Budgeting

1. Budgeting

2. Introduction Budgeting is the key to financial management This presentation aims to help you to: • understand the benefits of budgeting • develop a budget • monitoryour budget

3. Principles of Budgeting In order to develop and use budgets effectively in your organisation You will need to first have a sound understanding of the principles behindbudgeting These can be summarised by asking three questions: • Why do a budget at all? • What is a budget? • Who should be involved in preparing the budget?

4. Why budget at all? The budget is a powerful management tool It is a basis for financial accountability and transparency It tells you how much money you will need in order to carry out activities It forces you to re-think certain decisions and actions It helps you set performance targets and goals It is part of the planning process

5. What is a budget? • It is an estimate or informed guess about what you need in monetary terms to do your work • It sets out money that will need to be generated to cover the costs of getting the work done (income) • It sets out money that will be needed to be spent to get the planned activities done (expenditure)

6. Who should be involved. . .? It depends on the type of organisation: A small business may need a small budgeting team A large organisation may need each of its branches or departments draw up its own budget for its own work…. and then these would all be consolidated into one overall budget for the organisation

7. Who should be involved. . .? The criteria to determine who should be involved is: Responsibility An understanding of the values, strategy and plan for the organisation Competency in relation to financial management The following personnel are usually involved in the process: The financial manager, The project manager, The bookkeeper or accountant All key personnel involved in the process need to understand the steps required throughout the process

8. It’s a project that takes some time and thought… Putting a budget together takes some time and thought View the process as a planning exercise View the process as a means of gaining clarity of purpose

9. It’s a project that takes some time and thought… As you prepare the budget, you will find yourself asking the following questions: Could we have spent less last year and still achieved the same results or better? How can we avoid wasting money in the future? Where can we cut? Are there discrepancies in the budget? Did the last budget produce a profit?

10. Questions that impact managerial decision making…. The answers to the questions raised during the budgeting process will have an impact on important decisions that management are required to address when running a business Such as : identifying problems re-thinking action plans setting staff performance targets

11. Time frames When forecasting your budget, your time periods should include a short range month to month plan, as well as a long-range year plan….. …Short range month to month plan…. For a period of 12 to 24 months A monthly breakdown facilitates monitoring …Long range plan…. For a period of 3 to 5 years on a quarterly or annual basis Based on a medium to long term plan, it is not simply an uninformed guess

12. Preparing the budget Step One – The sales or revenue budget is the starting point StepTwo – Prepare your operating costs budget Step Three - Look at profit or loss from operations…. based on numbers obtained from sales and operating costs estimates Step Four - Lastly, your budget should reflect the cumulative profits or losses over a period of months

13. Preparing the budget The totals will tell you: When your business will break even When it will begin earning a profit How much you may have to borrow or inject into the business before it is profitable

14. Step one: Sales or Revenue Budget Make reasonable estimates of the income you can expect to generate for the upcoming year by month List the likely sources of income and categorise them Your income budgeted figures should be the result of a complete analysis of: • Your marketing and sales activities • Historical data • Market research • Economic conditions Make sure this figure contains high, low and medium sales estimates

15. Step one: Sales or Revenue Budget These sales numbers are critical as they will be used to compute gross profit margin And will help determine operating expenses, accounts receivable and inventory levels necessary to support the business

16. Step Two: Projected Operating Costs This part of the budget should include all the costs of operation involved in producing and delivering the product or service to customers These may include: • The costs of purchasing or producing the product or service • Sales and marketing costs • Your business’s administration and operation costs • All fixed, variable and semi-variable costs

17. Step Two: Projected Operating Costs When you are producing goods for sale Plan production for the entire year So that the company will produce enough inventory to meet the units required in the sales budget The units will then determine the direct material and direct staff or labour needs for the year ahead

18. Remaining steps Prepare the budget format Add in notes where necessary Obtain feedback Finalise

19. The Budget planning cycle .”

20. Different kinds of budgets The working budget • What you realistically expect to generate or raise…. • …and how this will be spent • “What if” budgets • These could include a “minimum” budget required in order to survive • ..or an “optimal” budget – what you could do if extra money came in

21. Different budgeting techniques Incremental budgeting– where the figures are based on those of the actual expenditure for the previous year, with a % added for inflation for the new year.. This kind of budgeting would be appropriate where each year is very similar to the previous one in terms of activities Zero based budgeting– past figures are not used as the starting point. The budgeting process starts from scratch, with the proposed activities for the year ahead This kind of budgeting is used for business start-ups, and in an ever-changing and pro-active organisational environment

22. Cash Flow Budget Profit and cash are not the same thing A separate cash flow budget is essential A cash flow budget shows the expected flow of cash in and out of a business and predicts its bank balance at the end of the month Cash flow management is the lifeline of a business’s future growth Profitability is the destination for the business and cash flow is the vehicle which enables you to get there……

23. Profit vs. Cash flow A profit projection is the tool that allows the business to address the viability of the business It includes non-cash expenses such as depreciation Cash flow or liquidity means the ability of the business to meet its ccommitments as and when they fall due Planning for cash flow means that you ensure that the business can meet its day to day commitments

24. The process ..

25. Implementation Once the budget is finalised…… Implement it ! Carry out the activities necessary to generate income Carry out the activities that necessarily incur expenses

26. Monitoring There are a few vital questions you can ask at the end of each month: With the budget vs. actual comparisons in hand, ask your team these key questions: • How are we doing compared to budget? • Are we on target in terms of income and expenditure? • Why did actual results differ from the plan?

27. Monitoring • What must we do now to have a better result next month? • How can we keep the positive differences and avoid more of the negative ones? • What are we learning that will make next year’s budget better? • Monitoring the budget allows you to : • Measure how closely you are meeting your objectives in terms of finances, and • make financial decisions based on the results

28. Variance Reporting At the end of each month, prepare a variance report The variance report allows you to compare the actual vs. budgeted income and expenditure • The standard rule is where-ever you see a variance of more than 10% you need to investigate that line item further, and if necessary, take remedial action You will be able to see where you are: • Under-spending • Over-spending • Are on Target

29. Taking action and management The variance report will give you the opportunity to: Take action to correct problems, for example • The variance statement shows that you are repeatedly spending too much on stationary each month..you could • Tighten controls on the stationary • Or increase the budget for stationary if you believe you have under-budgeted for stationary

30. In conclusion Budgeting involves: Planning Human resource management (setting goals and targets) Financial management

31. Thank You Name of presenter: Position in firm: Firm name: • Disclaimer- Whilst every care has been taken in the compilation of this seminar, presentation and handouts, no responsibility of any nature whatsoever shall be accepted for any inaccuracies, errors or omissions, nor for the accuracy of any information contained in the seminar handouts.