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  • This portion of the presentation deals with: What is a budget What is its purpose How can it be used to guide decisions and measure performance How to analyze financial statements Analytical tools, ratios
  • Think of what you do when you take a trip somewhere. First, you plan your itinerary…when you want to leave, how long you plan to stay, sights you want to see, how you plan to travel, and so on. Next, you pack you bag. These are the resources you need to achieve the success of your itinerary. In much the same way, an organization plans ITS trips – its strategic objectives – and prepares for the journey with an action plan called a budget.
  • Operating budgets – normally set a the departmental level for operations covering the fiscal year. Capital Budgets – plans for capital expenditures over a longer-term - also sets plans for how the expenditures will be funded/financed Cash flow budgets – measure cash receipts, payments and investing activities. Normally used to determine the appropriate level of working capital.
  • You need to understand the overall goals of the organization in order to create a useful budget. consider the overall economic climate Stay on top of trends Consider the organization values Consider the strengths, weaknesses, opportunities and threats. What your department sets out to accomplish must be in line with the overall objectives of the organization. The budget acts as a blueprint for how you will get there based on your assumptions. Allows you to set the course. The assumptions you base your budget on will ultimately determine the strength of the budget plan in terms of directing your entity. Budgeting is the foundation of the planning process.
  • The Master Budget is comprised of a series of micro-plans. These combine to form the overall strategic direction. Communication is essential to ensure all components are pulling in the same direction. Once the strategic goals and the course is set, the budget must be communicated throughout the organization.
  • Importance of monitoring: We want you to feel comfortable in this room for our presentation. If it gets too hot, we risk having you drift off to sleep. So we had maintenance set the temperature to 18 degrees celcius. As the session progresses, we need to make sure it does not get too warm in here. If the temperature increases, we can take corrective action by turning on the air conditioning.
  • Assessing revenue and expense performance must be done in concert. Consider if the expenses change seasonally or if there are large one-time expenditures. You will need to monitor those line items with “surprises” closely. May need to re-examine the assumptions and possibly revise the budget. - I.e. reallocate budgets for expenses. If it looks like you will experience a budget variance – communicate this to upper management. Reassess budget forecasts quarterly. Keep old estimates and assumptions, even if turn out to be flawed. This will help is setting next year’s budget assumptions.
  • In order to gauge success, we need some benchmark against which to compare. Budgets can act as this benchmark. There are 3 kinds of accountants in the world…..those who can count and those who can’t. This is only one aspect of the performance evaluation. We must also consider the achievement of goals (financial and non-financial), fulfillment of the mandate, value for money, etc.
  • Organizational Strategy – What is the overall mission, mandate, what is the organization trying to accomplish. Normally done at senior levels. – General set of objectives and policies Goals should be specific and measureble Targets – need to understand what you are trying to accomplish, whether the targets are dictated to you or whether you are expected to develop your own. Assumptions – need to know what the assumptions are. For example, payroll cost will increase by a cost of living adjustment. Can start with last years results and modify assumptions and most likely economic conditions Quantify – need to form an assumption of what the COLA adjustment will be. Step back – does it make sense? Does it cover the scope of your department? Is anything missing?
  • An accountant is in a car travelling with a farmer client around his farm. They pass a herd of cattle and the farmer says, “You’re pretty good with numbers. How many cows do you reckon are in that pasture?” The accountant looks at the herd for a moment and says “1,832.” The farmer is amazed. “Exactly right”, he says “How did you work that out so fast?” “ Easy,” says the accountant. “I counted the number of feet and divided by four.”
  • The financial statements provide information on the financial position of an entity at a specific point in time and the financial performance over a period of time. Financial statement analysis involves translating the data into information that is useful for informed decision making. The objectives are: Understand the numbers Provide a solid basis for financial forecasting Decisions based on informed and supportable data They can tell you such things as: What is the current debt level Is the entity operating within its current funding Are resources available for future operations – to ensure long-term viability Where does the funding come from? Where is it being spent? Can the entity meet its financial obligations in the near term? This information provides a basis to understand the organization and plan for the future.
  • The first step in analyzing financial statements and financial information is to understand the objectives of financial reporting. Independent auditors’ report can alert us to reporting issues. Notes to the financial statements, including the accounting policies used, provide the underlying background. The financial statements, can then be used to understand financial position and performance.
  • Context – what looks like a big (or small) number may not be once you understand what’s typical for an organization (department) of your size and characteristics. Peer comparison – how do you stack up against entities of your size and characteristics Trends – What has changed from last year, does this appear to be a trend?
  • Financial statement analysis can be accomplished through a variety of means. Comparison to budget and prior years are the most common. This comparison highlights the significant changes. We then seek to understand why those variance occurred and what adjustments to operations, if any, are required. Common-size statements express financial statement components compared to a common base. For example: departmental payroll costs expressed as a percentage of departmental funding can lead to interesting inter-departmental comparisons. Trend analysis identifies common themes over time for example: funding levels over a number of years, if continually declining must plan to replace revenue sources or reduce costs. Peer group comparison involves comparing your results with other groups (internal or external) with same or similar attributes (size, mandate, funding, etc.)
  • Profitability – evaluate the level of profitability by expressing revenue and contribution (bottom line) in relation to other components. Liquidity – measures entities ability to meet obligations in the near term. Operating – measures efficiency of how corporate resources are employed Leverage – measures extent of debt financing and financing strength - Is the current level of support appropriate? - Assess ability to service debt
  • ROA – provides a quantitative description of how well an entity has invested in assets. - Surplus for the Year divided by total assets - 633,604 / 6,389,348 = 9.9% - As bottom line is really not a significant focus for Governments and NPO’s need to consider context. ROE – shows the return on the portion of the entities financing that is provided internally. - Surplus for the year / Members position - $633,604 / $4,645,321 = 13.6% ROR – measures how revenue translates to bottom line. - Surplus for year / total revenue $633,604 / $4,853,818 = 13.1%
  • Current ratio - Prime measure of solvency. - higher the ratio the better the financial condition - $1,019,839 / $665,590 = 1.53:1.00 Quick ratio – measures the ratio of a company’s assets that can be quickly liquidated and used to pay debts. ($144,285+$439,702+35,000) / $665,590 = 0.93:1.00
  • Asset turnover – measures how efficiently an entity uses its assets - Sales / assets - $4,853,818 / $6,389,348 = 0.76 times Consider excluding tangible capital assets $4,853,818 / $1,611,711 = 3.01 times Days in receivables – measures how long it takes to collect a/r. ( net a/r / revenue ) x 365 days ($439,702 / $4,853,818) x 365 = 33.06 days The higher the number the more working capital the entity needs to finance operations. Days in payables – measures how many days it takes to pay suppliers - the fewer the days, the less likely you will default on obligations -( Accounts payable / COGS ) x 365 Cost of goods sold in not really relevant. This can be adapted to operating expenditures.
  • Interest coverage – gives measure of entity’s margin of safety – how many times can you make interest payments ( Surplus + interest expense ) / interest expense ( $633,604 + $50,000) / $50,000 = 13.7 times Debt to equity – measures how the entity uses debt to enhance members position - total debt / members position ( $665,590 + $1,000,000) / $4,645,321 = 0.36:1.00
  • PPT

    1. 1. Budgets and Analysis Understanding your financial performance Mark DeBlois, Partner KPMG Lethbridge (403) 380 – 5702 Thursday, February 26, 2004
    2. 2. The Budget Planning for Success
    3. 3. How many accountants does it take to change a light bulb? Two. One to change the bulb and one to check it was done within budget.
    4. 4. The Budget – Your Financial Road Map <ul><li>A budget is the translation of strategic plans into measurable quantities that express the expected resources required and the anticipated returns over a period of time. </li></ul><ul><li>A detailed estimate of future transactions, designed to provide a plan for and control over future operations and activities. </li></ul>
    5. 5. Budget Scope <ul><li>Budgets are normally developed for a specific program of activities </li></ul><ul><li>Budgets are prepared for: </li></ul><ul><ul><ul><li>Operations </li></ul></ul></ul><ul><ul><ul><li>Capital expenditures </li></ul></ul></ul><ul><ul><ul><li>Cash Flow </li></ul></ul></ul>
    6. 6. Budgets - The 4 Basic Functions <ul><li>Planning </li></ul><ul><li>Coordinating and communicating </li></ul><ul><li>Monitoring progress </li></ul><ul><li>Evaluating performance </li></ul>
    7. 7. Planning <ul><li>Involves a process to ensure the organization will have the necessary resources to achieve its goals. </li></ul><ul><li>It involves building assumptions to facilitate economic modeling </li></ul><ul><li>Strength of the budget is dependent upon thorough planning </li></ul>
    8. 8. Coordinating & Communicating <ul><li>Coordination involves pulling the pieces together to achieve the Master Budget. </li></ul><ul><li>Expresses the organization’s overall financial objectives and strategic goals. </li></ul><ul><li>To achieve success, communication is essential. </li></ul>
    9. 9. Monitoring Progress <ul><li>Timely and periodic monitoring allows management to track progress by comparing actual results to expected or planned results. </li></ul><ul><li>Through the monitoring process we are able to identify variance. We can then take action to ensure we stay the course. </li></ul>
    10. 10. Tracking your budget <ul><li>To track your budget: </li></ul><ul><li>Assess monthly revenue performance versus budget </li></ul><ul><li>Assess monthly expense performance versus budget </li></ul><ul><li>Determine the effect variances will have on your overall bottom line </li></ul>
    11. 11. Evaluating Performance <ul><li>Managers are held accountable for the performance of their department and their contribution to the goals of the organization as a whole. </li></ul><ul><li>Performance is often evaluated against the budget or plan. </li></ul>
    12. 12. Tips for Effective Budgeting <ul><li>Stay goal-oriented </li></ul><ul><li>Be realistic, achievable but with stretch </li></ul><ul><li>Don’t try to do it alone </li></ul><ul><li>A budget is not a substitute for regular communication </li></ul><ul><li>Don’t use the budget to deny requests </li></ul>
    13. 13. Where do we start? <ul><li>Analyze the organizational strategy </li></ul><ul><li>Understand the targets </li></ul><ul><li>Document your assumptions </li></ul><ul><li>Quantify your assumptions </li></ul><ul><li>Take a step back </li></ul>
    14. 14. <ul><li>To some degree, preparing a budget involves crunching numbers – a process being left more and more to financial models, computers and technology. </li></ul><ul><li>Behind the budget are people - like you - who develop the assumptions, people who know the operations and consider the strategic goals. </li></ul>
    15. 15. Analyzing Financial Performance Accounting will prove anything. Even the truth!
    16. 16. Analyzing and Interpreting Financial Statements <ul><li>Financial Statements provide a wealth of information </li></ul><ul><li>Analyzing and interpreting this information is key to making informed decisions and developing successful strategies </li></ul>
    17. 17. Analysis and Interpretation <ul><li>What do the numbers tell us? </li></ul><ul><li>How can we use the financial statements in financial forecasting? </li></ul><ul><li>Value of informed decision making. </li></ul>
    18. 18. Tips for Analyzing <ul><li>Consider the context </li></ul><ul><li>Compare your department to your peers </li></ul><ul><li>Watch for trends </li></ul>
    19. 19. Financial Statement Analysis <ul><li>Comparison to budget </li></ul><ul><li>Comparison to prior years </li></ul><ul><li>Common-size statements </li></ul><ul><li>Trend analysis </li></ul><ul><li>Peer group comparison </li></ul>
    20. 20. Ratio Analysis <ul><li>Provides a means of digging deeper into the information contained in the financial statements. </li></ul><ul><li>A financial Ratio is a means of expressing key components in relation to other components </li></ul><ul><li>Value added when compared to peers </li></ul>
    21. 21. Ratio Analysis <ul><li>Profitability Ratios </li></ul><ul><li>Liquidity Ratios </li></ul><ul><li>Operating Ratios </li></ul><ul><li>Leverage Ratios </li></ul>
    22. 22. Profitability Ratios <ul><li>Return on assets (ROA) </li></ul><ul><li>Return on equity (ROE) </li></ul><ul><li>Return on revenue (ROR) </li></ul>
    23. 23. Liquidity Ratios <ul><li>Current ratio </li></ul><ul><ul><ul><li>Current assets / current liabilities </li></ul></ul></ul><ul><li>Quick ratio </li></ul><ul><ul><ul><li>(Cash +short-term investments+A/R) / Current liabilities </li></ul></ul></ul>
    24. 24. Operating Ratios <ul><li>Asset turnover </li></ul><ul><li>Days in receivables </li></ul><ul><li>Days in payables </li></ul>
    25. 25. Leverage Ratios <ul><li>Interest coverage </li></ul><ul><li>Debt to equity </li></ul>
    26. 26. <ul><li>Questions? </li></ul>
    27. 27. <ul><li>What is the definition of an accountant? </li></ul><ul><li>Someone who solves a problem you did not know you had in a way you don't understand. </li></ul>