Budgeting refers to the process through which different business and non-business organizations forecast and plan for their expected revenues and costs for a specific time period. Different types of budgets are used by different organizations for their planning purposes. Organizations plan for their future and on the strategies that the organizations will use towards achieving their long and short-term goals and objectives. Good planning and budgeting processes are vital in the management of an organization’s finances and, thus, vital for the success of the organization (Melkers & Willoughby, 2005, 184). There are several types of budgets and budgeting methods that are commonly used by individual organizations, depending on the drivers of the elements that constitute the budget. The research’s selected budget is a business budget of the World Health Organization for the year ended 31st December 2019. The selected budget’s duration of time is one year. Thus, its time period of use was between 1st January 2018 to the end of the organization’s accounting period, 31st December 2019.
The report analyzes the key elements, cost and revenue illustrated in the budget, and the drivers to the elements. It also analyzes the budgeting process and method used, the identifying areas that require improvements and critiques to the budget and the budgeting process. An analysis of how the budget is well articulated to the organization’s goals, objectives, and strategies to achieve these goals and objectives is also done in the report.
The Budgeting Process
The world health organization uses the bottom-up budgeting approach for enacting its budgets. The departments produce their departmental budgets, which the top management uses to come up with the organization’s budget. Despite the fact that it is the top management that produces the end budget for all organizations, it is the minors in the different departments who formulate the budget. The WHO uses the comparisons of the previous years’ budgets and the actual performance of the organization to come up with the current targets and goals that the organization budget for. World Heath Organization’s budgets differ with accounting basis budget requirements. The organization approves its internal budgets on a modified cash basis, whereas the accounting standards require that approval be done through the full accrual basis.
The world health organization prepares its budget on a biennial basis, which means once every two years. The budgets are approved only for the general fund, and no other funds for which budgets are approved. However, the organization’s financial statements generally cover all its activities. According to a presentation of the selected budget’s information in the organization’s financial statements, all funds are administered concerning the requirements of the IPSAS 24. The actual amounts are presented on a comparable basis to the budget amounts, with timely identifications, and the identification of presentation and entity variations separately. The organization has also presented its budget and financial statements in a manner in which there exist some differences in classification schemes and formats it adopts. The organization uses the comparison statement of the original budget and actual amounts to comparing the final budget amounts to the actual amounts to depict the organization’s performance for the period.
The communication of the budgets is done through reports in the financial statements. The world health organization’s biennial budgets are incorporated into the organization’s financial statements for efficient communication to the investors, donors, and other stakeholders relevant to the organization.
Key Cost Elements in the Budget
The unavoidable costs
The unavoidable costs are costs that are prioritized first. Resource allocation for these costs is done first before any other resources have been allocated to other types of costs. These costs include the payroll costs, which are made up of the salaries paid to employees, wages, cost of benefits, and other payments incurred such as the holiday pay and overtime (Kim, 2015, 26). The key cost drivers to compensation costs are the volume or the number of employees and part-time workers the organization requires to have over a given time period. The organization’s level of human resource motivation also influences the amounts budgeted for payrolls over a specific time period. The emergence of epidemics, for instance, the COVID-19 pandemic, influenced the amount of money allocated for contracting specialists who could help in mitigating and controlling the risk of contracting the disease. Payroll costs are categorized both as fixed and variable costs by the organization.
Another unavoidable cost represented in the selected budget is the facilities and related costs. Facilities and related costs are considered after taking care of the payroll. The organization must pay for the facilities that are used by its employees and workers., whether it means by purchasing the facilities or hiring. These costs include rent, utilities such as electricity and water services, security services, among others. These are a burden to the organization, especially due to its new projects in different countries, such as the implementation of universal health care across the globe. Thus, new projects and the need for new facilities during a particular accounting period act as key cost drivers to facilities and related costs. There are both facilities’ fixed costs and variable costs.
- Discretionary Costs
These are cost elements that are funded last, in the case of discretionary costs remaining. They are associated with costs such as those incurred in funding grant programs and other activities aimed at supporting the welfare of powerful stakeholders. They are influenced by the unavoidable costs’ budget. The world health organization categorizes the discretionary costs as variable costs rather than fixed costs, as they are dependent on the number of resources allocated to other costs and the availability of funding.
- Indirect Costs
The only indirect cost allocated to the world health organization’s budget is the depreciation and amortization cost. Amortization and depreciation costs are variable costs are dependent on the usage of the organization’s machines and equipment. The volume or number of the machines and equipment also influence the amount of funds allocated to the depreciation and amortization costs. The effectiveness and efficiency of the depreciation and amortization costs depend on the projected machine and equipment use.
The cost Structure
According to the costs allocated in the world health organization’s biennial budget for the years ended 31st December 2019, the organization’s costs are driven by both quality and value. The organization focuses on allocating resources to the activities that create value to its service receivers, at the least cost possible. Despite the organization putting into use two distinct cost structures, it prioritizes value addition, as is a non-profit making organization. Thus, the organization’s management focuses on allocating resources to costs expensed for high value and quality products but requiring the least possible amount of funds.
Key Revenue Elements
The key revenue element illustrated in the budget is funds received from contributions. Contributions are the main source of revenue to the organization and is categorized as assessed and voluntary contributions. Assessed contributions are fixed, as their predictability is easily determined. The voluntary contributions are categorized as variable revenue elements as they are less predictable and vary from time to time depending on the economic situations in donor countries.
Capital Investment Decisions
Financial and capital instruments are recognized when the organization becomes a party to the instruments’ contractual provisions until the time when the rights to receive cash flows from the assets (Emmanuel et al., 2010). They are also recognized when the assets and financial instruments are transferred, and the organization has completed the transfers of all the rewards of ownership and risks. The World health organization categorizes its capital investments into two, bank deposits and financial liabilities and assets at fair value. The expected returns from the capital investments are budgeted on a biennial basis. Capital investment decisions of the WHO are made through the considerations of what value they are going to add to the organizations, as well as the riskiness of the capital instruments. According to a report by WHO, the organization’s management focuses on less risky capital investments, which bear little returns. Thus, the organization avoids involvement in risky investments. This is because it faces zero pressure on profitability as it is a non-profit making intergovernmental organization.
The availability or the unavailability of bank credit is a major factor that impacts organizations’ capital investment decisions (Chen & Kieschnick, 2018, 560). Access to banking finance is essential to any organization because it offers organizations an increased liquidity level. Through credit finances, organizations can finance their activities and meet their short-term or long-term obligations. Similarly, the world health organization, the availability of credit finance, especially from the IMF, influences their capital investment decisions.
From the world health organization’s selected budget, most of its activities are financed through contributions made by member countries and donations. From the selected budget and financial statements, the organization’s obligations are relatively small compared to its assets. This is important in enhancing good financial decisions so as to maintain the desired liquidity level. To meet the organization’s financial goals and objectives, it maintains a relatively low level of debt as a financial strategy. The establishment of strict budgets is also that the organization uses for ensuring that financial goals and objectives of the organization are achieved within the stipulated timelines. Proper budgeting is usually in line with an organization’s financial goals and objectives (Kim, 2015, 33). The organization’s budget is in line with the organization’s goals of providing and improving health facilities across the world, especially to the disadvantaged communities. This is ascertained by the total amount that was allocated to the fight against diseases. For the 2018-2019 budgeting period, $ 4.5 million was allocated to dealing with health issues in different categories such as communicable and non-communicable diseases, health systems, emergencies, among other health issues.
There are four major cost principles for effective cost allocations (Idreos, 2018, 538), which include reasonability, ability to be allocated, consistency in mode of treatment, and the ability for the allocation to be allowed, allowability. Based on the costs posted in the world health organization’s budget for the period ended 31st December, 2019, the above-mentioned principles were met by the organization’s budgeting team. The allocate costs were reasonable in that they were all in line with the organization’s mission of improving and providing health information across the world. The allocated resources were majorly on diseases, pandemics, emergencies, heath systems and employee compensation, which are all reasonable for an organization dealing with facilitation, enhancement and provision of better health and health information to the world’s population.
All costs incurred through the same manner or for a similar purpose should be treated similarly and consistently over different accounting or budgeting periods. This enhances the efficiency and ease of comparison, evaluation and monitoring. Comparing the costs allocated for the 2018-2019 period with those of the 2016-2017 period, same accounting approaches have ben employed. Thus, it is easy to conduct evaluation and comparative analysis, for information on cost allocation between the two periods. According to Idreos (2018), costs are termed as allowable if they are permitted by the federal regulations and the organization’s internal control. With respect to the main purposes of the world health organization, the budgeted costs are allowed by the internal control regulations and the federal laws and regulations. The allocated costs are also allocable as they are not above the organizations revenues. Thus, the organization is in a position to meet its allocated costs by use of its revenues from contributions and donors.
Cost behaviour refers to the likelihood of, and how costs change with respect to the amount of activity by an organization. Variable costs increase with increase in an organization’s activities and decrease when the amount of activities decrease (Al-Ramadan, 2014). The fixed costs do not change with respect to changes in an organizations’ activities, and thus are constant over an accounting period. Other costs are partially fixed and partially variable. These could experience change as result of activity changes. The selected budgets exhibit the three cost behaviours. Costs such as staff costs are partially fixed and partially variable, as they can increase with increase in activity past the projected costs. Depreciation and amortization costs are fixed and remain constant throughout the accounting period, and are not depended much on the organization’s activity. They can however increase or decrease at constant rate, depending on the method used to account for them. The constant increase or decrease isn’t based on the organization’s activity, but on the selected accounting method.
Budgeting, Monitoring and Evaluation
The execution of a budget is done after it has been approved by the associated authorities. This is the stage in the budgeting cycle in which the implementation of what has been indicated in the budget is done. Budgets bear the strategic paths towards achieving the financial goals and objectives of the organization. the activities that power an organization to success require adequate funding, which is allocated through the budgeting process. Thus, the execution of the budget is important for any organization, whether for profit or not-for-profit organization.
After approval, the budget of the world health organization is executed through the different departments and regional divisions across the world. To be able to understand the effectiveness of the budget execution on the organizations road towards achieving its strategic goals, the world health organization monitors and evaluates the budgeting process, as well the efficiency through which the budget has been implemented and followed. Through monitoring and evaluation of the budget, the organization is able to identify the gaps and areas that require improvement in the budget and budgeting process.
The evaluation of the budget execution is done during the periodic reviews of the organization’s activities. The process identifies whether the actual cost and revenue activities are in line with the budgeted amounts. The world health organization uses a comparative statement for comparison and evaluation of the budget execution.
Gaps and Areas That Require Improvement
The gaps and areas within the budgeting process and the budgets are identified through the evaluation process for an organization’s budgets and budgeting process. Fund utilization, money value evaluation and organization’s performance assessment are evaluated to identify weaknesses in the budgeting process.
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