Budgeting

1
Budgeting!

• It is a thoughtful, on-going, decision-making
  process for allocating resources and setting
  priorities and direction. It is strategic in
  nature, encompassing a multi-year financial and
  operating plan that allocates resources on the
  basis of identified goals.
• Spreadsheets are quantitative summaries
• Historically
• control mechanism, now a mgt. Tool
• For profit vs. non-profit

2
Budget Functions

• A policy document
• Reflects your goals and objectives
• An operations guide
• Should include evaluations of performance
• A financial plan
• Should explain financial structure
• A communications device
• Should facilitate stockholder understanding of
  different decisions support allocation

3
Strategic Budgeting

• Can facilitate and perform these tasks
• Direct resources toward accompl org objs
• Better link financial plan operations
• Encourage alternative approaches
• Actively involve stakeholders
• Help identify implications of alternatives
• Identify necessary resources
• Provide a basis for evaluation
• Gives guidance to respond to opps threats

4
Budgeting as a Process

• Effective budgets (p. 652)
• Define org objs priorities
• Are both present future oriented
• Focus attn on both expenditures outcomes
• Identifies pops to be served (standards
  benefits)
• Recognizes and responds to local politics
• Enhances coordination across divisions and
  functions
• Connects other planning, ops and perform eval
  (fs)
• Involves internal and external stakeholders
• Encourages mgmt to enhance efficiency
• Complies w/ state and local laws/regulations
• Documents communicate guide implement eval

5
Elements of Budgeting

• Establish broad goals as guidelines for decision
  making
• Develop Approaches to achieve these goals
• Develop a budget consistent w/ approaches to
  reach goals
• Monitor and analyze performance
• Budget to actual performance of
  programs/facilities

6
Good Budgets

• Are related to Mission Objectives
• Op plan mission stmts budget stmts
• Are organized based on the orgs structure
• By dept., separate Parks and Rec., etc.
• Trend to manage each unit independently
• Indep.Business Op (IBO) or Stragegic Bus Op (SBO)
• Use Calendars and Timelines (cycles)
• Preparation shouldnt be hurried (many inputs)
• Includes Instructions (cover letter)

7
Budgeting Approaches

• For Operating and Capital Budgeting
• Incremental Budgeting
• Incremental changes from previous yrs budget
• Based on anticipated changes (demand, inflation)
• Many are computer based
• Can make it difficult to expand
• Zero-based Budgeting
• Have to dvlp rationales for every item each year
• Does not mean it is a break-even budget
• More complex, but evaluates programs continually

8
Budgeting Approaches

• For Expense Budgeting
• Fixed Allocation Budgeting
• Budget not related to revenue (they dont change)
• Budget callback (if unexpected factors affect
  ops)
• Encouraged to spend all funds
• Variable Expense Budgeting
• Budget is linked to amount of income generated
• Set a target income, allocate expenses based on a
  target percentage of actual revenue
• Common for orgs that generate their own
  operating rev.

9
Factors determining Practices

• Size of organization
• Number and influence of stakeholders
• Complexity of the program-facility line
• Legislative requirements processes
• Org budgeting traditions cultures
• Political issues
• Level sources of resources available
• Legal requirements
• Org capabilities, information support

10
Categories of Budgets

• Either operating or capital budgets
• Each w/ multiple categories
• Format channels readers attention
• Operating Budgets
• Developed each year to plan allocate
• Project income expenses required to operate
• Capital Budgets
• Help orgs identify/prioritize capital projects
• Land acquisitions, repairs, replacement, etc
• non-recurring expenditures

11
Types of Operating Budgets

• Line Item
• Reported as income and expense lines
• Strength ez to understand
• Weakness focus on expenses not goals
• Also does not re
• Encourage certain strategies on each item
• Never ask for less than you already get

12
Operating Budgets (cont.)

• Zero Based Budget
• Existing programs compete on an equal basis w/
  proposed new programs
• No assumption that current programs will stay
• Used to eliminate duplication priortize
• Results in better understanding of purpose
• Steps
• Clarify goals, identify units, dvlp
  activity-decision packages, rank packages,
  allocate based on rankings, evaluate perf.
• Deliberate effort to identify/assess new
  approaches

13
Operating Budgets (cont.)

• Revenue Budgets
• Budget related to income projections
• Need to later compare to actual income
• Units that produce gt rev receive priority
• Cash-Flow Budgets
• Based on inflows and outflows
• vs - cash flow
• Predicts periods of surplus/shortage

14
Operating Budgets (cont.)

• Program budgets
• Based on performance of programs
• cost efficiency of each program
• Performance budgets
• Focus on product cost vs. objectives
• Performance/Program budgets
• Emphasizes participant outcomes
• Looks at outputs, not inputs (ie, salary)

15
Capital Budgeting

• Purposes to..
• Assess affects of alternative projects
• Clarify relat between current programs and
  proposed capital projects
• Forecast financial requirements
• Evaluate if project complies w/ policies
• Identify the best possible investments
• Affordability or return on investment

16
Capital Budgeting (cont.)

• Independent Investment
• Org chooses to accept/reject project regardless
  of action taken on other projects
• Has no effect on other projects new
• Mutually exclusive Investment
• Only 1 of group of alternatives can be chosen
• Ie, choose a Ford or Chevy truck

17
Capital Budgeting Issues

• Cost/benefit Analysis
• Often does not consider non- benefits
• Payback Period
• Number of years to recoup investment
• Internal rate of return
• Measures potential net returns (profit)
• Ignores the time value of money
• Time value of money (p. 700)
• Compounding vs. Discounting

18
Managing Budgets

• Variances Budget-to-Actual Outcomes
• Caused by bad forecasts, assumptions, unexpected
  change, ineffective mngmt.
• Monitoring Tools
• Audits, payroll analysis, purchase order system,
  bid system ( competition), inventory control,
  contingency planning
• Performance Monitoring
• Beyond overspending are programs good?