INTERNAL CONTROLS, FRAUDSAND BUDGETSThursday May 23, 2013Secretary General ConferenceIslamabad, PakistanBy: Malik Mirza, F...
INTRODUCTION• Facilitator• Objectives• Format for two hours’session• Conclusion
FacilitatorMalik Mirza
OBJECTIVES• UNDERSTAND about internal controls• KNOW budgeting techniques to prepareeffective budget
FORMAT• Case study• Group discussions• Sharing experience• Power point presentation
Who is this man?• New York moneymanager BernardMadoffs $65 billionPonzi scheme, thelargest fraud ever by anindividual, was...
Who is he?• Shortly after thecompany was createdby the merger of CUCInternational and HFS in1997, a massive, decadelong ac...
Guess who?• The 2002 fraud-inducedbankruptcy of the telecomcompany wiped out a firmthat once had $103.9billion in assets o...
Now: Who is this person• In March of 2003, the SECaccused CEO Richard M.Scrushy of overstatingearnings by at least $1.4bil...
Last guess: A good guy?• Qwests stock traded ashigh as $64 in 2000before plummeting in2002 to less than $1because of a mul...
What’s the conclusion after fiveguesses?• Frauds do happen• Can it happen at your organization?• If yes, how?• If no, why ...
Case studyMr. Rahim has recently joined the Business chamber of commerce as chiefaccountant.The President and Secretary of...
Case study• There is no further check on Mr. Rahim except for trust of the President andSecretary. The only oversight by t...
14COSO Definition of Internal ControlInternal control is a process, effected by an entity’s board of directors,management ...
15COSO Internal Controls Key Concepts– Internal control is a process. It is a means to an end, not an end in itself.– Inte...
COSO’S FRAMEWORK – THREEDIMENSIONS OF INTERNALCONTROLMONITORINGINFORMATION ANDCOMMUNICATIONCONTROL ACTIVITIESRISK ASSESSME...
17Control EnvironmentCONTROL ENVIRONMENTOPERATIONSFINANCIALREPORTINGCOMPLIANCEThe control environment sets the tone of the...
18Risk AssessmentRISK ASSESSMENTOPERATIONSFINANCIALREPORTINGCOMPLIANCERisk assessment is the identificationand analysis of...
19Risk AssessmentRISK ASSESSMENTOPERATIONSFINANCIALREPORTINGCOMPLIANCEObjectives (i.e. assertions) must be established pri...
20Control ActivitiesCONTROL ACTIVITIESOPERATIONSFINANCIALREPORTINGCOMPLIANCEControl activities are the policies and proced...
21Control ClassificationPreventive controls focus on preventingerrors or exceptions. Such preventivecontrols are– Standard...
CONCLUDING INTERNAL CONTROLS: SHARING EXPERIENCELet’s review the environment of chambers and provide feedback on:1. Contro...
Budget Preparation:Best Practice & Strategy
WHAT IS A BUDGET• A budget is a detailed plan of income andexpenses.
WHY WE NEED BUDGETI’ ve got a greattraining course Have u donea budget
CRITICISMS OF TRADITIONALBUDGETING• Rarely strategically focused• Time consuming and costly• Reinforces departmental barri...
Two Questions1. Why Do We Budget and Forecast?– Budget and Forecast Timeline1. How Do We Budget and Forecast
BUDGET PREPRATION ANDSTRATEGYBankruptWaah!What’swrong withhim?He didn’t preparea budget
Why Budget and Forecast?Budgets and ForecastsA Budget is a formal expression of the plansfor the operation for a specific ...
Why Budget and Forecast?Budgets and ForecastsMeasure actual and forecasts against thebudget throughout the planning proces...
Why Budget and Forecast?Budgets and ForecastsAssist in monitoring control of currentperformanceProvide early warning of de...
Why Budget and Forecast?Budgets and ForecastsImpact decisions at higher levelsReporting responsibility to Board of Directo...
Budget Preparation:Best Practice & Strategy
FINANCIAL BUDGET PREPARATIONI need to prepare atraining budget.Don’t forget todevelop your trainingplan first.PLAN
FINANCIAL BUDGET PREPARATIONBUSINESS PLANEXECUTIVE SUMMARYMAJOR ASSUMPTIONSSWOT ANALYSISMARKETING AND SALES PLANFINANCIAL ...
GANTT CHART – NEW COMPANYLaunch DateCompany SetupApplication of LicenseOffice RenovationStaff RecruitmentSystem Installati...
Budget Preparation:Best Practice & Strategy
FINANCIAL BUDGET PREPARATIONBUSINESS PLANGANTT CHARTMARKETING PLANFINANCIAL BUDGET
FINANCIAL BUDGET PREPARATIONMARKETING OBJECTIVESPRODUCTS AND SERVICESCURRENT MARKET SITUATIONa.Target Marketsb.Business Op...
FINANCIAL BUDGET PREPARATIONMASTER BUDGETOPERATING BUDGET FINANCIAL BUDGETCAPITAL BUDGETBUDGETED P&LCASHFLOW BUDGETREVENUE...
FINANCIAL BUDGET PREPARATIONREVENUE BUDGETRs 100outSo I need atleast Rs 100 tocover expensesWhere I will findthis money
FINANCIAL BUDGET PREPARATIONREVENUE BUDGETOPERATING BUDGETProvide Business StatisticsProvide breakdown ofrevenue by typeEx...
FINANCIAL BUDGET PREPARATIONOPERATING EXPENSE BUDGETOPERATING BUDGETCategorise the expensesPersonnel CostsOffice PremisesT...
FINANCIAL BUDGET PREPARATIONADVERTISING BUDGETOPERATING BUDGETProvide Marketing and SalesPlanProvide justification andcalc...
FINANCIAL BUDGET PREPARATIONPROFIT AND LOSS BUDGETIncomeRs 100ExpensesRs 80Great! I willmake profit ofRs 20
FINANCIAL BUDGET PREPARATIONPROFIT AND LOSS BUDGETIncomeRs 80, Expenses Rs 100,What will I do??
FINANCIAL BUDGET PREPARATION• IN CASE OF LOSS–Increase income–Reduce expensesDOWNSIZING
FINANCIAL BUDGET PREPARATIONBREAK EVENOhwell at least Ididn’tlose anything.
FINANCIAL BUDGET PREPARATION• To break even meansIncome is equal to expensesIncome Rs 100 – Expenses Rs 100 =Profit Rs 0
Budget Preparation:Best Practice & Strategy
FINANCIAL BUDGET PREPARATIONCAPITAL BUDGETOPERATING BUDGET FINANCIAL BUDGETCAPITAL BUDGETBUDGETED P&LCASHFLOW BUDGETDescri...
FINANCIAL BUDGET PREPARATIONCASHFLOW BUDGETOPERATING BUDGET FINANCIAL BUDGETCAPITAL BUDGETBUDGETED P&LCASHFLOW BUDGETFrom ...
FINANCIAL BUDGET PREPARATIONBUDGET AND PROJECTION TEMPLATEOPERATING BUDGETHistoricalYear 1 toCurrentYearBudgetCurrentYearP...
KEY PERFORMANCE INDICATORS• Abbreviated KPIs• Quantitative Measure• Derived from Key Success Factors• Base vs Stretch targ...
Budget Preparation:Best Practice & Strategy
FINANCIAL BUDGET PREPARATION
FINANCIAL BUDGET PREPARATION
TOP DOWN VS BOTTOM UP A top down budget is a budget that is setwithout allowing the ultimate budget holderto have the opp...
BUDGETARY SLACK• Difference between minimum necessary costsand the costs built into budget or actuallyincurred.• Managers ...
BUDGET TYPES Firm/ Sanctioned Unfirm/ Contingent/ Unsanactioned In most of the organisations contingentbudget is also a...
INCREMENTAL BUDGETING Starts with previous year budget or actualresults and +/ - an incremental amount tocover inflation ...
INCREMENTAL BUDGETING Suitable for stable businesses Costs are not expected to change significantly Good cost control ...
ZERO BASED BUDGETINGRequires each cost element to be specificallyjustified through the activities to which thebudget relat...
ZERO BASED BUDGETING Inefficient operations can be discontinued Increased staff involvement Responds to change in busin...
ROLLING BUDGETSKept continuously up to date by adding anotheraccounting period (month or quarter) when theearliest account...
ZERO BASED BUDGETING Planning will be based on most accurate budget Reduce element of uncertainty Always a budget that ...
ACTIVITY BASED BUDGETINGBased on budgeting based on an activityframework and utilising cost driver data Use for overhead ...
HOW DO I MONITOR THE BUDGETCOMPARISONACTUAL VSBUDGET
FEED FORWARD CONTROLComparing budgeted results against aforecasted results Feed back simply compare historical resultswit...
FEED FORWARD CONTROLSalesRsBudget 2011Sales to date used toforecast results to endof the yearControl action can betaken no...
FEED FORWARD CONTROLFeedback ReportSales report for April 2011Month YTDBudget Actual Variance Budget Actual VarianceProduc...
FEED FORWARD CONTROLFeedforward ReportSales report for April 2011Full YearBudget Forecast VarianceProduct Rs000 Rs000 Rs00...
REPORTING ON VARIANCESThere are different reports being prepared forreporting of variances.There is a link between numbe...
REPORTING ON VARIANCESWithout descriptive, textual and narrative partnumbers are considered to be meaningless In large o...
THANK YOU
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Financial Management for Business Associations

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Financial Management for Business Associations

  1. 1. INTERNAL CONTROLS, FRAUDSAND BUDGETSThursday May 23, 2013Secretary General ConferenceIslamabad, PakistanBy: Malik Mirza, FCCA, ACA, MBAwww.wisdomfrombooks.com4/27/2012 www.wisdomfrombooks.com
  2. 2. INTRODUCTION• Facilitator• Objectives• Format for two hours’session• Conclusion
  3. 3. FacilitatorMalik Mirza
  4. 4. OBJECTIVES• UNDERSTAND about internal controls• KNOW budgeting techniques to prepareeffective budget
  5. 5. FORMAT• Case study• Group discussions• Sharing experience• Power point presentation
  6. 6. Who is this man?• New York moneymanager BernardMadoffs $65 billionPonzi scheme, thelargest fraud ever by anindividual, was exposedin December 2008when Madoff, nowdoing 150 years inprison, confessed to hissons. The case led theSEC, which missedseveral opportunities tostop the fraud, to focuson Ponzis andinvestment advisorfraud.
  7. 7. Who is he?• Shortly after thecompany was createdby the merger of CUCInternational and HFS in1997, a massive, decadelong accounting fraud atCUC was uncovered. Itwas estimated to havecost investors at least$19 billion, and was thelargest fraudprosecuted by the SECto that date. Securitiesclass action lawsuitssettled later for morethan $3 billion. A judgesentenced formerchairman Walter Forbesto 12 years and sevenmonths in federal prisonand ordered him to pay$3.275 billion inrestitution.
  8. 8. Guess who?• The 2002 fraud-inducedbankruptcy of the telecomcompany wiped out a firmthat once had $103.9billion in assets on itsbooks. The resulting $6.1billion securities classaction lawsuit payout isthe second largest since1995. Former CEOWorldcom Mr. BernardEbbers was convicted offraud and is doing 25 yearsin federal prison.
  9. 9. Now: Who is this person• In March of 2003, the SECaccused CEO Richard M.Scrushy of overstatingearnings by at least $1.4billion over four years.Scrushy was acquitted of allcharges but later went to jailon a separate charge ofbribing Alabamas governor.Fifteen former executives,including all five of its recentCFOs, pleaded guilty toaccounting fraud.
  10. 10. Last guess: A good guy?• Qwests stock traded ashigh as $64 in 2000before plummeting in2002 to less than $1because of a multiyearaccounting fraud. TheSEC and DOJ probe wasprompted by awhistleblower letter.CEO Joseph Nacchioforfeited $44 million forinsider trading and wentto jail. A class actionsettlement added $400million to the pot butinvestors got backpennies on the dollar.
  11. 11. What’s the conclusion after fiveguesses?• Frauds do happen• Can it happen at your organization?• If yes, how?• If no, why not?
  12. 12. Case studyMr. Rahim has recently joined the Business chamber of commerce as chiefaccountant.The President and Secretary of Chamber have full faith and trust on Mr. Rahim and asa result, Mr. Rahim is all in all in finance.The President and Secretary of Chamber have authorized Mr. Rahim to:• Finalize rates of transactions with vendors• Receive invoices• Verify invoices• Prepare cheques• Deliver cheques to vendors• Record transactions in the books of account
  13. 13. Case study• There is no further check on Mr. Rahim except for trust of the President andSecretary. The only oversight by the President and Secretary of the Businesschamber is the signature on cheques.ASSIGNMENT / GROUP DISCUSSION & PRESENTATION• Please consider the above scenario and after discussion in your group, answer thefollowing:• How can Mr. Rahim conduct fraud or what are two frauds Mr. Rahim can conduct?• What are three suggested internal controls which will help mitigate chances offraud at the Business Chamber of Commerce?• Are there any internal controls at your chamber? Please explain three of them• What one internal control do you consider you will implement once you are backfrom this session?
  14. 14. 14COSO Definition of Internal ControlInternal control is a process, effected by an entity’s board of directors,management and other personnel, designed to provide reasonableassurance regarding the achievement of objectives in the followingcategories:• Effectiveness and efficiency of operations• Reliability of financial reporting• Compliance with applicable laws and regulationsWhat do we mean by ‘internalcontrol’?
  15. 15. 15COSO Internal Controls Key Concepts– Internal control is a process. It is a means to an end, not an end in itself.– Internal control is effected by people. It’s not merely policy manuals and forms,but people at every level of an organization.– Internal control can be expected to provide only reasonable assurance, notabsolute assurance, to an entity’s management and board.– Internal control is geared to the achievement of objectives in one or moreseparate but overlapping categories.What do we mean by ‘internalcontrol’?
  16. 16. COSO’S FRAMEWORK – THREEDIMENSIONS OF INTERNALCONTROLMONITORINGINFORMATION ANDCOMMUNICATIONCONTROL ACTIVITIESRISK ASSESSMENTCONTROL ENVIRONMENTOPERATIONSFINANCIALREPORTINGCOMPLIANCEUNITAUNITBACTIVITY1ACTIVITY2ACTIVITY31. Consists of three objectives:– Effectiveness and efficiency of operations– Reliability of financial reporting– Compliance with applicable laws andregulations2. Consists of five components:– Control environment– Risk assessment– Control activities– Information/Communication– Monitoring3. Requires an entity level focus and an activitylevel focus
  17. 17. 17Control EnvironmentCONTROL ENVIRONMENTOPERATIONSFINANCIALREPORTINGCOMPLIANCEThe control environment sets the tone of the organization,influencing the control consciousness of its people. It is thefoundation for all other components of internal control, providingdiscipline and structure.Control environment factors include:• Integrity and ethical values• Commitment to competence• Board of Directors or Audit Committee• Management philosophy and operating style• Organizational structure• Assignment of authority and responsibility• Human resource policies and proceduresCONTROL ENVIRONMENT
  18. 18. 18Risk AssessmentRISK ASSESSMENTOPERATIONSFINANCIALREPORTINGCOMPLIANCERisk assessment is the identificationand analysis of relevant risks toachievement of the objectives, forminga basis for determining how the risksshould be managed.RISK ASSESSMENT
  19. 19. 19Risk AssessmentRISK ASSESSMENTOPERATIONSFINANCIALREPORTINGCOMPLIANCEObjectives (i.e. assertions) must be established prior to the identificationof risks to their achievement and to take necessary actions to manage therisks.By setting objectives, both at entity and activitylevels, prior to a risk assessment, a companycan determine the critical success factors; thendetermine the risks to the critical successfactors.A risk assessment usually includes:a. Estimating the significance of a riskb. Assessing the likelihood (orfrequency) of the risk occurringc. Consideration of how the risk shouldbe managedRISK ASSESSMENT
  20. 20. 20Control ActivitiesCONTROL ACTIVITIESOPERATIONSFINANCIALREPORTINGCOMPLIANCEControl activities are the policies and procedures that help ensuremanagement directives are carried out. They help to ensure that necessaryactions are taken to address risks to achievement of the entitys objectives.Control activities occur throughout the organization, at all levels and in allfunctions.Control activities include:•Approvals•Authorizations•Verifications•Reconciliations•Reviews of operating performance•Security of assets•Segregation dutiesCONTROL ACTIVITIES
  21. 21. 21Control ClassificationPreventive controls focus on preventingerrors or exceptions. Such preventivecontrols are– Standard policies and procedures– Proper segregation of duties– Authorization levels/approvalsDetective controls are designed to identify anerror or exception after it has occurred.Such detective controls are:– Exception reports– Reconciliations– Periodic auditsInternal controls can be classified as either Preventive or Detective.CONTROL ACTIVITIESOPERATIONSFINANCIALREPORTINGCOMPLIANCECONTROL ACTIVITIES
  22. 22. CONCLUDING INTERNAL CONTROLS: SHARING EXPERIENCELet’s review the environment of chambers and provide feedback on:1. Control environment2. Risk assessment3. Control activities4. Information/Communication5. Monitoring
  23. 23. Budget Preparation:Best Practice & Strategy
  24. 24. WHAT IS A BUDGET• A budget is a detailed plan of income andexpenses.
  25. 25. WHY WE NEED BUDGETI’ ve got a greattraining course Have u donea budget
  26. 26. CRITICISMS OF TRADITIONALBUDGETING• Rarely strategically focused• Time consuming and costly• Reinforces departmental barriers rather thanencouraging knowledge sharing• Sometimes based on unsupportedassumptions and guesswork as opposed towell-constructed performance data• Infrequently updated (budget amendment)
  27. 27. Two Questions1. Why Do We Budget and Forecast?– Budget and Forecast Timeline1. How Do We Budget and Forecast
  28. 28. BUDGET PREPRATION ANDSTRATEGYBankruptWaah!What’swrong withhim?He didn’t preparea budget
  29. 29. Why Budget and Forecast?Budgets and ForecastsA Budget is a formal expression of the plansfor the operation for a specific periodA forecast is a projection of activity basedupon the informationA budget and forecast is your best estimate ofthe department’s/ function’s financial resultfor a fiscal year
  30. 30. Why Budget and Forecast?Budgets and ForecastsMeasure actual and forecasts against thebudget throughout the planning processAnalyze anticipated versus actual resultsPredict future performance and anticipatechanges
  31. 31. Why Budget and Forecast?Budgets and ForecastsAssist in monitoring control of currentperformanceProvide early warning of deviations from plansInternal financial control by department
  32. 32. Why Budget and Forecast?Budgets and ForecastsImpact decisions at higher levelsReporting responsibility to Board of DirectorsQuarterly meeting plus executive sessionsImportance of good budgets and goodforecasts
  33. 33. Budget Preparation:Best Practice & Strategy
  34. 34. FINANCIAL BUDGET PREPARATIONI need to prepare atraining budget.Don’t forget todevelop your trainingplan first.PLAN
  35. 35. FINANCIAL BUDGET PREPARATIONBUSINESS PLANEXECUTIVE SUMMARYMAJOR ASSUMPTIONSSWOT ANALYSISMARKETING AND SALES PLANFINANCIAL BUDGET
  36. 36. GANTT CHART – NEW COMPANYLaunch DateCompany SetupApplication of LicenseOffice RenovationStaff RecruitmentSystem InstallationSystem ReadinessGANTT CHARTQ1 Q2 Q3 Q4
  37. 37. Budget Preparation:Best Practice & Strategy
  38. 38. FINANCIAL BUDGET PREPARATIONBUSINESS PLANGANTT CHARTMARKETING PLANFINANCIAL BUDGET
  39. 39. FINANCIAL BUDGET PREPARATIONMARKETING OBJECTIVESPRODUCTS AND SERVICESCURRENT MARKET SITUATIONa.Target Marketsb.Business Opportunitiesc.CompetitionSALES AND MARKETING PLAN
  40. 40. FINANCIAL BUDGET PREPARATIONMASTER BUDGETOPERATING BUDGET FINANCIAL BUDGETCAPITAL BUDGETBUDGETED P&LCASHFLOW BUDGETREVENUE BUDGETCOST OF SALESBUDGETOPERATING EXPENSEBUDGETADVERTISINGBUDGETBUDGETED P&L
  41. 41. FINANCIAL BUDGET PREPARATIONREVENUE BUDGETRs 100outSo I need atleast Rs 100 tocover expensesWhere I will findthis money
  42. 42. FINANCIAL BUDGET PREPARATIONREVENUE BUDGETOPERATING BUDGETProvide Business StatisticsProvide breakdown ofrevenue by typeExplain how these revenueare achieved (Business mode)Provide calculation of revenuenumbers together with relateddirect costsSpecify when the revenuetargets will be achievedSpecify when the relateddirect costs are incurredREVENUE BUDGETCOST OF SALESBUDGETOPERATING EXPENSEBUDGETADVERTISINGBUDGETBUDGETED P&L
  43. 43. FINANCIAL BUDGET PREPARATIONOPERATING EXPENSE BUDGETOPERATING BUDGETCategorise the expensesPersonnel CostsOffice PremisesTravel and EntertainmentPostage and CouriersPrinting and StationeryProvide justification andcalculation for each type ofexpensesWhen to incur the expense??REVENUE BUDGETCOST OF SALESBUDGETOPERATING EXPENSEBUDGETADVERTISINGBUDGETBUDGETED P&L
  44. 44. FINANCIAL BUDGET PREPARATIONADVERTISING BUDGETOPERATING BUDGETProvide Marketing and SalesPlanProvide justification andcalculation for each type ofcostsHow the expense will beincurred??When to incur the expense??REVENUE BUDGETCOST OF SALESBUDGETOPERATING EXPENSEBUDGETADVERTISINGBUDGETBUDGETED P&L
  45. 45. FINANCIAL BUDGET PREPARATIONPROFIT AND LOSS BUDGETIncomeRs 100ExpensesRs 80Great! I willmake profit ofRs 20
  46. 46. FINANCIAL BUDGET PREPARATIONPROFIT AND LOSS BUDGETIncomeRs 80, Expenses Rs 100,What will I do??
  47. 47. FINANCIAL BUDGET PREPARATION• IN CASE OF LOSS–Increase income–Reduce expensesDOWNSIZING
  48. 48. FINANCIAL BUDGET PREPARATIONBREAK EVENOhwell at least Ididn’tlose anything.
  49. 49. FINANCIAL BUDGET PREPARATION• To break even meansIncome is equal to expensesIncome Rs 100 – Expenses Rs 100 =Profit Rs 0
  50. 50. Budget Preparation:Best Practice & Strategy
  51. 51. FINANCIAL BUDGET PREPARATIONCAPITAL BUDGETOPERATING BUDGET FINANCIAL BUDGETCAPITAL BUDGETBUDGETED P&LCASHFLOW BUDGETDescription of ExpenditureProvide JustificationProvide CostingWhen to PurchaseHow to Finance
  52. 52. FINANCIAL BUDGET PREPARATIONCASHFLOW BUDGETOPERATING BUDGET FINANCIAL BUDGETCAPITAL BUDGETBUDGETED P&LCASHFLOW BUDGETFrom Operating ActivitiesFrom Investing ActivitiesFrom Financing ActivitiesBudgeted Cash Requirements
  53. 53. FINANCIAL BUDGET PREPARATIONBUDGET AND PROJECTION TEMPLATEOPERATING BUDGETHistoricalYear 1 toCurrentYearBudgetCurrentYearProjectionNext 4YearsProvideYearlyAnalysisProvideYearlyAnalysisProvideMonthlyAnalysis
  54. 54. KEY PERFORMANCE INDICATORS• Abbreviated KPIs• Quantitative Measure• Derived from Key Success Factors• Base vs Stretch targetFor Forecast• YTD actual and FY Forecast• Comments on expected variance
  55. 55. Budget Preparation:Best Practice & Strategy
  56. 56. FINANCIAL BUDGET PREPARATION
  57. 57. FINANCIAL BUDGET PREPARATION
  58. 58. TOP DOWN VS BOTTOM UP A top down budget is a budget that is setwithout allowing the ultimate budget holderto have the opportunity to participate in thebudgeting process A bottom up budget is a system of budgetingin which budget holders have the opportunityto participate in setting their own budgets.Also called PARTICIPATIVE BUDGET
  59. 59. BUDGETARY SLACK• Difference between minimum necessary costsand the costs built into budget or actuallyincurred.• Managers set targets that are too easy toachieve.• Managers must ensure that their spendingrises to meet their budget.• Waste money on non-essential expenses.SOLUTION ZBB
  60. 60. BUDGET TYPES Firm/ Sanctioned Unfirm/ Contingent/ Unsanactioned In most of the organisations contingentbudget is also approved by board. The movement from contingent to firm isconsidered as memorandum amendment
  61. 61. INCREMENTAL BUDGETING Starts with previous year budget or actualresults and +/ - an incremental amount tocover inflation and other known changes Have advantages and disadvantages
  62. 62. INCREMENTAL BUDGETING Suitable for stable businesses Costs are not expected to change significantly Good cost control Limited discretionary costs Quick & easy to prepare Builds inefficiency Uneconomic activities may be continued Budgetary Slack
  63. 63. ZERO BASED BUDGETINGRequires each cost element to be specificallyjustified through the activities to which thebudget relates Managers should specify those activities thatcan be individually evaluated Decision is evaluated and ranked using cost/benefit analysis Resources are then allocated
  64. 64. ZERO BASED BUDGETING Inefficient operations can be discontinued Increased staff involvement Responds to change in business environment Efficient allocation of resources Enhanced knowledge of cost behaviourpatterns Emphasis short term benefits Demotivation due to large amount of time Ranking can be difficult for different type ofactivities
  65. 65. ROLLING BUDGETSKept continuously up to date by adding anotheraccounting period (month or quarter) when theearliest accounting period has expired Suitable in fast moving environment whereaccurate forecasts cannot be made Suitable if business needs tight controlQ1 Y1 Q2 Y1 Q3 Y1 Q4 Y1 Q1 Y2BudgetActualAdd
  66. 66. ZERO BASED BUDGETING Planning will be based on most accurate budget Reduce element of uncertainty Always a budget that extends into future Forces management to reassess the budgetregularly Costly and time consuming Danger Budget = last budget +/- Demotivate employees = budgetary targetsconstantly changing
  67. 67. ACTIVITY BASED BUDGETINGBased on budgeting based on an activityframework and utilising cost driver data Use for overhead costs determination Constructed by preparing activity matrix Good tool for variance feedback processes
  68. 68. HOW DO I MONITOR THE BUDGETCOMPARISONACTUAL VSBUDGET
  69. 69. FEED FORWARD CONTROLComparing budgeted results against aforecasted results Feed back simply compare historical resultswith the budgeted results Feed forward is the acceptable system overthe world for control action
  70. 70. FEED FORWARD CONTROLSalesRsBudget 2011Sales to date used toforecast results to endof the yearControl action can betaken now to closethe gapTimeCurrent dateSalesto date
  71. 71. FEED FORWARD CONTROLFeedback ReportSales report for April 2011Month YTDBudget Actual Variance Budget Actual VarianceProduct Rs000 Rs000 Rs000 Rs000 Rs000 Rs000X 35 38 3 (F) 90 94 4 (F)Y 20 14 (6) (A) 50 39 (11) (A)Z 25 23 (2) (A) 50 45 (5) (A)Total 80 75 (5) (A) 190 178 (12) (A)
  72. 72. FEED FORWARD CONTROLFeedforward ReportSales report for April 2011Full YearBudget Forecast VarianceProduct Rs000 Rs000 Rs000X 240 250 10 (F)Y 150 120 (30) (A)Z 210 194 (16) (A)Total 600 564 (36) (A)
  73. 73. REPORTING ON VARIANCESThere are different reports being prepared forreporting of variances.There is a link between numbers and words.Numbers are represented by different nameslike Flash Report, Summary Analysis,Variance Analysis, Snapshots, etc.
  74. 74. REPORTING ON VARIANCESWithout descriptive, textual and narrative partnumbers are considered to be meaningless In large organisations, a weekly CEO report orfor small organisations, a monthlycommentary.These documents embed with numbers (flashreport) along with narratives.
  75. 75. THANK YOU

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