Transcript Slide 1

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Beyond Sport Online
Learning Session
Toolkit: Budgeting and
Forecasting
What is financial management?
Financial management can be defined as managing the finances of an organisation in order to
achieve financial and strategic objectives. Done effectively, this should include a view of the past
and a plan for the future...
•
Financial statements and reports are backward looking, summarising income and
expenditure over a certain period of time.
•
Financial planning and budgeting is forward looking, forecasting what is going to happen
and what resources will be required in the future.
The purpose of financial
management is to...
Establish...
Monitor...
Control...
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...financial resources of an organisation in order to
ensure that activities / programmes...
...are delivered efficiently.
...are within budget.
...deliver expected financial benefits.
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Why is financial management important?
Financial management helps organisations to...
Make optimum use of their money to achieve maximum returns.
Understand if they have the resources to meet their objectives.
Identify short term financial issues and address them as early as
possible.
Express their intentions, and explain what resources are required to
achieve them.
Inform all levels of the organisation about what needs to be achieved,
and the resources available for doing so.
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Financial statements
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Income and expenditure statement
An income and expenditure account should only contain information regarding cash flow:
money in and money out.
In
Out
Cash inflows...
payments into an
organisation from members
or other sources
Cash outflows...
payments made by
an organisation
•
It provides a summary of income and expenditure over a specified time (usually one year).
•
It includes only revenue items.
•
The balance at the end shows the net operating result in the form of surplus (i.e. excess of
income over expenditure) or deficit (i.e. excess of expenditure over income), which is
transferred to the capital fund shown in the balance sheet.
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Example: income and expenditure statement
2011 (£)
2010 (£)
It should refer to a specified period
(usually 12 months).
Functions Income
4,500
2,000
Donors
10,000
8,500
Sponsorship
5,000
3,000
Total Income
19,500
13,500
Different ‘types’ of income should
be listed in the left hand column.
There are no rules around what
these categories can be - you may
find it easier to have lots of
different categories or you might
wish to to group similar items
under one heading.
Wages
9,500
6,000
Rent
4,000
3,750
900
800
Travel
1,000
900
Net Surplus (Before Tax)
4,100
2,010
Net Surplus (After Tax)
4,100
2,010
Income
Expenditure
Utilities
Expenses are then listed –
categorised appropriately.
Income minus expenses gives a net
surplus (if income has been greater
than expenses) or deficit (if
expenses were greater than
income).
The net figure is stated before tax
and after tax.
NB: tax exemptions may differ in accordance with
location of operation - contact local charity
commission and / or HMRC for further details.
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Balance sheet
•
An organisation’s balance sheet is a snapshot of assets and liabilities and gives a view
financial health at a specific point in time.
•
An organisation should ideally have more assets than liabilities - similar to the income and
expenditure account.
•
A version of the balance sheet should be presented at monthly meetings to ensure that
financial performance is being monitored.
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Example: balance sheet
Fixed Assets
Current Assets
Debtors
Cash at Bank
Cash on Hand
Stock
Current Liabilities
Overdrafts
VAT
Creditors
Accrued Expenses
Excess of Current Assets over Current Liabilities
2012 (£)
2011 (£)
15,000
15,000
450
2100
1350
400
600
2000
1100
350
0
650
500
450
2700
0
500
200
375
2975
17700
17975
3500
4000
Net Assets
14200
13975
Retained Reserves
Previous Balance
13975
12110
Total Reserves
14200
13975
Total Assets less Current Liabilities
Long Term Liabilities
Loans
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Assets are listed at the top of the
balance sheet grouped into fixed
and current assets.
Current assets are cash or assets
which are readily convertible to
cash.
Current liabilities are amounts that
are due in the short term.
The difference between the two
gives us a quick measure of how
well an organisation is doing
Total liabilities are deducted from
total assets to give the net asset
figure.
Reserves show what investment
has been made into an
organisation. Reserves are not a
pot of cash. They are calculated by
taking last year’s closing balance
and adjusting for this year’s surplus
or deficit.
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Financial planning
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Why is financial planning important?
Financial statements (balance sheet, income and expenditure account) give a historic view of an
organisation, but another source of financial information is necessary – budgeting and planning.
Financial planning is essential because...
•
Organisations need to consider what is likely to happen during the fiscal year, and plan
accordingly.
•
It is too late to discover at the end of the year that income was not sufficient to meet
expenditure.
There is no legal requirement to prepare financial plans (budgets), and no specific format that
these plans should take. It is important for an organisation to choose a process that works for
them, and allows them to obtain relevant information.
Financial plans should not be too easily achieved, but also must not be too ambitious. This can
be a difficult balance to achieve – the must remain realistic.
Three steps in financial planning
1.
Prepare
Planning for the year – preparing the budget. What needs to be achieved?
What resources are available to do so?
2.
Monitor
Regularly reviewing performance – compare actual performance against
budgeted performance
3.
Control
If variances are observed, take corrective action where necessary
What is a budget?
•
A budget is a financial plan for a set period in the future.
•
Organisations should consider what income they expect to receive and what expenses they
are likely to incur during this time period.
•
This information can be used to predict the surplus or deficit they expect to obtain during
the budgeted period.
A typical budget setting process could involve seven simple steps:
1
4
Agree objectives for
the year
2
5
3
What income will be
available?
Review predicted
budget surplus /
deficit
Construct a draft
budget
6
What expenses will
be incurred?
7
Make any necessary
changes
Seek formal approval
sign / off
There are two types of budgeting...
Zero-based budgeting
•
Start with a blank page.
•
All income and expenditure will be considered & analysed in depth.
•
Level of analysis allows for consideration on how appropriate each ‘spend’ is
Incremental budgeting
•
Start with budget from previous period (if there is one in place) and adjust accordingly –
enabling ‘quick’ forecasting if performance has been consistent.
•
Limited opportunities for research – particularly if significant changes may occur over the
next fiscal year.
Neither method is more or less appropriate. Many organisations employ a
combination of the two – beginning incrementally and using zero-based
techniques and analysis where necessary.
Before setting a budget...
Look at financial statements from the previous budgeting period (usually 12 months)....

Consider income and expenditure from the previous 12 months (or length of budgeting
period) – providing an idea of surplus / deficit that an organization can anticipate to
generate

Split this information over the course of 12 months (or length of budgeting period) to
anticipate when income is earned, and when expenses are incurred - depending on the
nature of income or expenditure it might be split evenly over the year or associated with
certain months

Remember that the surplus / deficit on an income & expenditure sheet will be the product
of 12 months of cash flow – whilst a budget may incur either surplus or deficit from
month-to-month, before reaching the end of the fiscal year.
The budget setting process (1/3)
1
Agree objectives for
the year
2
What income will be
available?
3
What expenses will
be incurred?
•
What needs to be achieved - the main driver for income & expense.
•
Objectives should be clearly defined so success can be measured
easily.
•
Examples include: plans to grow, improve performance, coordinate
events, fundraising, reach more people etc.
•
Income to achieve objectives must be considered.
•
For example, these may include: fundraising, grants, donations,
sponsorship etc.
•
Expenses for the year are likely to include: wages, rent, cash
expenses, utilities, insurance etc.
The budget setting process (2/3)
4
Construct a draft
budget
5
Review predicted
budget surplus /
deficit
6
Make any necessary
changes
•
After considering incomes & expenses, you should prepare a draft
budget.
•
Be realistic in your considerations.
•
Be prudent - it is better to understate income & overstate expenses
than vice versa.
•
Are these reasonable?
•
The draft budget should be reviewed to ensure everybody is happy
with predictions
•
A surplus may be impossible to achieve – a deficit may be acceptable
– make sure everybody is comfortable with targets
The budget setting process (3/3)
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Seek formal approval
sign / off
•
Not only should the budget be approved, everyone should accept the
expectations to work within in
•
Without this, objectives will not be effectively achieved
Example budget: summary of expenses
Summary
Item description
Estimated cost

Complete a summary table to ensure
that goals for the fiscal year are
clearly outlined
1. Labour
0

2. Materials & Supplies
0
3. Facilities
0
Input from stakeholders at all levels
within an organisation should be
considered and incorporated where
appropriate
4. IT Infrastructure
0

5. Software Licenses & Support
0
6. Training
Estimated costs must not be too
generous – but they should also not
be too stringent
0
7. Travel
0
8. Administration
0
9. Other
0
Total
0
Example budget: drill down into each section
1. Labour
Role & Name
Internal programme staff
Days
Cost
Days
Cost
Days
Cost
Days
Cost
Days
Cost
External specialist consultants
Free lancers
Volunteer costs
Total labour
2. Materials and Supplies
Item description
Purchase of new office equipment
Total materials & supplies cost
Name
AN other

Break down the initial summary into
smaller, more specific categories

Highlight individual items (and
groups of items)

Provide detailed cost estimates for
each item

Does the sum of these estimates
match your initial summary
estimate? (They can total a sum
which is lower, but they must not
exceed that amount).
Example budget: allocating cost & time
2. Materials and Supplies
Item description
Name
Purchase of new office equip
AN other
Total materials & supplies cost
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Total
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

Allocated cost and time by in monthly buckets allows an organisation to identify how
much cash will be required at specific points during the budgeted period

Completing this process can also help to commit resources for a specific amount of
labour days
Allocating time – staffing projections
•
Staffing projections should be recorded – these can be recorded on a daily basis so all work
is accountable
•
Projections can be based upon work which has happened previously – how many hours
were required from how many members of staff to see a project through to completion?
•
Work around these estimates rather than on an ad-hoc basis – this will ensure an
organization remains within budget
Monitoring a budget
Having set a budget, it is crucial to check actual performance against budgeted performance...
•
Ideally, an organisation should review actual performance against budget on a monthly
basis
•
Monitoring must happen in a timely manner to ensure it is not too late to take corrective
action
•
Comparison of actual performance against budgeted performance is known as variance
analysis
•
In the instance of a one off event, or embarking on a capital project that has its own
individual budget it will require more regular monitoring
•
Upon identifying instances where actual performance does not meet budgeted
performance, an organisation must investigate the reasons for these variances, and take
action
Approaching & investigating variances
Gather information
on actual
performance
Document all income
and expenditure –
create new categories
if necessary
Establish actual
figures
Investigate reasons
for variances
If variances have
occurred – establish
where they occurred
Compare these to
budgeted information
& calculate the
difference
Differences in
budgeted volume or
budgeted cost will
account for some
variances
Were facilities over
utilised? Were rent or
utility costs
increased?
Establish root cause
of variance – develop
better control
techniques
10 things to remember for successful budgeting...
1.
Involve as many people as possible in the budget setting process
2.
Allow sufficient time to complete the budget setting process
3.
Look ahead when budgeting – don’t base it entirely on the last 12 months
4.
Make budgeting a continuous process
5.
Learn from previous mistakes – don’t be detracted by them
6.
Use internal knowledge to make the budget as robust as possible
7.
Be willing to challenge previous practise
8.
Regularly review actual performance against budgeted performance
9.
Partner positive & negative variances with an explanation
10.
Ensure that key parties understand what is happening at every stage
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