Company Budget Allocation Methods

While implementing strategies the scarce resources of a firm such as financial, physical, human, and technological need to be allocated carefully, according to a plan. In this regard one can follow a top down or a bottom up approach. In a top down approach resources are allocated through a process of segregation down to the operating levels. The Board of Directors, Managing Director and other members of the top management typically decide the requirements of each sub-unit and distribute resources accordingly. In the bottom up approach resources are distributed after a process of aggregation from the operating level. A mix of these two may also find favor in fairly large, multi-plant organizations.

There are several ways of allocating resources in a systematic way, namely,

Budget: Keeping  the assumptions made before the formulation of a budget, divisional heads (SBUs) and functional managers focus their efforts on allocating funds, through an interactive exercise – taking the opinions of all those who matter most. The external influences and their likely impact and the internal capabilities of a firm area also to be kept mind in this joint budgeting effort hence it is  named as ‘Allocation of resources budget’.

Capital budget: The primary purpose of capital budget is to maximize the long term profitability of a firm while deploying resources. Various techniques like internal rate of return, payback period, and net present value of find where a rupee invested would earn maximum returns.

Performance Budget: Here the basic purpose is to focus attention on the work to be carried out, services to be rendered rather than things to be spent for or acquired. It concentrates attention on physical aspects of achievement. Here, there is not only a work plan but a work plan in terms of work done. It takes a systems view of activities to try and associate the inputs of the expenditure with the output of accomplishment in terms of services, benefits etc.

Zero based budget (ZBB): The key element of ZBB is future objective orientation of past objectives. Instead of taking the last year’s budgets and adjusting them for finding out the future level of activity and preparation of budget therefrom, ZBB forces managers to review the current, on-going objectives and operations. ZBB is therefore a type of budget that requires managers to justify the past objectives  projects and budget and to set priorities for the future. The essential idea of budget is that it differentiates ZBB  from traditional budgeting that requires managers to justify their budget request in detail from scratch  without any reference to the level of previous appropriations. It amounts to recalculation of all organizational activities to see which should be eliminated, funded at a reduced level, funded at the current level or which finances should  be increased.

ZBB process runs into the following steps:

Decision package: Each department activity and programme is broken down into a decision package. Decision package summaries the scope of work, requirements, anticipated benefits, term schedule, expected consequences if the element is not performed, etc. Thus decision package provides a running commentary of all the activities in a particular project.

Ranking:  Each decision package is ranked against packages for other proposed projects or activities, and the projects that are running (operating) currently. Decision packages are ranked according to their benefits to the total organization during the budget period.

Resource allocation:  The above ranking leads to organization-wide list of prioritized and priced out decision packages built from zero-base or ground up. Resources are then allocated to the packages according to the preferential rank in the organization. When properly executed, the zero based budgeting provides an opportunity for the managers to carefully examine, evaluate and prioritize each organizational activity and see whether modification, continuance or termination is feasible.

Constraints in Resource allocation:

Resource allocation in actual practice is not an easy job. Strategies should prioritize tasks that require maximum attention initially taking political relations, overall objectives, external influences etc., into account. Each department may fight for getting a maximum share of the scarce resources that are available leading to destructive conflict and personality clashes. External influences such as government regulations, shareholder preferences for higher dividends, credit restrictions imposed by financial institutions also affect the process of resource allocation considerably. To avoid trouble at a later stage, the deciding authorities need to prioritize everything and decide budgetary allocations in the initial stages itself. Many ‘budget battles’  could be avoided if targets, resource sharing, prioritization and midway revisions etc., are decided in an atmosphere of close cooperation and participation, especially at departmental and divisional  levels. Allocating  resources to specific divisions and departments alone does not mean successful strategy implementation. There are other troublesome issues to be looked into more closely.

After resolving the difficult issues concerning resource allocation, the deciding authorities should look for a suitable  organization structure for implementing the allocations.