Transcript No Slide Title

Budgeting
MSCM8615
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Overview of Financial Management
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Balancing Mission and Finances!
Planning:
 Define Mission
 Prioritize goals
Assess Resources
 Financial, human (volunteers, members, staff),
infrastructure, community
Budget and Control
Measure Results and Report
 Look at example of Diocese of Bridgeport
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Planning
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Establish the organization's mission. What is an example
of an organizational mission?
Develop a strategic plan to meet that mission.
The strategic plan is a broad set of organizational
goals and the primary approaches for reaching them.
Set long-range plans for achieving the goals defined in
the strategic plan.
Prepare budgets that show how management expects to
obtain and use the resources needed to meet those goals.
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Budgets
Master Budget
 operating budget
 revenues and other support
 expenses
 cash budget
 capital budget
 functional
Special types of budgets
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program budgets
 Fundraising event
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performance budgets
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flexible and zero-based budgets
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Two Approaches to Budgeting
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Centralized or Top Down Model - Priorities are set at
the top of the organization and imposed on the operating
units. More control but less staff involvement.
Decentralized or Bottom Up Model - Operating units
prepare budgets based on their perceptions of needs.
Less control but more involvement. Lots of negotiations.
Risk of losing sight of overall objectives.
Most organizations use hybrid approaches incorporating
elements of both methods.
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The Budget Process
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A process of planning and control.
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A look ahead at what an organization can and can't do.
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The Budget Cycle
- Preparation
– based on guidelines
– normally done by responsibility center managers
- Review and Adoption
- Implementation and Control
- Evaluation of Results and Feedback
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Budget Process, cont’d
From page 65:
 Set goals
 Establish objectives
 Design programs
 Prepare budget
 Budget approval
 Monitor progress
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Budgeting Formats
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Line item or object of expense - e.g., salaries, benefits,
supplies, rent, etc.
Responsibility Center - units for which individual
managers are held accountable, e.g., liturgical,
administration, development
Program Budgets include both revenues and expenses for
specific programs run by the church.
Generally, both Responsibility Center and Program
budgets are supported by line item detail.
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Line Item Operating Budget
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Revenue
Contributions
Program fees
Investment revenue
on endowment
Total revenue
Expenses
Salaries
Supplies
Bad debts
Interest
Rent
Total expenses
Profit/(loss)
$ 97,980,000
120,000
50,000
$ 98,150,000
$ 78,900,000
15,400,000
2,200,000
400,000
3,100,000
$100,000,000
$ (1,850,000)
The Operating Budget
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Revenue and Other Support is a forecast of resource
inflows into the organization.
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Revenues are earned from the sale of goods and
services and the receipt of contributions and grants.
Support refers to just contributions and grants.
Expenses represent the resources that an organization
uses up in carrying on its activities.
A surplus or profit is the excess of revenues and support
over expenses; a deficit or loss is an excess of expenses
over revenues and support.
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Operating Budget Example
Revenue
Collections
Program fees
Endowment earnings
Total revenue
$ 97,980,000
120,000
50,000
$ 98,150,000
Expenses
Salaries
Supplies
Bad debts
Interest
Rent
Total expenses
Change in Net Assets
$ 78,900,000
15,400,000
2,200,000
400,000
3,100,000
$100,000,000
$ (1,850,000)
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The Cash Budget
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Cash Budgets plan for an organization's cash inflows
and outflows.
Beginning Cash Balance
+ cash receipts
Subtotal: Available Cash
- cash payments
Subtotal: Total Cash Payments
Balance before borrowing, repaying or investing
+ borrowing or – repayments or investments
Ending Cash Balance
Note distinction between accrual-based revenue and
expense versus cash receipts and payments!
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Cash Budget Example
Millbridge’s urban planner for social services is working on the
budget for the town’s day care center. The center allows lower
income citizens to hold jobs. The Center is paid each quarter by
the county and state to care for children. The state pays 50% of
the amount that it is billed in the quarter immediately following
billing and 50% two quarters after receiving a bill. The county
pays 100% of the amount it is billed three quarters after receiving
the bill.
Parents are also required to pay the Center for caring for their
children. Parents pay the full amount that they owe on the first
day of the quarter that it is due. Based on the operating budget
on the next slide, how much cash can the Center expect to
collect in the 4th quarter?
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Revenues by Quarter
Revenue
State
County
Parents
Quarter 1 Quarter 2
$ 20,000
$15,000
25,000
30,000
5,100
4,800
$50,100
$49,800
Cash Collection for Fourth Quarter
State
50% of 2nd Qtr.
+ 50% of 3rd Qtr.
County 100% of 1st Qtr.
Parents 100% of 4th Qtr.
Total
Quarter 3
$10,000
35,000
5,200
$50,200
Quarter 4
$ 5,000
40,000
5,000
$50,000
Cash
$ 7,500
5,000
25,000
5,000
$42,500
Note the difference between the cash and revenue for the quarter!!!
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The Capital Budget
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Capital Budgets plan for the acquisition of high-value,
long-term (> 1 year) assets.
Capital Budgeting will be discussed next week
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Program Budgets
Program budgets include both revenue and expenses for
the major activities of an organization. Helps managers
focus on sources of profits and losses of programs that
could be expanded or discontinued.
Revenues
Meals on
Wheels
$40,000
Expenses
37,000
Profit/(Loss)
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$ 3,000
CCD
ElderDrive
Total
$ 18,000
$0
$ 58,000
17,000
20,000
74,000
$1,000 $(20,000) $(16,000)
Program Budget Example
Charity Church sponsors a three-day youth camp in Bear
Mountain Park. Charity provides a $500 grant for the event and
collects $130 from each camper. The camp director expects 40
campers to attend and anticipates the following expenses:
Campground fees
Bus transportation
Equipment rental
Meals
$350
$1,225
$40
$65
For 3 days
(60 rider capacity)
Per camper
Per camper
Determine the special purpose budget for the camp. Show
revenues and expenses by line item, and show the expected
profit or loss.
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Budget - 40 Campers
Revenue
Camp tuition
Church subsidy
Total revenue
Less Expenses
Campground rental
Bus transportation
Equipment rental
Meals
Total Expenses
Surplus/Loss
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$ 5,200
500
$ 5,700
$
350
1,225
1,600
2,600
$ 5,775
$
(75)
Responsibility Center
Expense Budget
Responsibility Center Budget
Liturgical
FY2010
$ 600,000
Development
100,000
Administration
200,000
Total
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$ 900,000
Functional Budgets
Functional Budgets focus on the major functions
performed by an organization. This format is often
used to report to outsiders.
Let’s look at some examples of budgeting templates from the Diocese of
Bridgeport:
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Flexible Budget
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Organizations often experience more or less volume
than budgeted.
Flexible budgets look at expected revenues,
expenses, and net income under different volume
assumptions.
The key to flexible budgeting is the identification of:
Fixed Costs - which do not change with volume.
Variable Costs - which do change with volume.
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Flexible budget results are normally shown in a sideby-side columnar format.
A flexible budget is a form of "What if?" analysis.
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Flexible Budget Example
Charity Church sponsors a three-day youth camp in Bear
Mountain Park. Charity provides a $500 grant (F) for the event
and collects $130 (V) from each camper. The camp director expects
40 campers to attend and anticipates the following expenses:
Campground fees
Bus transportation
Equipment rental
Meals
$350
$1,225
$40
$65
for 3 days (F)
(60 rider capacity) (F)
per camper (V)
per camper (V)
Provide a flexible budget assuming a 10% increase in the
number of campers.
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Budget
Revenue
Camp tuition
Church subsidy
Total revenue
Less expenses
Campground rental
Bus transportation
Equipment rental
Meals
Total expenses
Surplus/loss
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40 campers
$5,200
500
$5,700
$ 350
1,225
1,600
2,600
$ 5,775
$ (75)
10% Increase
44 campers
$5,720
500
$6,220
$
350
1,225
1,760
2,860
$ 6,195
$
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Meals for Homeless
Flexible Budget Example
Meals Delivered
Revenue
Donations (F)
City (V)
Total Revenue
Expenses
Salaries (F)
Supplies (V)
Rent (F)
Other (F)
Total Expenses
Surplus/(Deficit)
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35,000
40,000
45,000
$105,000
52,500
$157,500
$105,000
60,000
$165,000
$105,000
67,500
$172,500
$ 46,000
87,500
12,000
6,000
$151,500
$ 6,000
$ 46,000
100,000
12,000
6,000
$164,000
$ 1,000
$ 46,000
112,500
12,000
6,000
$176,500
$ (4,000)
Performance Budgeting
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Operating budgets attempt to plan the resources needed to
accomplish certain outcomes or results that the organization
hopes to achieve.
But the budgeting process focuses on resource negotiations
and uni-dimensional output measurements.
Performance Budgeting asks managers to define goals, plan
their resource needs, and measure the achievement of
various goals and objectives.
Does this measure outcomes or outputs?
Can simple measures tell the whole story, or are we back to
the questions of efficiency and effectiveness?
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Incremental Versus
Zero-Based Budgeting
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Incremental budgeting starts with current revenues
and expenses and projects next year by adjusting for
inflation, volume, efficiency, technology, etc.
Zero-Based Budgeting
- calls for a total reevaluation of all programs and
activities.
- requires that decision packages be prepared for
each separable activity or level of activity.
- ranks the packages.
- selects packages for adoption or rejection.
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Forecasting
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Forecasting is done using three approaches:
- Subjective methods when there are no historical
data.
- Time Series methods when the future is expected
to follow an historical trend.
- Causal Modeling which tries to forecast based on
statistical relationships among several factors.
Forecasting is an art. Models should be tested
before use and experience should be brought to
bear when appropriate.
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Factors in Revenue Forecasts
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Economic conditions
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Endowment Investment Decisions
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Price Setting
- historical approach - what we always got.
- market approach - what others charge.
- quantity maximization - do as much as possible
while staying solvent.
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Regression Analysis
for Forecasting
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Independent/Dependent Variables
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Ordinary Least Squares analysis
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Cautions
 Plausibility
 Goodness of Fit
 Statistical Significance
 Reasonableness of Assumptions
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The Human Element
in Forecasting
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Consider how the results will be used.
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Is the past a good predictor for the future.
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Does the forecast result make sense?
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Behavioral Aspects
of Budgeting
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People are the key to success in
budgeting
Goal Divergence vs Goal Congruence
Motivation is critical
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Allow staff input in budget process
Provide incentives – carrot or stick
 Raises
 Bonus
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The Holy Land Trip Budget
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The Budget Question: Can the church successfully
run a teen trip to the Holy Land?
The Issues:
- Does the trip fit within the church's mission?
- What is the market for such trips?
- How many teens will come on the trip?
- How much revenue can the church expect to
collect?
- What will the expenses be?
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The Holy Land Trip Budget
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The Process:
- Do a first estimate of the budget.
- Examine the assumptions and develop alternatives.
- Ask what happens if your forecasts and key
assumptions are wrong.
Lessons from the Case
- Budgeting requires thought.
- Budgeting requires estimating.
- The more facts that are available the better.
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