Budgeting-Power-Pointx - Profmark

northcarolinasweekManagement

Nov 10, 2013 (3 years and 9 months ago)

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Budgeting

Introduction

Budgeting

is

the

key

to

financial

management


This

presentation

aims

to

help

you

to
:



understand

the

benefits

of

budgeting



develop

a

budget



monitor

your

budget

Principles of Budgeting

In order to develop and use budgets effectively in your
organisation


You will need to first have a sound understanding of the
principles behind

budgeting


These
can be summarised by asking three questions:




Why do a budget

at all?


What is a budget?



Who should be involved in preparing the budget?




Why budget at all?

The budget

is a powerful management tool

It

is a basis for financial accountability and transparency

It

tells you how muc
h money you will need in order to
carry out activities

It

forces you to re
-
think certain decisions and actions

It

helps you set performance targets

and goals

It

is part of the planning process

What is a budget?


It sets out money that will need to
be generated to cover the costs of
getting the work done (income)



It sets out money that will be
needed to be spent to get the
planned activities done
(expenditure)




It is an estimate or informed guess about what
you need in monetary terms to do your work

Who should be involved. . .?

It

depends on the type of organisation:


A

small business may need a small budgeting team


A

large organisation may need each of its branches
or departments draw up its own budget for its own
work….


and then these would all be consolidated into one
overall budget for the organisation



Who should be involved. . .?

The criteria to determine who should be
involved is:

Responsibility

An understanding

of the values, strategy
and plan for the organisation

Competency in relation to financial
management

The following personnel are usually
involved in the process:

T
he financial manager,

The project manager,

The bookkeeper or accountant



All key personnel
involved in the
process need to
understand the
steps required
throughout the
process

It’s a project

that takes some
time and thought…


Putting a budget together

takes some time and thought






View the process as a planning exercise

View the process as a means of gaining clarity of purpose



It’s a project

that takes some
time and thought…


As you prepare the budget, you will find yourself asking the
following questions:


Could we have spent less last year and still achieved the same
results or better?


How can we avoid wasting

money in the future?

Where can we cut?

Are there discrepancies in the budget?

Did the last budget produce a profit?



Questions that impact
managerial decision making….


The answers to the questions raised during the budgeting
process

will have an impact on important decisions that
management are required to address when running a
business


Such as : identifying problems



re
-
thinking action plans



setting staff performance targets






Time frames


Short range

month to
month plan
….

For a period of 12 to 24
months

A monthly breakdown
facilitates monitoring










…Long range plan….

For a period of 3 to 5 years on a
quarterly or annual basis

Based on a medium to long
term plan, it is not simply an
uninformed guess











When forecasting your budget, your time periods should include a short
range month to month plan, as well as a long
-
range year plan…..

Preparing the

budget

Step One


The sales or revenue budget is the starting point


Step

Two


Prepare your
operating costs budget


Step Three
-

Look at profit or loss from operations…. based
on numbers obtained from sales and operating costs
estimates


Step Four
-

Lastly, your budget should reflect the cumulative
profits or losses over a period of months










Preparing the
budget

The totals will tell you:


When your business will break even


When it will begin earning a profit


How much you may have to borrow or

inject into the
business before it is profitable




Step one: Sales or Revenue
Budget

Make reasonable estimates of the income you can expect to generate for
the upcoming year by month


List the likely sources of income and categorise them


Your income

budgeted figures

should be the result of a complete analysis
of:


Your marketing and sales activities


Historical data


Market research


Economic conditions


Make sure this figure contains high, low and medium sales estimates





Step one: Sales or Revenue
Budget


These sales numbers are critical as they will be used to
compute gross profit margin


And


will help determine operating expenses, accounts
receivable and inventory levels necessary to support the
business




Step Two: Projected Operating
Costs

This part of the budget should include all the costs of
operation

involved in producing and delivering the
product or service to customers


These may include:



The costs of purchasing

or producing the product or
service


Sales

and marketing costs


Your

business’s administration and operation costs


All

fixed, variable and semi
-
variable costs

Step Two: Projected Operating
Costs


When you are producing goods for sale


Plan production for the entire year


So that the company will produce enough inventory
to meet the units required in the sales budget


The units will then determine the direct material and
direct staff or labour needs for the year ahead

Remaining steps


Prepare the budget format


Add in notes where necessary


Obtain feedback


Finalise

The Budget planning

cycle










.”

1.

Review what you
have done
historically in terms
of impact,
effectiveness and
efficiency

2.

Review and
clarify your
vision, mission,
strategy and
objectives

3.

Prepare your
operational plans

4.

Assess the
resources you
will need to
meet the needs
of the plan
-
estimate costs.

5.

Draw up a budget
to cover the work.
Discuss, amend
and finalise the
budget.

6.

Implement plans,
monitor impact and
income and
expenditure
-
adjust
where necessary.

Different

kinds of budgets

The working budget



What you realistically

expect to generate or raise….


…a
nd

how this will be spent


“What if” budgets



These could include a “minimum” budget

required in order to survive


..or

an “optimal” budget


what you could do if extra money came in



Different

budgeting techniques

Incremental budgeting


where the figures are based on those

of
the actual expenditure for the previous year, with a % added for
inflation for the new year..


This kind of budgeting would be appropriate where each year is
very similar to the previous one in terms of activities


Zero based budgeting


past figures are not used as the starting
point. The budgeting process starts from scratch, with the
proposed activities for the year ahead


This kind of budgeting is used for business start
-
ups, and in an
ever
-
changing

and pro
-
active organisational environment

Cash Flow Budget



Profit and cash are not the same thing




A separate

cash flow budget is essential




A cash flow budget
shows the expected


flow of cash in and out of a business




and predicts its bank balance at



the end of the month


Cash flow management is the lifeline of a business’s
future growth


Profitability is the destination for the business and
cash flow is the vehicle which enables you to get
there……

Profit vs. Cash flow


A profit projection

is the tool that allows the business
to address the viability of the business


It includes non
-
cash expenses such as depreciation


Cash flow or liquidity means the ability

o
f

the business to meet its

c
commitments

as and when they fall

d
ue


Planning for cash flow means that you ensure that the
business can meet its day to day commitments

The process

..

Compare income
statement budgets first


You need to know the
net income figure
before you can
prepare the pro forma
balance sheet, as the
profit number must be
plugged into retained
earnings

Prepare the pro
forma balance sheet
budget

Consider each item in
fixed assets


equipment, expenses,
investments

Break down the
liabilities, retained
earnings, bank loans

Do the cash flow
projection

You will need both
income statement
and balance sheet
projections in order
to create the cash
flow budget

Implementation

Once the budget is
finalised……


Implement it !


Carry out the activities
necessary to generate income


Carry out the activities that
necessarily incur expenses



Monitoring

There are a few vital questions you can ask at the end of each

month:


With the budget vs.

actual comparisons in hand, ask your team
these key questions:



How are we doing compared to budget?


Are we on target in terms of income and expenditure?


Why

did actual results differ from the plan?

Monitoring


What

must we do now to have a better result next month?



How

can we keep the positive differences and avoid more of the
negative ones?



What

are we learning that will make next year’s budget better?



Monitoring the budget allows you to :


Measure how closely you are meeting your objectives in terms
of finances, and


make financial decisions based on the results

Variance Reporting

At the end of each month, prepare a variance report


The variance report allows you to compare the actual vs. budgeted income
and expenditure

The standard rule is where
-
ever you see a variance of more than 10% you
need to investigate that line item further, and if necessary, take remedial
action



You will be able to see where you are:



Under
-
spending



Over
-
spending



Are on Target



Taking action and management


The variance

report will give you the opportunity to:


Take action to correct problems, for example



The variance statement shows that you are repeatedly

spending too much on stationary each month..you could



Tighten controls on the stationary



Or increase the budget for stationary if you believe you
have under
-
budgeted for stationary



In conclusion

Budgeting

involves:


Planning


Human resource management
(setting goals and targets)


Financial management

Thank You

Name of presenter:

Position in firm:

Firm name:

Disclaimer
-

Whilst every care has been taken in
the compilation of this seminar, presentation
and handouts, no responsibility of any nature
whatsoever shall be accepted for any
inaccuracies, errors or omissions, nor for the
accuracy of any information contained in the
seminar handouts.