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Budgeting - Budgeting Management Principles Kines 4433...

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Unformatted text preview: Budgeting Management Principles Kines 4433 Table of Contents • Overview – Functions – Terminology • Budgeting Process – – – – Characteristics Components Calendar Approaches • Categories of Budgets – Categories – Types of Budgets – Capital • Managing Budgets Budget • French “bougette” - meaning leather bag • a financial plan indicating expected income and anticipated expenses for a specific time, which can be used as a means of exercising financial control 4 F unctions • • • • Policy document Operations Guide Financial plan Communication device Terminology • Accounting - recording,classifying, summarizing, and interpreting of financial data • Accounts payable - money owed to another • Accounts receivable - money owed to you • Accrual accounting- revenues are recorded when earned and expenses are recorded at the time they are incurred • Assets - properties of value owned by a business firm or by an individual Terminology • Balance sheet - financial statement that reveals the asset, liabilities, and owner’s equity • Capital - money, goods, land, or equipment used to produce other goods or services • Contingency fund- money allocated for use in cases of emergency • Encumbrance- an obligation to disburse funds in the future Terminology • Equity - money value of a property or of an interest in a property in excess of claims or liens • Fixed Asset - land, plant, equipment, and other physical productive assets - have useful life in excess of one year • Fixed costs - costs that must be incurred regardless of the level of production undertaken Terminology • Gross profit - profit earned on sales after deducting the cost of the goods sold but before deducting other business expenses • Income statement - financial statement revealing the summary of the income or loss resulting from the business transactions for the preceding period Terminology • Ledger - individual account books that keep a running balance of the status of each account • Liability - debt owned by an individual to others and the equity of creditors in business firms • Net income - earnings of a company after allowing for all legitimate business expenses, including taxes Terminology • Operating expenses - expenses incurred because of the production operations of the business firm • Profit - excess of sales income after deducting all related expenses • Variable costs - costs whose total magnitude varies directly with the level of production E stablishing an Accounting System • System should be able to be – – – – Easy and friendly Track daily financial transactions Reliable and flexible Do checks and balances E stablishing an Accounting System • Include: – – – – – – – – Accounts Payable Payroll Accounts receivable Inventory control General ledger Financial statements Sales analysis Invoicing accounts E stablishing an Accounting System I nternal Control Systems • Business Checking Accounts • Monthly Bank Reconciliation • Evaluate Petty Cash I nternal Control Systems Business checking account • • • • Deposit all cash transactions daily Compare deposit receipts to cash receipts Develop internal system for paying bills Possibly have two check signers I nternal Control Systems Monthly bank reconciliation Compare monthly bank statements to facility account records Reconcile any difference between bank and business accounts Have adjustments made by different person I nternal Control Systems Evaluate Petty Cash • Establish petty cash fund • Determine max amount that may be used for petty cash • Develop a petty cash voucher • Replace cash out with receipt • Reconcile transactions regularly • Reimburse cash with check Petty Cash Fund • Small payments impractical to pay by check Cash Versus Accrual Accounting • Cash accounting- recording transactions only when the accounting entity receives or pays cash (record revenue and expenses only when cash is actually received or paid out) • Accrual accounting-recording transactions in the accounting period during which they occur regardless of when paid or received Why clubs use accrual system • Better cash management • More realistic picture • Report net worth easily F inancial Statements • Provide financial summary of current status of the organization • Depicts the strengths and weaknesses of the business and the gains or losses arising from various transactions • Two major types: balance sheet and income statement Balance sheet • Purpose is to give the management pertinent information about the financial condition of the business on a specific date • Assets=liabilities + owner’s equity • Assets=anything a business owns of monetary value Balance Sheet • Balances of all asset accounts such as cash, accounts receivable, etc • Balance of all liability accounts such as accounts payable, notes, etc Assets=liabilities + owner’s equity • Assets=anything a business owns of monetary value (land, facilities,equipment) – Two categories: current assets (cash, accounts receivable, inventory, prepaid expenses) and fixed assets (land, building, equipment) Assets=liabilities + owner’s equity • Liabilities=amounts owed to creditors – Two categories: current liabilities (notes, accounts payables, accruals) and long-term liabilities (take longer than one year to pay back) Assets=liabilities + owner’s equity • Owner’s equity (net worth)= owner’s claim on assets of the business I ncome statements • Statement of profit and loss-reflects financial results of business operations over a specific time (month, quarter, or year). • Includes revenues and expenses Budget Planning • 4 typical types of budgets – – – – Sales Operating Capital Cash Sales budget • Projection of revenue categories directly affecting overall business Operating Budget • Goal is to summarize the financial projections of all phases of the business • Each income and expense category is broken down into line items Capital Expenditure Budget • Future cost of projects • In health clubs (4-6% of total annual revenue goes to capital budgets) Cash Flow budget • Period-by-period estimate of amount and timing of the cash flows produced by planned operations Budget Preparation • Steps – – – – Call to action Draft presentations Completed budget Budget analysis Budget Calendar What are my budget responsibilities? • Budget of one program or for budgets that encompass larger entities What budget style or format does the agency use? What is my timeframe? What is the agency’s budget calendar? How much time do I have to prepare the budget? I ncome management • Typical health centers – 82% membership (due/initiation) – 18% nondues (31% sport programs, 6% fitness programs, 7% profit centers, 2% misc) Key for future is to increasing amount supported by nondues-related profit centers • The Most Profitable Programs and Services Offered by Clubs As part of a supplemental survey, clubs were asked to identify their five most profitable programs or services--i.e., those programs with the greatest net operating revenue before overhead. The following figures indicate what percentage of clubs cited a given program or service as being among their five most profitable. • • • • • • • • • 1. Personal Training 50.5% 2. Massage Therapy 28.2% 3. Pro Shop 26.2% 4. Aquatics Programs 24.3% 5. Tennis Programs 20.5% 6. Food & Beverage Sales 11.7% 7. Tanning 9.7% 8. Physical Therapy 7. 8% Summer Camps 7.8% 9. Kids Programs 6.8% Martial Arts 6.8% * For example, 50.5% the clubs responding reported that personal training services were among their five most profitable programs. Accounts Receivable • Amount owed to business • Effective management includes 3 tools: -sales analysis (tracing and categorizing) -aged trial balance (length of time for outstanding balances) -credit policy (collection policy) E xpense Management • Typical health club 70% operating/22% fixed expense • Categories-payroll, rent/lease, administration, utilities D epreciation • Process of allocating cost of a long-term asset over estimated useful life as an expense. • Must know useful life and salvage value 12 tools of expense management • Accounting controls and security • Value analysis • Bidding • Negotiating • Doing it yourself • Eliminating • • • • • • Contracting out Trading or bartering Substituting Donating Efficient space use Buying used Tax considerations • Federal taxes • State and local taxes Compensation • Make certain that pay is competitive with similar positions • Recognize that employees are incomeproducing assets • Balance payroll with employee productivity • Manage payroll costs • Consider payroll costs as investments Oklahoma City Market Vale • • • • Head Athletic Trainer- $44,000 Physical Therapist- $56,500 Exercise Specialist- $35,000 Campus Recreation Director- $52,000 Groups of employees • Upper management/supervisors general manager • Full-time staff (salaried) front desk manager • Full-time staff (hourly) tennis instructor • Part-time staff (hourly) child care staff • Outside contractors aerobics instructor F orms of compensation • • • • • • Wages and salaries Overtime pay Commissions Bonuses and profit sharing Performance-based bay Pay for time not worked (vacation, holidays, sick, etc) • Benefits (medical, life, disability, death, illness, 401 K, retirement, etc) Benefits • Soft cost to employees but to employer they are hard cost. • Examples: Taxes (FICA, unemployment, workers’ comp, disability), health and life, holiday, vacation, sick, retirement, bonuses, training and education, uniforms, etc. Can be anywhere from 21-32% of base salary Three aspects of budgeting • Budgeting Process • Categories of budgets • Managing budgets E stablishing an Accounting System • System should be able to be – – – – Easy and friendly Track daily financial transactions Reliable and flexible Do checks and balances Budget As a Process • Should be connected process to all of organization • Helps organizations achieve mission and objectives • Helps prioritize needs • Develops future direction Budgeting Characteristics • Defines, verifies, and redefines organization objectives • Both present and future oriented • Focuses on expenditures and outcomes • Identifies population • Recognize and respond to local politics Budgeting Characteristics • Enhance coordination of divisions • Connects and supports other planning and evaluation • Complies with State and Local laws • Produces understandable information - to increase communication Common components to budget processing • 1. Start with development, clarification, and review of the organization goals for next year • 2. Managers develop work plans and estimates of revenue and expenditures • 3. Evaluate the timing of the anticipated revenue and expenses to understand the appropriate time to make purchasing and hiring decisions Budget Process • Must support strategic plan • Organized based upon structure of the organization (may be organized by departments, geographical location, divisions or units) Budget Process • Operating budgets are developed because– require separate source of funding (grants,bonds) – necessary information to assist with program fund raising – essential because operate with partnerships with several organizations – desirable to more precisely monitor and evaluate Operating Plan - two parts • Mission statement – is a verbal description of the agency’s goals and objectives and how the agency anticipates meeting them • Budget Statement – financial component of the operating plan – they document anticipated income and expenses, and explain cash flow and staffing M ission Statement four components • Goal statement - broad statements or general direction • Objectives - statements of intention that are measurable • Strategies - specific ideas to implement to achieve objectives Assumptions - items that are necessary for strategies to be accomplished that are outside the control of the agency (school has to give permission to distribute flyers) Budget Statement four components • Budget assumptions - explanation of each line of the budget • Staffing guidelines - explanations of when staff will be hired, rate, and hours • Budget spreadsheet - actual line-item breakdown of budgeted amounts (monthly) • Cash flow analysis - reviewing the bottom line see when cash is available to pay expenses Calendars and timelines (Budget Cycle) • Length of the budget development cycle varies depending upon size and complexity of the operation • Budgets take effect upon specific time of year (Fiscal, Calendar, Seasonal) • Budget cycle for approval usually includes many steps (2-6 months, depending upon how the organization is funded - government takes more time for approval vs. private) Budget Time Frame • Calendar Year • Fiscal Year Budgeting Approaches Two Approaches • Incremental – budget developed through incremental changes of previous budgets – use many methods (% increase, projected, demand/supply, even computer generated models) • Zero-based – each year start with zero and have to develop rationales for every item in the budget (income and expense) Approaches • Two other ways to approach budgets are: – fixed allocation budgeting - have set amounts they receive (common in P & R) – variable expense - expense and income generated are linked (if revenue is higher than expected then expenses can go up) F actors to determine type of budget • • • • • • • • Size or organization influence and roles of stockholders complexity traditions politics resources legal requirements organizational capabilities and support Two categories • Operating - developed each year to plan and allocate financial resources that will be used during the normal course of operations. Project income and expenses (wages, supplies, utilities, etc) • Capital - help organizations identify, evaluate, prioritize, and finance capital projects (land, facilities, major repairs, etc) Usually expensive items in which their cost is allocated over many years. Nonrecurring expenditures with multiyear impacts Choosing a type of budget • Format of budget impacts budgeting results • the format defines the readers’ reality and channels the readers’ attention and thought process Types of Operating Budgets • • • • Line-item Zero-based Program Revenue • Performance-based • Program/Performance • Cash flow L ine-item budgets • Focuses attention on items of expense - not purpose. It supports hierarchical authority and control • Earliest and most common type • Also called object of expenditure budgets • Income and expenses are grouped into accounts (specific categories) • Easy to understand and control L ine item - weaknesses • Focus on items of expense rather than goals • does not require or support evaluation of programs (not based on productivity but rather just status quo) L ine item - weaknesses • Also allows for efficient allocation of funds – never ask for less money – spend all monies that are allocated – never encourage scrutiny by making major changes – pad your budget - to prepare for cuts – eliminate request for new personnel or capital that will be on going – allocation of cuts and increase are spread equally across departments Z ero-based budgets (ZBB) • Priority based - requires a comparative assessment of input and outputs of existing and proposed programs • focus on efficiency and practicality • institutionalizes evaluation as part of budgeting process • Aim is to reduce duplication and establish priorities Z ero-based budgets (ZBB) continued • continuing review of existing and proposed programs – determine if existing programs should be continued – assess relevance and contributions with priorities and capabilities – assess capacity to continue program at acceptable level – increase efficiency of resource allocation across programs and departments Z BB Steps • clarify program goals • identify decision units • develop activity-decision packages (descriptions, goals, levels, funding) • rank decision packages • decide allocations based on ranking • execute and evaluate program performance Z BB advantages • Identifies and assess new approaches • requires to consider costs and benefits • everyone is aware of costs and level of performances Z BB weakness • Difficult to implement and sustain because: – perceived threat to existing – gives rise to negative competition – assessment can be difficult and costly – challenges status quo Revenue Budgets • Anticipates the types, amounts, and timing of revenue for different budget periods • Methods used to forecast revenues include: trend analysis and cycle projection, comparative evaluations, and econometric models. Revenue Budgets • Revenue projections are performed by: – examining past revenue performance – identifying internal and external factors that correlate with and have the most influence on revenue – making assumptions relating to the future condition and behavior of these factors Cash-flow budgets • Emphasis in on amounts and timing of cash inflows and outflows. • Positive cash flow is if available cash exceeds outflow • Negative cash flow is if cash expenditures exceed cash on-hand Cash-flow budgets • Cash-flow budgets: – project the amounts and timing of cash flow – predict periods of expected cash surpluses and deficiencies – identify possible strategies for dealing with shortages and surpluses Program budgets • Program budgets came about because of the concern that line item budgets were too focused on inputs and controlling expenditures, with little or no emphasis on outcomes. Program budgets • Program budgets redirect attention away from only expenditures to the purpose, benefits, performance of programs and facilities - link expenditures with policy, objectives, and impact Program budgets • Identify projected revenue and expenditures for distinct programs • Used frequently with programs funded by grants Program budgets - Advantages • better communication on how resources are allocated and expended within an organization • provide a comparison of the costs of providing different programs and facilities • allow a better understanding of the programmatic implications of proposed budget cuts • identify the extent to which fee-supported programs are covered Program budgets 5 components • • • • 1. Program description 2. Outputs 3. Expenditures (associated with outputs) 4. Performance measures (workload, efficiency, and indicators) • 5. Alternative approaches Performance budgets • Budgets which link input (resources) and outputs (volume of work produced) to outcomes (extent results have been achieved) • Important part is the workload measures(a work plan that justifies the budget total), cost and output measures (basis for comparing the cost and quality of services), if the services are delivered efficient and economically, and if the outcome and impact of the program meets the goals Performance/ program budgets • P/PB is newest form of budget and combines the other two. It is outcomebased and integrates planning, budgeting, and evaluation. • Links objectives to programs Performance/ program budgets • Process includes: – identification of broad program goals and expected outcomes for clients – consideration of services and strategies, then develop specific and measurable objectives – selection of a single outcome measure for each objective – documentation of outcome - impact on client is most important Capital Budgets • Commit and allocate money for major new items • Usually differ from operating because they differ in the source of funding, decisionmaking process, time frame, and monitoring Capital BudgetsCharacteristics • Provide relatively large benefit to organization that accrues over a period longer than a year • Difficult to reverse once purchased or started • Usually require formal review process Capital BudgetsPurpose • Assess and compare the likely affects and performance and financial requirements of alternative capital projects • determine and clarify relationship between capital projects and programs • forecast financial requirements • evaluate capital projects and financing methods with policy • identify the best investment Capital BudgetsD ecisions based on... • • • • • Contribution and support future capacity and capability regulatory and performance requirements replacement criteria (full life/return) linkage of acquisition and replacement to goals Budgeting Keys • • • • Cut cost without reducing quality Accountability Do not allow items to “walk” Every $ saved is a $ earned M anaging Tools • • • • • • Auditing Payroll analysis Purchase order system Bid system Inventory control Contingency planning Audit • Internal • External • GAAPP - general accepted accounting procedures and practices M anaging Tools • Auditing-review of financial operations – Internal-day-to-day procedures are being followed (within organization) – External-review the entire financial system, checks for accuracy and investigates all financial processes (outside organization) – **audits confirm accuracy – does not evaluate the quality of financial decisions M anaging Tools • Payroll analysis-compare projected expenses for payroll to the actual. Done each pay period • Purchase order system-centralized and automated to compare budgeted items verses actual purchases. Needs to incorporate policies and procedures like specifications, guidelines, authorization, ordering, and emergency buying M anaging Tools • Bid system-bid process encourages vendors to compete on specific item so organization can get the best price • Inventory control-information about movable and unmovable property. Identify large dollars items into an inventory base. Develop day to day inventory (stocking, storage, & distribution) Purchasing • Petty Cash • Purchase Orders • Bid and Quotes Petty Cash • • • • • • Establish small/emergency money Determine max amount Develop petty cash voucher Replace cash out with receipt Reconcile transactions regularly Reimburse cash with check Purchase Orders • Written approval of purchases • Assigned codes and numbers • Indicate account and department Bids and Quotes • Purpose to increase competition and decrease cost • Used extensively with government/nonprofit especially large $ items Bids • Written solicitation from vendors for specific service/good • Include: specific information, quality, quantity, date needed, how delivered, sample requested, etc. Bid Specs • First step is to get good specifications (as much information as possible) • Watch substitutions – and very low bids • Brand and/or equivalent product • Nonrefundable sample (if appropriate) Bids • Add color, size, materials, design, performance characteristics, etc. • Include history on delivered and service, dependability, size of inventory, financial stability, on-site installation, on-site repair, parts, warranty, etc. Getting Bids • Responsible bidder requires enough time to evaluate adequately the specifications, service, and warranty requirements of the bid. • Develop a bidder list D efinition of Cost • • • • Economical Social Environmental Risk Management M ethods of Accounting • Cash System - treats expenditures as actual expenditures only when money is materially spent • Accrual Accounting - expenses and income are recorded in the organization’s financial records when they are incurred (regardless of when money goes out) Cost • Monetary measurement of the amount of resources needed to create, implement, and evaluate programs Two types of Cost • Indirect Costs - those costs that an organization incurs regardless of whether or not it operates a specific program • Direct Costs - those that may be traced directly back to a specific program Cost Allocation Methods • • • • Equal Share of Indirect Expenses Percentage of Budget Time Budget Study Space or Measurement Studies D irect Cost • Fixed Cost - item is assumed to remain constant during a specified time period (i.e. rent) • Variable Cost - costs that may be directly attributed to the program and vary proportionately with change in volume (i.e. supplies) Continuum of Cost Recovery • • • • No Price Charge Variable Cost Partial Overhead Costs Full Cost Recovery Pricing Objectives • • • • • Efficient use of financial resources fairness or equitableness usage maximization commercial sector encouragement market disincentives Price Differentials • Based on: – – – – – – Participants Product Place Time Quantity Incentives Alternative Funding • • • • • • • Gifts and donations Grantwriting In-Kind Contributions Partnerships Scrounging Sponsorship Volunteers Psychological Dimensions of Pricing • • • • • Protection of self-esteem Price-Quality relationship Reference Point Consistency of Image Odd Pricing E stablishing Pricing • Cost-Based • Competition-Based • Demand-Based Revision of Price • • • • Tolerance Zone Customer Adjustment Perceived Value of Service Anchor Pricing ...
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