Accounting and Financial Management

Budget Cycle

The budget cycle (also called the budget process or budget calendar) is the complete, recurring sequence of stages through which a government budget passes — from its preparation to its final review and audit. It is a continuous, never-ending cycle, because as soon as one fiscal year's budget is closed, preparation for the next year's budget begins. In Nepal, the budget cycle is governed mainly by Article 119 of the Constitution of Nepal (2072) and the Financial Procedures and Fiscal Responsibility Act (FPFRA), 2076.

The budget cycle consists of the following major stages:

1. Budget Formulation (Preparation): The Ministry of Finance (MoF) issues a budget calendar and circular to all ministries, departments and provincial/local governments. Line ministries prepare and submit their estimates; the National Planning Commission fixes the ceiling for the annual development programme; the MoF consolidates these into the annual budget. In Nepal, this stage generally runs from Falgun to Jestha.

2. Budget Approval (Legislative Stage): The Finance Minister presents the budget (the annual estimate of revenue and expenditure) in the joint sitting of both Houses of Parliament on 15 Jestha (as per constitutional practice). Parliament debates it, and the estimates are passed through the Appropriation Bill, Finance Bill and other related bills. The budget must be approved before the start of the fiscal year (Shrawan 1).

3. Budget Execution (Implementation): After approval, funds are released to spending agencies through the Financial Comptroller General Office (FCGO). Ministries and departments spend the allocated amounts on recurrent and capital expenditure, following the rules of the FPFRA and the Public Procurement Act. This stage runs throughout the fiscal year (Shrawan to Ashad).

4. Budget Monitoring and Control: During execution, the MoF, line ministries, FCGO and the Financial Comptroller General's Office monitor spending against allocations. Supplementary grants, vote transfers and re-appropriations may be made with parliamentary approval where necessary.

5. Accounting and Reporting: All government offices maintain accounts and submit monthly and quarterly reports to the FCGO and MoF. The FCGO prepares the Annual Financial Statement (consolidated accounts) showing actual revenue and expenditure.

6. Audit and Review (Post-Audit Stage): The Office of the Auditor General (OAG) audits the government accounts and submits its annual report to the President, who lays it before Parliament. The Public Accounts Committee (PAC) of Parliament examines the audit report and gives directives. This completes the cycle and feeds back into the next year's formulation.

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Major Differences Between a Private Enterprise Budget and the Government Budget

Conclusion: The fundamental difference lies in motive — a private enterprise budget is profit-oriented and internal, whereas a government budget is welfare-oriented, legally binding and publicly accountable.

Net Present Value (NPV)

NPV is the difference between the present value of all future cash inflows and the present value of all cash outflows of a project, discounted at the required rate of return (cost of capital).

$NPV = \sum_{t=1}^{n} \frac{CF_t}{(1+k)^t} - I_0$

Where:

• $CF_t$ = cash inflow in year $t$
• $k$ = discount rate (cost of capital)
• $n$ = project life
• $I_0$ = initial investment

Decision Rule

• NPV > 0 → Accept the project (adds value to the firm)
• NPV = 0 → Indifferent (project just breaks even)
• NPV < 0 → Reject the project (destroys value)
• Among mutually exclusive projects, select the one with the highest positive NPV.

How NPV Helps in Project Management Decision

1. Wealth maximization: It measures the absolute increase in firm value; a positive NPV directly adds to shareholder wealth.
2. Time value of money: All cash flows are discounted to present value, so the timing of benefits is properly accounted for.
3. Uses all cash flows: It considers the entire stream of cash flows over the project's whole life, not just one period.
4. Clear accept/reject signal: The result is expressed in absolute money terms, making the decision simple and unambiguous.
5. Comparison of projects: Projects of different sizes and durations can be ranked on a common, consistent basis.
6. Considers risk: The discount rate can be adjusted upward for riskier projects, so risk is built into the decision.
7. Consistency with goal: It aligns project selection with the firm's objective of maximizing value.

Limitations

• Requires an accurate estimate of the discount rate.
• Cash flow forecasts may be uncertain.
• Ignores managerial flexibility (real options) and project size in ranking.

Conclusion: NPV is the most reliable capital budgeting technique because it uses discounted cash flows and shows the exact value a project adds. A project should be accepted only when its NPV is positive.