Budgeting: A Necessary Evil

BUDGETING

A Necessary Evil

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Definition of Budget

A Budget is a plan for the future, expressed qualitatively (usually in amounts of money) that covers a specific period of time (normally one year).

Budgets serve three purposes: Planning Assessing Controlling

2


Planning3

First role of budgeting is planning A roadmap for personal or business expenses Allows you to meet objectives Most important part of budgeting is to think

about future plans and goals Have an in-depth conversation with family or

business leaders to understand needs


Assessing4

Second role of budget is assessing Allows family or business to make mid-

course corrections to financial plan Add income Reduce expenses Improve timing of purchases


Controlling5

Final aspect of budgeting is controlling Many people need to know about the financial

state of individuals or businesses Bankers and Mortgage Lenders Investors / Stockholders Partners and Board of Directors Regulators / Internal Revenue Service Employees and Clients Family Members


Additional Roles of Budget6

Compels communication throughout all levels of an organization

Focus planning on the future instead of day-to-day operations

Identify, understand, and address any potential constraints

Improve coordination of functional activities across diverse departments and divisions


Additional Roles of Budget (cont.)7

Deliver and implement standards of performance and excellence

Benchmark against industry trends and past performance

Provide motivation for department and functional managers throughout the company


Budget Strategies8

Top-Down Develops expected revenue first

Income or sales

Bottom-Up Estimate costs and expenses first

Using a bottom-up strategy is normally more accurate


Techniques for Creating a Budget9

Zero-Based Budget Starting with a blank piece of paper

Year-on-Year Budget Use prior years’ performance to estimate this

year’s revenue and expenses

Predicted Profit (or Loss) Difference between planned revenue and

expenses


Using Different Budget Techniques10

Zero-Based Budget Must be used for a new business or new

products Evaluate year-on-year budgets every 3 to 5 years

for correct inclusion of discretionary expenses

Year-on-Year Budget Established business or family expenses Adjust expenses by estimated inflation


Types of Costs to Include11

Fixed Costs Recurring and Known

Rent and lease expenses Computer / internet charges Employee salaries, wages, and benefits Utilities

Variable Costs Based upon production volume

Raw materials Shipping

Or Based upon activities Travel Maintenance / repair


Time Period for Budget12

Depends on type of business, consistency of sales and expenses, monitoring and control frequency

Suggested frequencies: Annual Semi-annual Quarterly Monthly Weekly Daily (for large projects)


Different Types of Budgets13

Master Budget Collection of all anticipated business revenues

and expenses, including capital

Production Budget Accounts for a single department, function, or

program Composed of sales and expense budget for a

particular division Typically administered by department manager


Sales Budget14

Part of the Production Budget Created for Each Business Division Must include the following:

Sales forecasts (volume, unit price) Purchases Direct labor costs Manufacturing overhead Selling and Administrative


Capital Budget15

Capital Appropriations involve Major Equipment or Land Purchases

Check with your tax advisor for your business

Closely tied to cash budget Pay for capital purchases up-front Negotiate a bank loan for purchases Raise capital through stock sale


Monitoring / Controlling the Budget16

The Budget is the Plan Compare Planned Revenues and

Expenses to Actual Revenues and Expenses Profit = Revenue – Expenses

Adjust the Plan Delay variable costs or capital

expenditures Increase advertising or purchase

equipment


Variance Analysis17

Used for monitoring and control Compare actual revenue/expenses to budget

Sales Variance = Actual Sales – Planned Sales Rent Variance = Actual Rent Expense – Planned Rent

Allows business leaders to make timely decisions Repair vs. replace equipment Delay travel or advertising expenses


Key Budget Learning Points18

Budgets are used for: Planning Assessing Controlling

Recommend using a bottom-up strategy to create a zero-based budget

Prepare for sufficient time period Master Budget (annual planning) Production Budget (at least quarterly) Operating Budget (weekly or monthly)


Additional Resources19

Personal or Family Budgeting Many videos available on the internet Financial Planning Association

Using Microsoft Excel to Create a Budget A sample budget

A Necessary Evil: The Budget by Teresa Jurgens-Kowal Get to the Point Books http://ryangroup.contentshelf.com/product?product=I130129000000BF4 [email protected]

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