A program budget is a framework by which the business allocates its resources to different departments and activities and manages the cash flows of the organization. There are many types of budgets. A program budget is one of them. First, let’s establish an understanding of its definition.
What is a Program Budget?
It is a budget prepared specifically for a project or program. This type of budget includes expenses and revenues related to one specific project. No revenues or expenses of any other projects are mixed with this particular project.
A business has many different projects running at a single time. Therefore, it becomes very important to set the goals and objectives of each individual project, along with its budget. This budget allocates resources to a project, which helps in monitoring the performance of the project and increases accountability.
Let’s look at an example to understand the concept more clearly.
Example of a Program Budget
Xion Ltd. is in the textile business. It receives multiple orders from different clients every year. One of these clients, Noble Ltd., gave Xion Ltd. an annual contract. Xion Ltd. follows and prepares a program budget. Here, Xion Ltd. shall prepare the program budget of Noble Ltd. by including all the income and expenses related to this single project. No other project shall be considered while preparing the budget for Noble Ltd. Thus; the program budget focus is only on individual projects.
Advantages and Disadvantages of a Program Budget
As explained below, there are many advantages and disadvantages of a Program-Budget.
Advantages of a Program Budget
- It helps in determining the priority of the projects.
- It helps in planning and managing the delivery of services in the future.
- This budget monitors the allocation of resources to a project and determines how they are used to meet the organization’s goals.
- It helps identify areas where cost reduction can be implemented, and savings can be made.
- It helps in spotting the areas where higher levels of funds are required.
- This budget adds accountability to the organization. Since each project has its respective budget, performance measurement can be done, and firm accountability can be set.
Apart from the advantages, there are also some disadvantages to program budgets.
Disadvantages of a Program Budget
- It requires a lot of information, and it can take a lot of time to determine the exact financial resources required. Additionally, during the year, when any changes must be made to the resources required, it becomes very difficult to achieve a balanced budget.
- Sometimes, overlapping causes several changes to the budget. For example, the municipality department may include the electricity repair expenses in the budget, which may or may not occur. This leads to the budgeting of dual expenses.
- If this budget is incorrect, it can lead to an increase in costs.
- It sometimes makes it difficult to evaluate the performance of the project. Multiple layers of administrators govern a project, so finding out the actual performance of any administrator can become a daunting task.
Program budgets form an important part of any large organization these days. They provide the basis to allocate the company’s resources to a project in the right manner. It not only lays down accountability but also brings efficiency and effectiveness to the organization. It helps to divide the activities under different subprograms for a particular project. Many may point to the disadvantages of the program budget, but the pros outweigh the cons, and such budgets help achieve the goals and objectives of a business in the desired manner.