Budgeting

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Budgeting
Chapter 6
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Areas of Discussion

• The Budgeting Process
• The Difference between Capital Expenditures
  versus Operating Expense Items
• Lease versus Buy Which One is Better?
• Other Budgeting Factors to Consider
• Additional Resources

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Budgeting

• Budgeting a planning process
• Budgetary Control the process of regulating the
  operating budgets of the organization

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Purposes Of Budgeting

• Plan for the future
• Maximize profits
• Maintain cost effectiveness

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Advantages Of Budgeting

• Requires management consideration of
  organizational policies
• Assists departmental-level managers in developing
  practices to attain budgetary goals
• Helps managers to identify resources needed to
  attain goals

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Advantages Of Budgeting

• Assists managers in making accurate, timely
  decisions regarding organizational operations
• Assists in identifying which units are not
  operating efficiently
• Assists in identifying which units are having
  difficulty in achieving company goals

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Limitations Of Budgeting

• Budgets are based on estimates. Budgeting
  depends on how accurate the estimates are.
• Having employees stay within budget limits is a
  challenge.
• Management has to motivate employees about budget
  limits.
• Budgets depend on how accurate the revisions are.

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Prerequisites of Successful Budgeting

• Proper organization
• Proper groups of tasks within functions
• Definitive lines of authority and areas of
  responsibility
• Financial data
• Number of units sold
• Cost of producing units sold
• Emerging financial trends
• Commitment of top management

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Budget Preparation

• Determining the budget period
• long enough to include seasonal fluctuations
• Developing the budget
• department budget
• master organization budget
• budget committee
• Chief Financial Officer

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Possible Budget Items

• Personnel
• Staff compensation
• Benefits
• Recruiting
• Bonuses/overtime
• Education/training
• Consultants/ temporary help

• Hardware
• Upgrades
• Maintenance and support
• New equipment
• Leases/rentals
• Replacement components

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Possible Budget Items

• Software
• New software (applications, operating systems,
  utilities, etc.)
• Upgrades
• License renewals

• Telecommunication Services
• Dial-up services
• Service fees for handheld devices and cell phones
• Frame relay
• ISP services

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Possible Budget Items

• Supplies
• Printer consumables (paper, toner)
• Backup tapes

• Travel and entertainment
• Conferences
• Off-site travel to branch offices and new sites

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Possible Budget Items

• Miscellaneous
• Books and subscriptions
• Membership dues
• Postage
• Duplication

• Depreciation
• Hardware
• software

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Possible Budget Items

• Physical Plant
• Data centers services (cabinets, raised-floor,
  HVAC, electrical
• Cabling (fiber and copper)
• Furniture

• Outside Services
• Disaster recovery
• Off-site tape storage
• Service bureaus
• Consultants

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Possible Budget Items

• Overhead
• Telephone
• Rent
• Utilities

• Other
• Taxes
• Insurance

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Reviewers of Your Budget

• Staff
• Supervisor
• Director
• Vice President
• Chief Financial Officer

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Employee Involvement With Budgeting

• Involve employee in budgeting process
• Reflect realistic estimates of operating costs in
  budgets
• Prepare for unforeseen circumstances
• Commit employees to budget

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Estimating (and Overestimating Your Numbers)

• General practice to overestimate
• Gives room to cut if upper management asks to
  reduce spending
• Gives room for unanticipated expenses that
  invariably emerge
• Increases likelihood that you will be within
  budget for the year

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Revising The Budget

• Periodic review
• Progressive review
• Moving review
• Zero-based budgeting (ZBB)--justify costs each
  period
• Traditional budgeting--increase a percentage from
  last years budget

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Getting Approval and Defending Your Budget

• Summaries are generally the norm when presenting
  budget
• Include how requested incomes will assist the
  company in the mission and goals rather than just
  focusing on IT department
• Explain how budget reductions will impact various
  goals and projects (company as well)
• Be prepared to adjust budget as requested

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During the Year Tracking and Revising Your
Budget

• Verify monthly transactions for accuracy
• Revise budget
• Include new projects
• Eliminate or reduce projects
• Update estimated costs
• Demonstrate anticipate cost reduction

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BUDGETARY CONTROL

• Budget reports
• explain exceptions
• give comparison base
• summarize much of the report
• interpret information where appropriate
• use charts and graphs for visual view of data
• maintain consistency with the report format

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COST CONTROL

• Keep expenditures as low as possible
• Develop standard costs for various office
  operations

• Develop a cost-conscious staff
• Develop efficient operating procedures
• Allocate costs of operations to appropriate
  functions
• Identify inefficient operations

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• Controlling costs for a few cents saved is not
  worth the effort.

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Information for Operating Costs

• Can help identify actual costs with accepted
  costs
• Can identify inefficient operations
• Can help determine new equipment needs
• Can determine work methods to be revised or
  revamped
• Can identify alternative procedures

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The Difference between Capital Expenditures
versus Operating Expense Items

• Capital Expenditure An item that will have a
  useful life of several years
• Operating Expense Value of something that is
  gone in a shorter period of time than a capital
  item
• Review depreciation schedules for company
• Gray areas

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Techniques For Controlling Office Operating Costs

• Cost breakdowns
• Salarieddirect and indirect
• Suppliesdirect and indirect
• overhead
• Standard costsunit costs
• Cost analysis studiespresent with past

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Corrective action procedures

• Making changes when costs exceed an acceptable
  level.
• Work procedures
• Employees (not properly trained)
• Equipment (not properly functioning)
• Supplies (not appropriate quality)
• Employees (not cost conscious)
• Employees (not motivated to perform)

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Lease versus Buy Which One is Better?

• Pros
• Predictable payments for life of lease
• Allows for companies with limited cash flow to
  obtain expensive equipment
• Allows for predictable and planned turnover of
  equipment

• Cons
• Extra effort during purchasing to coordinate
  activities of leasing company and vendor
• Complications arise if equipment is upgraded
  during lease period
• Tracking inventory of high volume of equipment

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Lease versus Buy Which One is Better?

• Pros
• Companies dont have to own equipment
• Depreciation and interest on debt may be tax
  benefits

• Cons
• Packing and shipping equipment can be expensive
• Charging equipment to individual departments is
  extra work

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Other Budgeting Factors to Consider

• Growth of your departments workload
• Technological change
• Staff
• Software maintenance
• Hardware maintenance

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Other Budgeting Factors to Consider

• Time-and-Material Contracts
• Risks with TM
• Repairs include persons time and parts
• Vendors give priority to customers than to calls
  for TM service
• Vendors TM Policies
• Hourly rates and overtime
• Minimum time charges
• Charges for travel
• Credit for defective parts that are swapped out
• Availability of parts
• Warranties (three years is common)

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Summary

• Budgets require planning and organizing
• Budgets help plan for the future, maximize
  profits, and maintain cost effectiveness
• Budgets are about working in the present, looking
  to the future, and utilizing the past

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• Budgets require goals, control, and limitations.
• Budgets require top management support,
  department management support, and employee
  support.
• Capital versus operating costs must be
  considered.
• Budgeting will influence the success of a company.