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Welcome to: FNSACC402 Prepare Operational Budgets Lisa Genna lisa.genna2@tafensw.edu.au Monday Room H.G.11 6:00 pm to 9:00 pm AMEG House Rules Be punctual (teacher included!) Come to every class (if possible)

  1. Welcome to: FNSACC402 Prepare Operational Budgets Lisa Genna lisa.genna2@tafensw.edu.au Monday – Room H.G.11 – 6:00 pm to 9:00 pm

  2. AMEG ¡House ¡Rules ¡ — Be punctual (teacher included!) — Come to every class (if possible) (especially if the Tigers are playing) — Come to class prepared (students & teacher) — Bring textbook (might help a bit) — Create and maintain a safe and supportive learning environment (there is no such thing as a silly question!) — Eating and drinking in class totally permitted J

  3. Lesson 1 – Chapter 1 FNSACC402 Prepare Operational Budgets

  4. Overview 1. What is a budget? 2. What is a budget used for? 3. The pros and cons of budgets 4. Approaches to budgeting 5. Budget classification 6. Types of budgets à MASTER BUDGETS 7. The budget development process 8. The behavioural and ethical aspects of budgeting (to be covered in lesson 2)

  5. What is a budget? A BUDGET is: — a written statement — of management ’ s strategic plans for achieving the organisation's key objectives — expressed in financial terms

  6. What is a budget? Put very simply, a BUDGET is … - an itemised forecast - of money coming in and money going out - for a specified period of time - for either a specific activity, department, product or the organisation as a whole.

  7. What is a budget used for?

  8. Budgets help the leadership team of an organisation to COORDINATE and CONTROL key activities across the organisation, enabling the goals of the organisation to be reached. Budgeting is : — an integral part of the organisation’s planning process . — Involves the allocation of resources across the organisation — used to support management decision making in relation to the allocation of scarce resources to facilitate goal achievement .

  9. Specifically, budgets are used by management as a tool for: 1. Planning 2. Organising 3. Controlling 4. Motivating

  10. 1. PLANNING: >> is defined as: the set of actions taken to formulate the scope and direction of future activities and operations. >> requires goals to be set and decisions to be made as to what action needs to be taken to reach those goals (i.e. where are we going and how are we going to get there?) >> forces all involved to plan ahead and set their KPIs and targets in line with the organisation’s overarching goals and strategies. >> The planning process may include doing a SWOT analysis as well as a risk assessment.

  11. 2. ORGANISING: >> The finance team is responsible for coordinating the budget between different departments and work groups. >> Doing so enhances the consultative process and promotes cooperation between these groups. >> It also helps ensure that the budget accurately reflects the goals of the organisation and that certain milestones are met along the way.

  12. 3. CONTROLLING: is the process of: — setting standards (e.g. budget) — measuring current performance (comparing actuals versus budget à variance) — taking remedial action if required. ( i.e. monitor progress & make adjustments if necessary ). >> Budgets provide estimates of expected performance. >> They serve as a control tool when compared to actual performance and any variations from the plan are identified and any necessary corrective action is taken.

  13. The planning cycle (budgetary control) BUDGET ¡ PERFORMANCE ¡REPORT ¡ Comparison ¡of ¡ACTUAL ¡results ¡to ¡BUDGET ¡ à à ¡VARIANCE ¡

  14. The planning cycle (budgetary control) (ref. diagram on previous slide) 1. Plans, including budgets are prepared. 2. Action is taken to implement these plans. 3. Performance is measured by comparing actual results to the budget. 4. Differences or variances are analysed so that corrective action can be taken. 5. If necessary, plans are reviewed and assessed.

  15. 4. MOTIVATING: >> The budget can be used as a motivational tool for managers and their staff. >> The employees of an organisation can be motivated to work towards achieving the goals set out in a budget if these goals are effectively tied to some sort of reward e.g. bonus or stock options. >> It is important to allow key staff members to participate in and contribute to the budget setting process and then hold them accountable for budget outcomes on a periodic basis.

  16. Benefits of budgets Forces management to do some planning. 1. Provides realistic performance targets (if done properly 2. involving the appropriate personnel). Basis for controlling what happens within the 3. organisation. Helps co-ordinate the activities of the various 4. departments that make up the business. Promotes communication – managers exchange 5. information on ideas, business goals etc. Motivational tool – if appropriate staff are involved 6. in the budget-setting process

  17. Limitations of budgets Only estimates, not statements of facts. 1. Costly and time-consuming to prepare, implement 2. and monitor. No substitute for sound management practices. 3. Need to be amended if circumstances change. 4. Preparation does not guarantee success. 5. Aspects of people’s behaviour may undermine the 6. value of the process.

  18. Approaches to budgeting Approach used depends on the SIZE and STRUCTURE of the firm and the type of ENVIRONMENT in which it operates. e.g. organisations planning a change of focus or strategy cannot rely on established budgeting processes & procedures.

  19. Approaches to budgeting — Standard approach : — Historical figures (actual or budget) are used and adjusted for any likely future events. — Not recommended as past inefficiencies may be perpetuated and funds may not be allocated to activities designed to meet the organisation’s objectives. — Zero-based approach : — The initial figures for each activity are set to zero. — To receive funding, each activity must be justified in terms of how it meets the organisation’s objectives. — The dollar figure attached to that activity is then based on the resources needed to make that activity happen.

  20. Budget classification ClassificaBon ¡by ¡ Types ¡ Period ¡ Period ¡budget ¡ Form ¡ Rolling ¡or ¡con8nuous ¡budget ¡ Ac8vity ¡level ¡ Sta8c ¡budget ¡ Flexible ¡budget ¡

  21. Budget classification Classification by PERIOD: 1. PERIOD budget: à à developed for a specific (and generally shorter) period of time e.g. a quarter. — Short term budgets: span up to 1 year (detailed; represent current operations of the business; may be broken down into smaller periods e.g. months) — Medium term budgets: span 6 months to 5 years (represent current operations + impending changes e.g. new products, equipment upgrades etc.) — Long term budgets: span 3 to 10 years (more strategic in nature)

  22. Budget classification Classification by FORM: 2. ROLLING (CONTINUOUS) budget: à continually updated so that it always reflect plans for the à same length of time e.g. 12 months. This is done by periodically adding a new time period to the forecast and dropping off the equivalent period just completed.

  23. Budget classification Classification by ACTIVITY LEVEL: 3. STATIC (fixed) budget: à prepared for one level of planned activity e.g. a particular level of sales, say, $75,000. 4. FLEXIBLE budget: à a series of budgets that show how costs vary at different levels of activity within which the organisation may operate.

  24. Types of budgets — Revenue budgets : (LESSON 3) Provide estimates of the income of an organisation from the sale of goods and/or provision of services for a specific period of time. — Operating budgets : (LESSON 4) Provide an estimate of the activities that will affect net profit including purchases, COGS and operating expenses. — Budgeted financial statements : (FNSACC503) Show the estimated results and projected financial position of a business and include the budgeted income statement, balance sheet and cash flow statement.

  25. Master budgets Ø a combination of all the budgets of an organisation Ø reflects the integrated plans and expected financial results of all operations and departments of the organisation * Starting point à sales / revenue budget * Other budgets are then prepared in line with the budgeted level of sales.

  26. ¡ Master budgets

  27. The budget development process The organisation’s leadership team has to work out: 1. Where are we now? 2. Where do we want to go? 3. How are we going to get there?

  28. The budget development process — Allow enough time to prepare the budget. — Involve appropriate staff.

  29. The budget development process 1. Set and communicate process guidelines 2. Prepare budget 3. Approve budget 4. Communicate final budget 5. Monitor actual performance versus budget

  30. The budget development process

  31. Continuous improvement — Effective feedback system required so continuous improvement initiatives can be shared and implemented. — Needs everyone across the organisation to participate fully.

  32. Budget milestones Why break budget period up into several manageable chunks e.g. months or quarters? — Makes it easier to: — monitor and measure actual performance — spot issues or problems early on so that countermeasure plans can be made (before it’s too late!)

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