Budgeting Basics

Vicky Hsu

February 18, 2011

What is Budgeting? A projected financial picture

of an organization that links to its plan with a number of goals.

Shows what it takes (expenditures) to achieve these goals and what it is expected to make (incomes) when carrying them out.

Purpose of a Budget To provide a blueprint that the

organization follows to allocate its resources

To provide a target to measure against the actual result and recheck the direction the organization is taking

To hold people who are responsible for executing the plan accountable

Financial Planning and Budgeting

An effective budget: Provide the projected financial impact (input and output)

of a plan for the duration of interest Start from and link to the strategic and business plans Prevent crisis and stay on top of the activities Identify what resources are needed and how to obtain

and develop the resources to achieve the goals Lay all feasible options on the table and help decision

making for major changes

What Makes a Good Budget?

• Bring attention to where it’s needed• Clear• Flexible• Informative• Involve the right people• Links objectives and resources• Realistic• Right amount of details• Timely• Understandable

Types of Budget Zero-based versus incremental

Comprehensive versus references to current Advantages and disadvantages

Organizational versus programmatic Operational versus tying to specific programs or funding sources Consideration of non program-related costs

Bottom-up versus top-down Visions and consolidations Advantages and disadvantages

Master, operating, capital, cash flow, balance sheet

Budgeting Process

Ws: what, how, when, who

Planning Identify the coordinator and persons involved Agree on the key definition, assumptions, and document

formats Set timelines and key deadlines Determine and schedule training or meetings

Budgeting Process (cont.)

Coordinating Communicate responsibilities, expectations and

deadlines to everyone involved Explain and distribute forms, templates and assumptions Share information and avoid duplication of effort Establish formal procedure to solve problems and

reconcile competing interests

Budgeting Process (cont.)

Goal setting Identify program goals and objectives Evaluate alternative courses of action Determine available resources and resources required Set selection criteria Agree on goals and assumptions

Budgeting Process (cont.)

Information gathering and compilation Research and gather information about income and

expense based on program goals and assumptions Construct budget details by program Have one person compile all information and review it for

consistency and redistribute to everyone involved

Budgeting Process (cont.)

Review and Approval Have the finance committee and other appropriate

personnel review the budget draft and key assumptions Allow plenty of time for review and revisions Be sure to address all questions and recommendations

and revise accordingly Distribute budget draft along with program goals and

supporting information

Budgeting Process (cont.)

Implementation and management Communicate budget, program goals and timelines to

personnel involved Line up financial reporting according to budget Review actual income and expense compared to the

budget on periodically and discuss any variances Evaluate unexpected circumstances and need for re-

direction Update and revise the budget as necessary

Operating: Revenue – expense = surplus or deficit Comprehensive and corresponds to income statement Sources of revenue: contribution, dues, fees, sales,

royalties, investment earnings Type of expense:

Fixed or variable May or may not have cash impact

Budgeting Mechanics

Example of expense: Personnel (salaries, benefits, training) Purchased services, professional fees Rent, utilities, telephone, internet, maintenance Insurance Printing, shipping, postage Supplies, minor equipment Travel, meeting, meals Taxes, interest Depreciation

Budgeting Mechanics (cont.)

Budgeting Mechanics (cont.)

What should not be included in the operating budget? Capital : purchase or sale of land, buildings,

fixture, equipment, furniture, or computers Investments Financing: proceeds or principal payments on

loans Items that belong to other periods

Budgeting Mechanics (cont.)

Cash: Beginning Balance Plus: Receipts Minus: Disbursement Equals: Surplus/Deficit from operation Financing: borrowings and repayments for the period

Making it Realistic and Accurate

Investigate, analyze, research Past experience Similar organizations Vendor quotes Involve knowledgeable personnel Document and evaluate key assumptions and formulas Assess likelihood and probability

Decision Making and Priorities Effects or impacts of different scenarios:

Level of activities Buy or lease Borrow Delays With or without external funding

What is important? What is optional? Relationship between programs Sensitivity Capacity building

Budgeting as Management Tool

Direction: supervise the activities so that they are carried out in an effective and efficient manner and within time and cost constraints

Control: measure the progress of resources and personnel in accomplishing the desired objective by comparing the actual results and budgeting estimates to identify problems needing attention

Coordination: build consensus, decide on activities, and communicate allocation of resources across the organization

Question 1

What is not a purpose of budgeting?A. To communicate plans and expectations

B. To allocate resources and control spending

C. To compare actual results at the period’s end

D. To put strategies into action

E. To guide and motivate managers

Question 2

What is budget analysis about?A. Compare the actual results to its budget independent of

the implementation of strategies and activities

B. Identify the implication of actual results on the underlying assumptions

C. Exclusively focus on the sources of unfavorable variances and what drove them

D. Disregard whether a program covers its cost if the organization makes money

E. Expect actual results conform to budget despite significant changes in circumstances

Question 3

What is part of the budget process?A. Motivating

B. Controlling

C. Organizing

D. Decision making

E. All of the above

Question 4

What should be included in the operating budget?A. Unconditional contribution pledged previously to be

received

B. Equipment purchase that meets capitalization threshold

C. Principal payment of loans

D. Value of professional services to be provided by vendors free of charge

E. Cash to be invested in stocks, mutual funds, and bonds