Question#1:

which style of budget is suitable in non-profit making organization…..?

Definition of budget:

A Budget is a plan that outlines an organization's financial and operational goals. So a budget may be thought of as an action plan; planning a budget helps a business allocate resources, evaluate performance, and formulate plans.

While planning a budget can occur at any time, for many businesses, planning a budget is an annual task, where the past year's budget is reviewed and budget projections are made for the next three or even five years.

Participative Budget Definition:

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by the manager's supervisor, and any issues are resolved by mutual agreement.

Self-Imposed Budget Definition:

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by the manager's supervisor, and any issues are resolved by mutual agreement.

THE INITIAL FLOW OF BUDGET DATA IN A PARTICIPATIVE BUDGETING SYSTEM:

Top Management

↑ ↑

Middle Management Middle Management

↑ ↑ ↑ ↑

Supervisor Supervisor Supervisor Supervisor

The initial flow of budget data in a participative system is from lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost

control will prepare his or her own budget estimates and submit them to the next higher level of management. These estimates are reviewed and consolidated as they move

upward in the organization.

Participative or Self imposed budgeting is an ideal budgetary process. However most companies deviate from this ideal budgetary process. Typically top managers initiate the budget process by issuing broad guidelines in terms of overall target profits or sales. Lower level managers are desired to prepare budgets that meet those targets. The difficulty is that the target set by top managers may be unrealistically high or may allow too much slack. If the budgets are too high and employees know they are unrealistic, motivation will suffer. If the targets allow too much slack, waste will occur. And unfortunately top management is often not in a position to know whether the targets they have set are appropriate.

Admittedly, however, a pure self imposed budgeting system is not without limitations. It may lack sufficient strategic direction and lower level managers may be tempted to build into their budgets a great deal of budgetary slack. Nevertheless, because of the motivational advantages of self imposed budgets, top managers should be cautious about setting inflexible budgets.

Advantages and Disadvantages of Self Imposed Or Participative Budget :

A number of advantages or benefits are cited for such self imposed budgets.

1. Individuals at all level of organization are recognized as members of the team whose review and judgments are valued by top management.

2. Budget estimates prepared by front line managers can be more accurate and reliable than estimates prepared by top managers who are more remote from day

to day activities and who have less intimate knowledge of markets and operating conditions.

3. Motivation is generally higher when an individual participates in setting his or her own goal then when the goals are imposed from above. Self imposed budgets create commitments.

4. If a manager is not able to meet the budget and it has been imposed from above, the manager can always say that the budget was unreasonable or unrealistic to start and, therefore, was impossible to meet. With a self imposed budget this excuse is not available.

Participative budget has following main limitations or disadvantages:

1. Time consuming and costly. 2. May foster budgetary “gaming” through budgetary slack

TYPES OF NONPROFIT ORGANIZATIONS

A wide range of charitable and other institutions are classified as nonprofit

organizations under the Internal Revenue Code. Many of these qualify

under the definition provided in Section 501(c)(3) of the Code, which

stipulates that all of the following qualify for tax-exempt status:

"Corporations, and any community chest, fund or foundation, organized and

operated exclusively for religious, charitable, scientific, testing for public

safety, literary or educational purposes, to foster certain national or

international amateur sports competition, or for the prevention of cruelty to

children or animals," provided that the institutions adhere to basic

standards of behavior and requirements of net earnings allocation.

CHARITABLE ORGANIZATIONS Charitable institutions comprise the bulk of

America's nonprofit organizations. These include a wide variety of

institutions involved in the realms of poverty assistance (soup kitchens,

counseling centers, homeless shelters, etc.); religion (churches and their

ancillary possessions, such as cemeteries, radio stations, etc.); science

(independent research institutions, universities); health (hospitals, clinics,

nursing homes, treatment centers); education (libraries, museums, schools,

universities, and other institutions); promotion of social welfare;

preservation of natural resources; and promotion of theatre, music, and

other fine arts.

ADVOCACY ORGANIZATIONS "These groups attempt to influence the

legislative process and/or the political process, or otherwise champion

particular positions," explained Hopkins. "They may call themselves 'social

welfare organizations' or perhaps 'political action committees.' Not all

advocacy is lobbying and not all political activity is political campaign

activity. Some of this type of program can be accomplished through a

charitable organization, but that outcome is rare where advocacy is the

organization's primary undertaking."

MEMBERSHIP GROUPS This kind of nonprofit organization includes business

associations, veterans' groups, and fraternal organizations.

SOCIAL/RECREATIONAL ORGANIZATIONS Country clubs, hobby and garden

clubs, college and university fraternity and sorority organizations, and

sports tournament organizations all can qualify as nonprofit organizations,

provided that they adhere to basic guidelines of net earnings distribution,

etc. Unlike other tax-exempt organizations, however, their investment

income is taxable.

"SATELLITE" ORGANIZATIONS Hopkins pointed out that "some nonprofit

organizations are deliberately organized as auxiliaries or subsidiaries of

other organizations." Such organizations include cooperatives, retirement

and other employee benefit funds, and title-holding companies.

EMPLOYEE BENEFIT FUNDS Some profit-sharing and retirement programs

can qualify for tax-exempt status.

ADVANTAGES AND DISADVANTAGES OF INCORPORATING

All nonprofit organizations are faced with the decision of whether or not to

incorporate. As Ted Nicholas noted in The Complete Guide to Nonprofit

Corporations, there are many benefits associated with incorporating: "Some

are the same as those commonly enjoyed by for-profit business

corporations. Others are unique to the nonprofit corporation. Perhaps the

greatest advantages of all—granted exclusively to organizations with bona

fide nonprofit status—is exemption from taxes at federal, state, and local

levels." In addition to tax exemption, Nicholas cited the following as

principle advantages of forming a nonprofit corporation:

Permission to solicit funds—Many nonprofit organizations depend on their

ability to solicit funds (in the form of gifts, donations, bequests, etc.) for

their very existence. Nicholas noted that whereas some states bestow a

fund-raising privilege on nonprofit corporations as soon as their articles of

incorporation are filed, other states require groups to fulfill additional

obligations before granting permission to solicit funds.

Low postage rates—Many nonprofit corporations are able to use the U.S.

mail system at considerably lower rates than private individuals or for-profit

businesses. To secure these lower rates, nonprofits must apply to the Postal

Service for a permit, but this is generally not a major hurdle, provided that

the nonprofit group has its affairs in order. "The importance of the mailing

rate advantage is directly proportional to the volume of mail the nonprofit

corporation generates in the course of its business," said Nicholas.

"Membership solicitations are usually mailed third class. Nonprofit

corporations that rely on membership income can use the mail even more

extensively to service their members. So potential savings from a special

mailing permit are considerable."

Exemption from labor rules—Nonprofit organizations enjoy exemption from

the various rules and guidelines of union collective bargaining, even if their

work force is represented by a union.

Immunity from tort liability—This advantage is not available in all states, but

Nicholas observed that some states still provide nonprofit charitable

organizations with immunity to tort liability. "It is important to recognize,

however, that where it exists, the immunity protects only the nonprofit

corporation—not the agent or employee where negligence injures someone."