Strategic Planning

Resource Person:
Gerry Padernal

Preparing and Managing Departmental Budgets

How to tell the money where to go & stop wondering where it went

Learning Objectives
Understand budgeting How to budget How to manage budgets

ISO steps for Continual Improvement

What is a budget? What is budgeting?

Definition

Budget (from French bougette, purse)

Definition
It is a list of all planned expenses & revenues

 A BUDGET is an organizational plan stated in monetary terms.

Definitions
The process of making the list is BUDGETING

Purpose of Budgeting
Purpose of budgeting is to: Provide a forecast of revenues and expenditures (i.e. a model of how a business might perform financially speaking if certain strategies, events and plans are carried out)

It is a MODEL!

 To assess performance by comparing actual operating results against the forecast / budget. (Model vs. Actual)

It is a METRIC!

Simply put:
A budget is a practical means of telling the money where to go, rather than simply wondering where it went.

Telling the money where to go And knowing where it went

Surely, there are many who wonder where the money went.

Because they were spending without a plan in mind. Without a budget!

Other uses
For a loan or other financing for business purposes
(One is expected to produce a business plan, which includes information concerning projected income and expenses.)

Caveat!
No business should ever proceed without planning, and a

budget
is the financial plan for conducting business in the near future.

Types of Budgets
An operating budget A capital budget A cash budget

The operating budget

An operating budget consists of three parts:
The statistical budget The revenue budget The expense budget

The statistical budget

The statistical budget, which is the best available projection of business activity for the coming year (units or pieces to be produced, contracts to be secured, estimated business activity, etc.).

Elements
Sales volume Production volume Inventory volume Headcount

The revenue budget

The revenue budget, which is a projection of estimated income for the coming year.

Elements
Sales
Gross VAT Net Withholding taxes

Marketing expenses Gross profit Levels:

Division Product Location Profit center

Commissions Incentives/promo Allowances

Bases
Often, good indicators of future revenues are:

past sales
(adjusted for whatever is known about the coming period, such as changes in business activity and expected price increases and the like).

The expense budget

The expense budget, which consists of all anticipated costs of operating the business and conducting the projected level of business.

Elements
Salaries & wages Payroll taxes Insurance Training & seminars Publications Memberships Fringe benefits
Medical Others

Travel Supplies Taxes & licenses Rent Miscellaneous/Others Levels:

Division Department Cost center

Depreciation Amortization

Headcount

Bases
Most accurate indicators of future costs are:

past costs
(adjusted for whatever is known about the coming period, such as changes in business activity and expected price increases and the like).

 A breakdown of the expenses charged to a department or activity, such as salaries, benefits, supplies, travel, postage and such, is essential.

 One must keep track of how much money is going into each category of expense, as well as how much one is spending in total.

The capital budget

A capital budget accounts for potential expenditures for major fixed equipment
(for example, a building, a boiler, a new roof, etc.) and major movable equipment (copy machines, computers, etc.).

The cash budget

A cash budget is usually prepared last in the budgeting process and consists of estimates of the business' cash needs for the year, as compared with projections of the cash receipts for the year.

 Operating cash receipts Receivables Loans Equity infusion

Operating cash payments Payables Capital expenditures Periodic amortization

Levels (of accumulation)

Section Departmental Division Corporate Regional Global Profit or Cost Center Project Event

Controllable Uncontrollable Variable cost Fixed cost

Corporate budget
The budget of a company is compiled annually. A finished budget usually requires considerable effort and can be seen as a financial plan for the new financial year.

 The Finance department compiles the company's budget, but today

modern software allows hundreds or even thousands of people in the various departments (operations, human resources, IT etc) to contribute to the final budget.

Budgeting Principles
(Some only)

Timing
A budget cannot be adequately prepared during the final week or two before the new budget period begins.

Preparation
You should collect information used in preparing the budget, especially information concerning expenses, several months ahead of time.

Some principles and practical rules of budgeting:

Expenses must always be charged to the department or activity incurring the expenditures.

 Every item of expense in the business must be under someone's direct control.

 Managers responsible for complying with an expense budget must participate in preparing the budget.

 No one should be held responsible for expenditures over which he or she has no control.

 Unused funds budgeted for expenses may not be carried over from one year's budget to the next.

 Unused capital-budget funds may not be transferred into operating expenses or vice versa.

 All individual expenditures must be approved by the appropriate levels of responsibility.

Narrative
A budget narrative is useful in defining the costs included in a budget. It can also be used to explain variances.

 A budget narrative often is used to explain line items in the budget.

It can be structured in one of two ways. You can create "Notes to the Budget" with footnote-style numbers or letters on the line items in the budget keyed to numbered or lettered explanations.

Examples

An operating budget

Excellence Corp Proposed Budget Volume Sales Production Inventory 60 70 5 Amount 5400 3780 315

Sales Discounts Net Sales Cost of sales Gross Margin % sales

5400 216 5184 3780 1404 26%

You and your budget Actions

Right

Impact

You and your budget Actions

Not right

Impact

You and your budget

Effectiveness

Efficiency

You and your budget Inaction / Omission Impact

Communication!

Frequency

Variance s!

Variances against budget Variances against history (usually prior year)

Periodic Reports

Periodic Reports
Example

Excellence Corp. Period ended 31 Oct 2008 To-date ('000 Php) Volume (Units) Net Sales Gross Margin %Sales Marketing G&A Net Operating Income 50 4,750 1,568 0 (255) (220) 1,093 48 4,608 1,521 0 (250) (225) 1,046 2 142 47 0 (5) 5 47 46 Due to marketing efforts 0 Discounts given 0 Production on the dot Budget Variance % Remarks

0 (0) 0 Still on track

Excellence Corp. Period ended 31 Oct 2008 ('000 Php) Volume (Units) Net Sales Gross Margin %Sales Marketing G&A Net Operating Income

For the Month

Budget

Variance

Remarks

6 570 188 0 (23) (22) 143

5 480 158 0 (25) (19) 114

1 90 30 0 2 (3) 29

4 Due to marketing efforts 0 Discounts given 0 Production on the dot

(0) 0 0 Still on track

Corrective

Increase sales/revenues

 Reduce cost Postpone cost

Eliminate cost Control cost

 If the actual results are close to the budget, this shows:

understands its business & has been successful in driving it in the direction planned!

 No one knows for sure what the future will bring, but a good budget will not leave one wondering where the money went.

Because:

You told the money where to go So, you know where it went

Summary

Thank you & Good Luck!