financial 3804 - chapter 6

process for formulating a budget includes . . .

define the financial objectives. This determines the direction and thrust of each department's operations establish goals for achieving objectives with the budget period identify the activities and quantify the elements needed to achieve established goals Describe the factors and situations that may affect planned activities

Effectiveness Measures

extent to which a program achieves its stated goals and objectives

Planning

first step It is the establishment of objectives and the formulation, evaluation, and selection of the policies, strategies, tactics, and actions required to achieve those objectives A plan defines what the organization wants to do the information from the planning process is used for the forecasting process

Strategic planning horizon

focus on long-term aspirations of the sport organization and management.

Zero-based Budgeting

forces prioritization a budgeting approach and a financial management strategy that requires building budget from a zero base rather than the previous year's budget well suited for sports industry and other businesses within the service industry this budgeting approach attempts to force an organization to remain competitive in a rapidly changing set of market conditions. helps prevent budgets from creeping up and shifts the burden of proof to the manager

Keys to successful budgeting

input from entire organization leads to a more accurate and effective budget means of sharing the budget across the organization as a way to have an efficient budgeting process

Budgeting (continued)

is an easy process when revenues increase becomes difficult when expenses have to be cut due to a decrease in revenues

Modified Zero-based Budgeting (MZBB) Disadvantages

may be unrealistic short term benefits versus long-term planning affected by internal politics

budget is a means of ...

motivation coordination communication

Preparation of the Budget

organization should set a general budgeting policy to guide resource allocation on the basis of program justification

Business planning horizon

period over which forecasts can be made with a reasonable degree of confidence (3-5yrs)

Expense budget

A list of a business unit's primary activities, with a dollar amount allocated to each line

Program Planning Budgeting System

An approach to developing a program budget that falls between the line-item budget and the performance budget

Decision Unit

An individual or unit where budget decisions are made. These units make decision packages

What father-and-son combo has the most career home runs?

Barry and Bobby Bonds (1094)

Modified Zero-based Budgeting (MZBB)

A budgeting concept that starts at a base higher than zero and matches spending levels with services to be performed

Decision Packages

A discrete addition to a reduced level budget to maintain an existing program, serve an increase workload, or add a new program valuated and ranked order of importance provide the priority for how resources are allocated

Cash Budget

A forecast of how much cash an organization will have on hand in a specific time period and how much it will need to meet expenses during that time

Revenue budget:

A forecast of revenues based on projections of the organization's sales

Capital expenditure budget

A forecast of the expenses and income related to capital investment

Variable

Change with volume

Three distinct time periods

Budget time horizon Business planning horizon Strategic planning horizon

Budgeting Tools

Planning & Forecasting

Efficiency Measures

how well are resources being consumed

Budget time horizon

the immediate future (next 12 months) that can be predicted with a reasonable degree of certainty on the basis of past business decisions and commitments

Steps in MZBB

1 Identify the expense type 2 Allocate Fixed and Mixed expenses 3 Identify any fixed expenses that can be eliminated. The remaining items are the floor. 4 Average the mixed expenses to determine the average amount spent over the past 6 to 9 months 5 Address and prioritize the variable expenses 6 Subtract total expenses from total revenues

Guidelines for Forecasting

1 Rely on past relationships and making predictions on historical information. Be ready to adjust forecasts based upon known changes. 2 Consider developing several forecasts under different potential scenarios and assign the probability to each scenario. 3 Consider shortening the planning period for more accurate forecasts 4 Forecasts of large interrelated items are more accurate than forecasts of specific itemized amounts 5 Understand your mission/objectives 6 Utilize entire organizational resources (human and non-human) 7 Share information with other organizational units

Modified Zero-based Budgeting (MZBB) Cost Identification and Cost Behavior

Costs are identified as fixed, variable, mixed or step costs

Zero-based Budgeting Key Elements

Decision Unit Base Budget Reduced-level budgets decision packages

Zero-based Budgeting Requirements

Each budget period starts fresh Budgets are zero unless managers make the case for resources Every activity is questioned as if it were new Each plan of action has to justified in terms of expected costs and benefit

Incremental Budgeting advantages

Easy to prepare and understand All departments receive the same boost or decline impact of changes can be seen quickly

Program budget:

Emphases programs rather than costs by clustering together associated costs. Use of program decision-making packages What are the goals and objectives of the organization? Allocation of all resources is tied to the accomplishment of stated goals and objectives Emphasis is on effectiveness rather than efficiency or spending

Program Planning Budgeting System Advantages

Enables an organization to allocate its resources purposefully shows managers how their departments' work in relation to overall organization provides evidence to show citizens how department is spending tax dollars staff involved in early stage

Modified Zero-based Budgeting (MZBB) Advantages

Focuses budget setters on variable costs less time consuming than ZBB Encourages alternatives strong evaluation component

Incremental Budgeting

Form of line-item budgeting approach in which line items, also known as objects of expenditure, are the main focus of analysis, authorization, and control Incremental budget is derived from last year budget and taking the same percentage increase or decrease on each item based on projected changes in operations and conditions

Four approaches to budgeting:

Incremental Budgeting Program planning budgeting system Zero-based budgeting Modified zero-based budgeting

Program Planning Budgeting System Disadvantages

Limits flexibility to shift dollars higher potential for conflict time consuming

Forecasting

Prediction of future events and their quantification for the purpose of budgeting includes the application of a person(s) judgement along with statistical methods

Who holds the single season record for stolen bases?

Rickey Henderson (1982) 130 SB

Incremental Budgeting Disadvantages

The assumption is that activities and methods of working will continue the same way no incentive for departments or employees to develop new ideas no incentive to reduce costs Overestimation is never corrected or reviewed

Base budget

The expenditure level necessary to maintain last year's service level at next year's prices

reduced-level budgets

The percentage below the base budget that a budget is required to be reduced

Characteristics of MZBB:

Uses cost identification and behavior techniques Begins with a floor of expenses Includes decision or add packages Requires managers to reduce their budgets by a predetermined percentage Puts existing programs in competition with new ones

performance budget

a budget where the relationship between program inputs and outputs is measured

Step

constant with a range of use but differ between ranges of ones

Mixed

contain both fixed and variable elements

Fixed

costs that do not vary with volume

budget

set of financial statements based on projections resulting from a particular scenario, generally the most likely or hoped scenario quantifies planned revenues and expenses over the course of a time period reflects management opinions on future financial circumstances forces a department to articulate vision, strategy, and goals over the period of the budget provides accountability in all areas of the organization serve as control mechanisms for decision-making

Workload Measures

volume of work completed