Budgeting 101

Budgeting 101 Kevin DerrivanUse Twitter Hashtag #npweb Special Thanks To Our Sponsors

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Budgeting 101 Kevin DerrivanAccounting Management Solutions, Inc. December 15, 2010

Kevin DerrivanSenior Consultant/Engagement ManagerAccounting Management Solutions, Inc. 5

About Us • For more than a decade, Accounting Management Solutions, (AMS) has provided accounting support and financial management leadership at the consulting CFO, controller and accounting manager level to dynamic companies throughout the Northeast. 6

Agenda • The basics of budgeting. • Why budgets are important for control purposes. • Various types of budgets. • When each type of budget is used. • How to prepare and address some of the important parts of a budget. • What are their limitations? 7

What is a Budget?• Budgets are summaries of short-term operational activities of a organization.• For example, a organization may prepare a cash budget to predict cash inflows and outflows.• Budgets are quantitative representations. 8

Budgeting vs. Forecasting:There is a Difference Budgeting vs. Forecasting there is a• A forecast is a difference! prediction.• There are many hypotheticals before a forecast looks like a budget.• A forecast can only predict. 9

Budgets are…• …. a strategic organizational plan.• …. based on facts, events in progress and actions planned.• …. a collaborative effort by finance and the departments affected by obtaining input before preparation.• …. managed by department heads to make the required steps to achieve the budget.• …. necessary for planning and for controlling. 10

Various Types of Budgets Two Major Types:• Operating Budgets• Capital or Investment Budgets 11

Characteristics of a Budget• Stated in monetary units however, could contain non- monetary items such as units produced, sold, no. of items processed etc.• Usually, short-term (one year) but could be extrapolated from or to the longer term.• Senior management must be involved in the process and must approve it.• Most important – budgets must be compared to actual and the variances must be investigated. 12

Critical to Forecast & Create a Plan• Management should review Budget on a monthly basis• The Board should receive a copy on a monthly basis• Managers should meet with finance on a monthly basis to discuss the financials and any unbudgeted expenditures. 13

The Budget Process:Best Practices• Know your goals and objectives• Upper Management Support and “Buy In” on your process• De-centralize the budgeting process• Involve staff at other levels• Create Strong Tools and Training (as needed)• Work closely with revenue-generating staff• Budget capital expenditures• Budget a surplus• Project cash flow• Budget temporary and permanently restricted revenue• Manage your operating budget & your audited financial statements 14

Best Practice: Know Your Goals &Objectives• PLANNING and GOAL SETTING MUST be completed BEFORE the budgeting Process BEGINS• Lack of proper planning/goal setting may lead to poor budgeting• If people do not know their goals they may not know how to start or may repeat current mode of operations• May miss substantial changes - may budget too little or too much, causing a lot of rework and frustration 15

Get Upper Management Support &Create “Buy-In”If they don’t care - no one else will. They need to:• Lead approval of Organization Goals and Operations Plan• Be involved/leaders in the budget process• Support the process by MANAGING their staff to the timelines and product completeness and accuracy• Approve all budgets prepared by those they supervise 16

De-centralize the Budget Process • Every manager who has a responsibility for a budget should be involved in the process • Understanding the rationale for their budget enables them to “own” it and act as stewards of their department expenses; since they understand the costs of running their program, they also become better fundraisers • The finance department can help coordinate the budgeting process but should not be putting together program budgets; they are not the individuals responsible for the budget Holds everyone accountable for day to day activities! 17

Involve Staff at Other LevelsGet their buy-in and delegate projects for them to plan and budget; the more they are involved, the more they will work to help the organization succeed• Example: Budget for a Special Event – the Event Planner reports to the Director of Fundraising; while the Director of Fundraising is the manager involved in the budget process, the Event Planner also needs to be part of the budget process• Example: A Day Care Center has 4 breakfasts a year for the mother’s of the toddler group; the Assistant Toddler Teachers are in charge of this; get them involved in how much the breakfasts will cost and how much they need to spend 18

Create Strong Tools & Training What can we do to involve others in the budgeting process? 19

Create Strong Tools & Training• Host a Budget Training• Create a Budget “toolkit” (typically your finance team would create this; starts with providing key assumptions and likely trends affecting the business environment during the budget’s timeframe) • Provide Written Instructions & Timelines with Dates/Deliverables • Budget Template (fill in the blanks) – managers fill in blanks and the template automatically calculates and assigns overhead and related costs 20

Create Strong Tools & TrainingCreate a Budget “toolkit” (continued) • Historical Info (Ops and Projects) and Year-to-date Info. - adjust for any changes in the new budget (Incremental Budgeting) Examples – COLA or inflation increases • Some Research – For new programs or events, get estimates and provide Narratives (Zero Based Budgeting - start from scratch) • Include any projects/costs for which you have received restricted funds or grants 21

Create Strong Tools & TrainingCreate a Budget “toolkit” (continued) • Aligning the look and feel of your budget template to your chart of accounts and the format of your financial statements gets everyone on the page • Some accounting software packages allow the importing of budgets directly from Excel, so you may want to consider using a worksheet in the template that allows each budget to be automatically entered 22

Budget TemplateSee example budget template in Excel:• Has instruction page• Fill in the blank format based on color codes• Some info filled in for them• Data entry creates final budgets (linked worksheets) and import into accounting system• Budget and GL should be in format that allows easy reporting for UFR and audit 23

Budget Template Very Specific and easy to understand 24

Budget Template Automatically filled in from worksheets Historical Data 25

Budget Template- Staff “Fill-In” Simply Fill In the Blue shaded area The Purple Areas automatically get created 26

Budget Template- Import Page Formatted to automatically upload into your accounting system 27

Budget Template- Final BudgetSummary by Program 28

Budget Timeline Work timeline back from final approval deadline 29

Review the Template• Historical Info • Place for Narrative Provided information• Summary Page • Projects• Salary, Benefits, Ops • Import Page into Page Accounting System 30

Revenue-Generating Staff• Work closely with your development office to assist with revenue piece if you are a grants-based organization• Work closely with your finance department if you are a membership organization• Weigh potential revenue sources by %’s (likelihood of receiving X)• Goal is to work with all staff throughout the org. to look at external markets, including sources of funding at the local, regional, and national economy 31

Components of the BudgetDiscussion on Participants Current Practices • Do you budget cash or accrual basis? • Besides the basic revenue and expense budgets – what other things are included in your budget process? 32

Budget ComponentsBesides the basic operating revenue and expense, what are the different components of your budget? • Capital Expenditures/Fixed Assets/Construction in Progress (CIP) • Surplus • Cash Flow Projection • Temporarily/permanently restricted revenue 33

Budget Capital ExpendituresWhy budget for these items (capital expenses) if they do not hit my income statement?They will: • Increase your budgeted depreciation expense • Increase your overall expenses • Thereby increasing needed operating revenue • Increase your cash flow/cash outlays needed 34

Why Budget a Surplus?• Ensuring that your organization can sustain itself during an unexpected change or difficult period• Work with management to project a surplus; identify other revenue sources 35

Project Cash Flow• Prepare a cash flow projection with your budget• Monitor and adjust monthly• Review with management and the board 36

Budget Temporary & Permanently-Restricted RevenueWhy budget for these revenue sources if they do not hit my Unrestricted Column on my Statement of Activities?They will:• Affect your final organization surplus/deficit result• Provide revenue goals and results for fundraising for future years 37

Manage Your Operating Budget &Your Audited Financial Statements• Don’t forget to budget for non-cash expenses (depreciation expenses, vacation expenses, deferred salary or benefits, etc.)• Vacation accruals can turn a $10,000 surplus on an operating budget into a deficit – don’t be surprised at year end• Understand the difference between the cash basis and accrual basis of accounting; communicate this to management 38

On-going Activity• The budget process is not a once-a-year activity• Management should be meeting with the managers once a month to review the actual vs. budgeted performance and plan (project) for the rest of the yr.• Some organizations even re-budget mid-year if there are substantial operational changes 39

Policies & Processes for Budgeting:Internal and the BoardDiscussion on Participants Current Practices• What are your organizations current policies on budget adoption and changes (internal and the Board)? 40

Policies & Processes• Once all draft budgets have been analyzed, modified, balanced, etc. prepare an overall budget document and presentation• This includes who presents, when they present, and what format they present the organization’s budget to the board of directors for approval• The presentation should include the goals and objectives for the upcoming year• A summary of the total income and expenses contained in the budget• Have an Organizational Chart/Staffing Plan available for review 41

Policies & Processes• Have an summary of income by individual sources• A summary of expenses by broad categories such as salaries and wages, consultants and contract services, supplies, facilities, materials• Overall budget summary should have comparative data from the prior year and current year (with projections); include a column indicating total change either by % or $ amount• Depending on the organization, the finance/executive committee should review and approve the budget before the full Board• Provide guidelines on how changes to the budget are made an approved, how expenditures that exceed budgeted amounts are approved, etc. 42

Other Supplemental Data Budgeted Expense 2010 1% 1% 1% 2% 6% 3% 7% 43% 7% 8% 9% 12% Salaries Payroll Taxes and benefits Office expense Consultants Professional fees Rent and building expense Depreciation and am ortization Program supplies and expenses Training and travel Interest Insurance Real estate taxes 43

Policies & Processes: Flex Budgets• If the organization reaches financial goals during the year, it can do more; build a flex budget into the budget process• Flex budgets provide a financial management and motivation tool• Gives the board comfort in knowing that the organization won’t risk financial operations to reach stretch goals 44

Other Policies & Processes• Work Plans – Every Department/Program should have one at the beginning of each fiscal year; mirror organizational budget plan• Federal or State Grants – Any carryover funds, if allowed, should be monitored; any budget modifications should be requested in writing (any budget changes from a prior fiscal year will affect this) 45

Group DiscussionDiscussion- Sharing of everyone’s experiences with Cash Flow and Budgeting • What challenges have you faced in your experiences? • What strategies have you used to meet those challenges? • What worked well vs. not well? 46

Contact InformationKevin Derrivan Senior Consultant Accounting Management Solutions, Inc. kderrivan@amsolutions.net 781-419-9266 47

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Budgeting 101

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