Beyond Sport Online Learning Session

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Nov 10, 2013 (3 years and 5 months ago)

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Beyond Sport Online
Learning Session



Toolkit: Budgeting and
Forecasting






www.pwc.com

PwC

What is financial management?

Financial management can be defined as managing the finances of an organisation in order to
achieve financial and strategic objectives. Done effectively, this should include a
view of the past
and a
plan for the future...


Financial statements and reports are
backward looking,
summarising income and
expenditure over a certain period of time.


Financial planning and budgeting is
forward looking
, forecasting what is going to happen
and what resources will be required in the future.




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...are delivered efficiently.

...are within budget.

...deliver expected financial benefits.

Establish...

Monitor...

Control...

The purpose of financial
management is to...

...financial resources of an organisation in order to
ensure that activities / programmes...

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Why is financial management important?

3

Make optimum use of their money to achieve maximum returns.

Understand if they have the resources to meet their objectives.

Identify short term financial issues and address them as early as
possible.

Express their intentions, and explain what resources are required to
achieve them.

Inform all levels of the organisation about what needs to be achieved,
and the resources available for doing so.

Financial management

helps organisations to...

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Financial statements

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Income and expenditure statement

An income and expenditure account should only contain information regarding cash flow:
money in
and
money out
.










It provides a summary of income and expenditure over a specified time (usually one year).


It includes only revenue items.


The balance at the end shows the net operating result in the form of surplus (i.e. excess of
income over expenditure) or deficit (i.e. excess of expenditure over income), which is
transferred to the capital fund shown in the balance sheet.




5

In

Out

Cash inflows...

payments into an
organisation from members
or other sources

Cash outflows...

payments made by
an organisation

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Example: income and expenditure statement

6

2011 (£)

2010 (£)

Income

Functions Income

4,500

2,000

Donors

10,000

8,500

Sponsorship

5,000

3,000

Total Income

19,500

13,500

Expenditure

Wages

9,500

6,000

Rent

4,000

3,750

Utilities

900

800

Travel

1,000

900

Net Surplus (Before

Tax)

4,100

2,010

Net Surplus

(After Tax)

4,100

2,010

It should refer to a specified period
(usually 12 months).

Different ‘types’ of income should
be listed in the left hand column.
There are no rules around what
these categories can be
-

you may
find it easier to have lots of
different categories or you might
wish to to group similar items
under one heading.

Expenses are then listed


categorised appropriately.

Income minus expenses gives a net
surplus (if income has been greater
than expenses) or deficit (if
expenses were greater than
income).

The net figure is stated before tax
and after tax.

NB:
tax exemptions may differ in accordance with
location of operation
-

contact local charity
commission and / or HMRC for further details.

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Balance sheet


An organisation’s balance sheet is a snapshot of assets and liabilities and gives a view
financial health
at a specific point in time.


An organisation should ideally have more assets than liabilities
-

similar to the income and
expenditure account.


A version of the balance sheet should be presented at monthly meetings to ensure that
financial performance is being monitored.


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Example: balance sheet

8



2012 (£)

2011 (£)

Fixed Assets

15,000

15,000

Current Assets





Debtors

450

600

Cash at Bank

2100

2000

Cash on Hand

1350

1100

Stock

400

350

Current Liabilities





Overdrafts

0

0

VAT

650

500

Creditors

500

200

Accrued Expenses

450

375

Excess of Current Assets over Current Liabilities

2700

2975

Total Assets less Current Liabilities

17700

17975

Long Term Liabilities





Loans

3500

4000

Net Assets

14200

13975

Retained Reserves





Previous Balance

13975

12110







Total Reserves

14200

13975

Assets are listed at the top of the
balance sheet grouped into
fixed

and
current

assets.

Current assets are cash or assets
which are readily convertible to
cash.

Current liabilities are amounts that
are due in the short term.

The difference between the two
gives us a quick measure of how
well an organisation is doing

Total liabilities are deducted from
total assets to give the net asset
figure.

Reserves show what investment
has been made into an
organisation. Reserves are
not

a
pot of cash. They are calculated by
taking last year’s closing balance
and adjusting for this year’s surplus
or deficit.

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Financial planning

Why is financial planning important?

Financial statements (balance sheet, income and expenditure account) give a historic view of an
organisation, but another source of financial information is necessary


budgeting and planning.


Financial planning is essential because...


Organisations need to consider what is likely to happen during the fiscal year, and plan
accordingly.


It is too late to discover at the end of the year that income was not sufficient to meet
expenditure.


There is no legal requirement to prepare financial plans (budgets), and no specific format that
these plans should take. It is important for an organisation to choose a process that works for
them, and allows them to obtain relevant information.

Financial plans should not be too easily achieved, but also must not be too ambitious. This can
be a difficult balance to achieve


the must remain
realistic.



Three steps in financial planning

Control

If variances are observed, take corrective action where necessary

Monitor

Regularly reviewing performance


compare actual performance against
budgeted performance

Prepare

Planning for the year


preparing the

budget
. What needs to be achieved?
What resources are available to do so?

1.

2.

3.

What is a budget?


A budget is a financial plan for a set period in the future.



Organisations should consider what income they expect to receive and what expenses they
are likely to incur during this time period.



This information can be used to predict the surplus or deficit they expect to obtain during
the budgeted period.


A typical budget setting process could involve seven simple steps:


Agree objectives for
the year

What income will be
available?

What expenses will
be incurred?

Construct a draft
budget

Review predicted
budget surplus /
deficit

Make any necessary
changes

Seek formal approval
sign / off

1

2

3

4

5

6

7

Neither method is more or less appropriate. Many organisations employ a
combination of the two


beginning
incrementally

and using
zero
-
based

techniques and analysis where necessary.

There are two types of budgeting...

Zero
-
based budgeting


Start with a blank page.


All income and expenditure will be considered & analysed in depth.


Level of analysis allows for consideration on how appropriate each ‘spend’ is


Incremental budgeting


Start with budget from previous period (if there is one in place) and adjust accordingly


enabling ‘quick’ forecasting if performance has been consistent.


Limited opportunities for research


particularly if significant changes may occur over the
next fiscal year.


Before setting a budget...

Look at financial statements from the previous budgeting period (usually 12 months)....



Consider income and expenditure from the previous 12 months (or length of budgeting
period)


providing an idea of surplus / deficit that an organization can anticipate to
generate


Split this information over the course of 12 months (or length of budgeting period) to
anticipate when income is earned, and when expenses are incurred
-

depending on the
nature of income or expenditure it might be split evenly over the year or associated with
certain months


Remember that the surplus / deficit on an income & expenditure sheet will be the product
of 12 months of cash flow


whilst a budget may incur either surplus or deficit from
month
-
to
-
month, before reaching the end of the fiscal year.


The budget setting process (1/3)



What needs to be achieved
-

the main driver for income & expense.


Objectives should be clearly defined so success can be measured
easily.


Examples include: plans to grow, improve performance, coordinate
events, fundraising, reach more people etc.



Income to achieve objectives must be considered.


For example, these may include: fundraising, grants, donations,
sponsorship etc.




Expenses for the year are likely to include: wages, rent, cash
expenses, utilities, insurance etc.

Agree objectives for
the year

1

What income will be
available?

2

What expenses will
be incurred?

3

Construct a draft
budget

The budget setting process (2/3)


After considering incomes & expenses, you should prepare a draft
budget.


Be realistic in your considerations.


Be prudent
-

it is better to understate income & overstate expenses
than vice versa.



Are these reasonable?





The draft budget should be reviewed to ensure everybody is happy
with predictions


A surplus may be impossible to achieve


a deficit may be acceptable


make sure everybody is comfortable with targets

4

Review predicted
budget surplus /
deficit

5

Make any necessary
changes

6

Seek formal approval
sign / off

The budget setting process (3/3)


Not only should the budget be approved, everyone should accept the
expectations to work within in


Without this, objectives will not be effectively achieved


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Example budget: summary of expenses

Summary

Item
description

Estimated

c
ost

1.
Labour

0

2. Materials & Supplies

0

3. Facilities

0

4. IT Infrastructure

0

5. Software Licenses & Support

0

6. Training

0

7. Travel

0

8. Administration

0

9. Other

0

Total

0


Complete a summary table to ensure
that goals for the fiscal year are
clearly outlined


Input from stakeholders at all levels
within an organisation should be
considered and incorporated where
appropriate


Estimated costs must not be too
generous


but they should also not
be too stringent

Example budget: drill down into each section

1. Labour

Role &
Name


Internal
programme
s
taff

Days

Cost

External specialist consultants

Days

Cost

Free lancers

Days

Cost

Volunteer

costs

Days

Cost

Total
labour









Days











Cost

2. Materials and Supplies

Item
description





Name





Purchase of
new
o
ffice equipment

AN
other

























Total
materials
&
supplies cost


Break down the initial summary into
smaller, more specific categories


Highlight individual items (and
groups of items)


Provide detailed cost estimates for
each item


Does the sum of these estimates
match your initial summary
estimate? (They can total a sum
which is lower, but they must not
exceed that amount).

Example budget: allocating cost & time


Allocated cost and time by in monthly buckets allows an organisation to identify how
much cash will be required at specific points during the budgeted period


Completing this process can also help to commit resources for a specific amount of
labour days


Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Total

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

2. Materials and Supplies

Item
description





Name

Purchase of
new
o
ffice
e
quip

AN
other

























Total
materials
&
supplies
c
ost

Allocating time


staffing projections


Staffing projections should be recorded


these can be recorded on a daily basis so all work
is accountable


Projections can be based upon work which has happened previously


how many hours
were required from how many members of staff to see a project through to completion?


Work around these estimates rather than on an ad
-
hoc basis


this will ensure an
organization remains within budget


Monitoring a budget

Having set a budget, it is crucial to check actual performance against budgeted performance...



Ideally, an organisation should review actual performance against budget on a monthly
basis


Monitoring must happen in a timely manner to ensure it is not too late to take corrective
action


Comparison of actual performance against budgeted performance is known as
variance
analysis


In the instance of a one off event, or embarking on a capital project that has its own
individual budget it will require more regular monitoring


Upon identifying instances where actual performance does not meet budgeted
performance, an organisation must investigate the reasons for these variances, and take
action


Approaching & investigating variances

Gather information
on actual
performance

Document all income
and expenditure


create new categories
if necessary

Establish actual
figures

Compare these to
budgeted information
& calculate the
difference

If variances have
occurred


establish
where they occurred

Investigate reasons
for variances

Differences in
budgeted volume or
budgeted cost will
account for some
variances

Were facilities over
utilised? Were rent or
utility costs
increased?

Establish root cause
of variance


develop
better control
techniques

10 things to remember for successful budgeting...


1.
Involve as many people as possible in the budget setting process

2.
Allow sufficient time to complete the budget setting process

3.
Look ahead when budgeting


don’t base it entirely on the last 12 months

4.
Make budgeting a continuous process

5.
Learn from previous mistakes


don’t be detracted by them

6.
Use internal knowledge to make the budget as robust as possible

7.
Be willing to challenge previous practise

8.
Regularly review actual performance against budgeted performance

9.
Partner positive & negative variances with an explanation

10.
Ensure that key parties understand what is happening at every stage

This publication has been prepared for general guidance on matters of interest only, and does
not constitute professional advice. You should not act upon the information contained in this
publication without obtaining specific professional advice. No representation or warranty
(express or implied) is given as to the accuracy or completeness of the information contained
in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its
members, employees and agents do not accept or assume any liability, responsibility or duty of
care for any consequences of you or anyone else acting, or refraining to act, in reliance on the
information contained in this publication or for any decision based on it.

© 2013 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to
PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a
member firm of PricewaterhouseCoopers International Limited, each member firm of which is a
separate legal entity.