the next year. Usually, the planning exercise covered 12 months. However, the period may extend depending upon the firm’s strategy (Kwarteng., 2018). While preparing a budget, firm performance, environmental influences, and department-wise activities, strategic planning of state shall be kept in consideration while discussing the public sector budgeting.
Health Sector required sufficient planning to keep the needs of the general public. However, public sectors are organizations for providing services to the people of the state. However, the sector authorizes shall keep things in mind regarding the appropriate utilization of funds.
Stage # 3 Forecasting based on planned activities.
It is a process by which prediction of the upcoming period is prepared based on historical data and financial figures. Such prediction and estimations are carried out based on different methods such as time series, cross-sectional, longitudinal, and self technical analysis. Forecasting shall be higher than any guess as this exercise is based on a variety of factors that affects its preparation. The allocation of budgeted targets and expected results has monitored closing to get the best results against the forecasting exercise. Such monitoring can be carried on monthly or quarterly as per sector needs. (Miller and Galeaz. 2007). These forecast monitoring exercises help adjust the budgets or actual performance results to achieve the targets in the long run.
Department for providing the Municipal services to the people of Malta estimates and shares the forecasted financial targets with the senior management in Government authorities for approval. The officials at the state level will then access whether the budget presents fair targets and incorporate factors.
Stage # 4 Implementation and evaluation of planned activities.
The final step in preparing budgetary figures is to implement and evaluate the budgets against the targets. Initially, the purpose of this process is to implement and remain compliant with the budgetary figures as approved by authorities. Any deviation or variance that occurred during the implementation process shall be scrutinized to understand the reasons behind such variance. These reasons are evaluated, and steps shall be discussed to remove the gap to reach the targeted figures. Evaluation and review of budgeted figures highlight the area of potential weaknesses on specific monitoring frequencies. This exercise will enable us to make alterations and rectifications of budgetary figures or targets to align the firm (Olurankinse, 2012). Keeping a close-up view on the budgeted amount throughout the period identifies how resources and the allocated amount could be utilized more efficiently and efficiently.
3. Importance of planning phase in budgeting.
Planning understands the relationship between the resources available, scares resources, and their utilization based on a priority basis. It consists of developing activities for the achievement of objectives (Mathur, 2019). The procedures, timetables, and performance standards are required to execute the approach and turning over individual accountability against results. Following are the points which are not possible without the planning phase in the public and private sector.
- The planning phase identifies the resources which are available to us in order to prepare the budget.
- This phase ensures prioritizing the area, which is required to focus more as compared to other matters. These areas may cover expenditures, amount allocation for special projects, and other regulatory requirements which cannot be deferred.
- Any scare resources required by the public sector are needed to be arranged in the planning phase. These items may include funding, human resources, or technological acquisition. In the case of non-acquisition of required items or funding allocation at the planning phase, these resources may halt due to these resources and cause a delay in preparing budgetary figures.
- The planning period prepares the schedule of resources, i.e., time at which these items will be utilized. Such a schedule helps public sector organizations to acquire the resources at the time of need rather than the purchase of resources at the start of the project, which may increase holding costs.
- The planning budget enables the managers to get ready for potential consequences related to adverse effects in budgetary figures due to sudden catastrophes. E.g., COVID-19 situation for health and business sector state own sectors
The ministry of education and employment calls the finance department for planning the budget. Members of the education and employment teams justify their requirements and projects for proposal approval based on which allocation of funding is processed. Any resources which need scare in nature are discussed to get the desired resources on a timely basis to accomplish the task.
4. Assessment and impact of macroeconomic factors affecting the budget preparation decision making in the public sector.
Preparation of Budget in the recent era is carried out under the control of internal and external factors. External Factors are those who are outside and beyond the control of the organization. Macroeconomic factors are one of them. The following are the macroeconomic factors.
1- Seasonal Cycles and tax revenue
Every business is affected by the economic and business cycle. The business cycle affects the revenue generation of the firm, which is the primary source of funding for budgetary figures. This shortage affects the taxation cycle for the public sector. A shortage of funds will curtail the expense for the said month or quarter (Willis, 2008). These inflows or outflow will then be utilized for expenses that need to be incurred on priority, and the rest of the task will be set aside by the time sufficient funds are available. Therefore taxation cycle affects the monthly or quarterly budgetary figures of the public sector.
The public sector under the umbrella of the Ministry of Agriculture, fisheries, and the human rights of animals dealing with agricultural products depend on different seasons. Therefore the agricultural public department needs to adjust the budget according to the season affect the fund’s generation stream.
2- Inflation factor
In general terms, inflation is a mechanism by which prices of the commodity increase, which reduces consumers’ purchasing power. In return, the prices of specific projects increase with inflation. While preparing the budget, the inflationary effects shall be considered on capital and day-to-day expenditures (Oladipo and Akinbobola, 2011). Uncertainty in the price of goods and services enables the budget amount to increase compared to the last period. In case inflation factors are not considered, then budgeted figures become unrealistic.
To consider the inflator effects, the Malta telecommunication authorities carry out the studies related to inflationary pressure and incorporate its adjustments in preparation of budgetary figures related acquisition of telecommunication purchases for providing adequate communication facilities to the people of malta.
3. Interest rates effects
An increase in interest rate increases the cost of public spending by the own state organization. Finance cost raises, which results in a shortage of supply of money. Raise in the interest rate during the year affects the expenditure and reduce the cash flows. The budget target for the next year increases due to the historical rise in the interest rate during the budget is prepared (Laubach, 2009). If the interest rates affect is not considering while preparing the budget, then ministries may face interest rate risk. Such risk may cast an adverse impact on providing service to general public needs.
According to the latest information, the Malta interest rate for Aug-2020 is 3.43 per annum. In Jan-2020, it was 3.48 per annum. Such a consistent interest rate, even the period of COVID-19, will remain unaffected to the budget figures of the country budget.
4. Credit Crunch
As the prevailing interest rates rise. The lender has no choices to increase the lending rate, which, in return, increases the cost of capital to a lender (Iachan, 2020). Government sectors such as the health sector, construction industry, and banking sector under the umbrella of public sector organizations take effect of the credit crunch. They may accept a higher interest rate against the fund obtained from a Government institution.
Considering the impact of the macroeconomic effect of change in interest rate, commercial banks such as Central Bank of Malta rises in interest rates based on the supply of money. These effects in the shape of rising or fall in finance cost are incorporated by firms who have obtained lending from these financial institutions. However, being a state-owned bank, they provide interest-free or reduce the rate of lending to provide the public service to the people of the state.
6. Five principles of finance affecting the negotiation for better budgetary preparations.
There are five principles of finance that can be discussed during the negotiation of budgetary figures with management.
1. Time value of money
The time value of money is what we can buy today at a specific rate become expensive after some time, purchasing power of person decline due to inflation. During the preparation of the budget by the government’s own public sector department, they check inflation factors affecting the budgetary figures. The inflation factor includes the interest rate, exchange rate, supply of money in the market, and demand for products (Siddique and Rahim ., 2015). While discussing the budget allocation, budgetary pressures shall be discussed to allocated inflation-adjusted figures.
Central Bank of Malta discusses budgeted figures with the finance division for control of the state’s economy. Other Departments try to justify the needed budget based on the future services provided to citizens of the state. In contrast, the ministry allocates the funds by considering the entire state economic conditions.
2. Risk Return during trade
During the budgetary meeting, the government’s departments and public sector institutions exhibit different projects and proposals to allocate budget amounts for public spending. The government authorities checked the returns or value adds to the general public compared to its spending and results. Any proposal that has a more significant impact on the general public required a more considerable budget due to higher returns in the shape of public satisfaction (Andriotto and Teti., 2014). Different government sectors such as defense, production, and municipal corporations conduct meetings with the finance department to present their idea and future implications for the general public. Accordingly, the finance department makes decisions based on the government plan for betterment.
3. Cash flow importance
Cash flows provide opportunities to utilize the cash generated from investing, financial, and operational core activities. Government focus on keeping the focus on tax collection and financial collection in terms of fee from different avenues. During budgetary discuss, departments try to receive the funds for any project before its initiation. However, it is the duty of the finance department of government to handover the funds on a timely basis for utilizations (Joseph and Richardson, 2002).
4. Market price reflection Information
The market price of any commodity represents every information affecting its worth for potential buyers and sellers. A suitable price represents rational behavior for the individual to decide to buy or sell. Not every price is error-free. There is a particular occasion in which the prevailing price does not represent its current worth. During the meeting at budget, the government department exhibits maximum information to the finance department to judge the utilization of funds (Chong, and Johnson, 2007). This information shall be compared with market news so that the budget’s current economic affairs of the country remain under control. The budgetary allocation shall then be allocated based upon the current economic situation. Health Sectors under the COVID19 situation required immediate government funding based on the daily affected number of patients.
5. The agency problem
The ministry and heads of the state are the agents of the general public. Both are entrusted to perform their task for the betterment of the general public. There is a situation where both agents are in discussion with each other betterments. For example, out of 03 projects of 3 different departments, government has to select 1 out of 3 projects, which is sometimes a difficult task. The Head of the state and finance department has to select the task and allocate the best under the current scenario. Declining the two remaining projects does not mean that the presenters are not fulfilling their responsibility towards this relationship of agency (Yan et al., 2010). However, it is the experiences and judgmental call of a member of the finance division and Head of the government to select a project that increases the betterment and economic well off for the general public and citizens of Malta.
6. Conclusion
This assignment has described the importance of budgeting and the importance of planning for the preparation sufficient budget. With the planning, the organization has to prepare the budget and align the resources. The planning phase affects the states’ macroeconomic factors, including interest rates, inflation, seasonal effects, and the credit crunch. Departments and management focus their budgetary decision by the value of money, the trade-off between the risk and return tag of war, cash-flow adjustments, information affecting pricing, and principal-agent relationship.
7. References
- Rebrowa, N., Kovalev, A., Frik, O., and Sargsyan, G., 2020. Budgeting as an Instrument of Increasing Competitiveness and Sustainability of Mining Enterprise. In E3S Web of Conferences(Vol. 174, p. 04054). EDP Sciences.
- Again, J., Rotimi, J.O., and Wilkinson, S., 2020. An evaluation of risk factors impacting project budget performance in New Zealand. Journal of Engineering, Design, and Technology.
- Kwarteng, A., 2018. The impact of budgetary planning on resource allocation: evidence from a developing country. African Journal of Economic and Management Studies.
- Miller, J., and Galeaz, G.R., 2007. Ways to improve budgeting and forecasting: financial services companies should take a strategic approach to better link financial planning with strategic direction. Bank Accounting & Finance, 20(5), pp.39-42.
- Olurankinse, F., 2012. Due process and budget implementation: An evaluation of the Nigerian Public sector auditing. Asian journal of finance and accounting, 4(2), pp.144-154.
- Mathur, S., 2019. Linking Planning with Budgeting: Examining Linkages between General Plans and Capital Improvement Plans. Journal of Planning Education and Research, 39(1), pp.65-78.
- Willis, J.K., Chambers, D.P., and Nerem, R.S., 2008. Assessing the globally averaged sea-level budget on seasonal to interannual timescales. Journal of Geophysical Research: Oceans, 113(C6).
- Oladipo, S.O. And Akinbobola, T.O., 2011. Budget deficit and inflation in Nigeria: A causal relationship. Journal of Emerging Trends in Economics and Management Sciences, 2(1), pp.1-8.
- Laubach, T., 2009. New evidence on the interest rate effects of budget deficits and debt. Journal of the European Economic Association, 7(4), pp.858-885.
- Cachan, F.S., 2020. Capital budgeting and risk-taking under credit constraints. Management of Science.
- Siddique, M.A., and Rahim, M., 2015. The concepts of discounting and the time value of money in Islamic capital budgeting framework: A theoretical study. Journal of Islamic Banking and Finance, Pakistan, 32(1), pp.23-29.
- Andreotti, M., and Teti, E., 2014. Beyond CAPM: an innovative factor model to optimize the risk and return trade-off. Journal of Business Economics and Management, 15(4), pp.615-630
- Joseph, K., and Richardson, V.J., 2002. Free cash flow, agency costs, and the affordability method of advertising budgeting. Journal of Marketing, 66(1), pp.94-107.
- Chong, V.K., and Johnson, D.M., 2007. Testing a model of the antecedents and consequences of budgetary participation in job performance. Accounting and business research, 37(1), pp.3-19.
- Yan, Y.H., Hsu, S., Yang, C.W., and Fang, S.C., 2010. Agency problems in hospitals participating in the self-management project under a global budget system in Taiwan. Health policy, 94(2), pp.135-143.
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