FINANCE: Chapter 6 - Budgeting

1. Identify expenses. 2. Allocate Fixed and mixed expenses. 3. Circle back to identify any fixed expenses that could have been eliminated. 4. Average the mixed expenses to determine the average amount spent per month over the last 6-9 months. 5. Address and prioritize the variable expenses. 6. Variable expenses must be offset against anticipated revenues.

What are the 6 steps in Modified Zero Based Budgeting?

1. Input from the entire organization 2. Means of sharing the budget across the organization

What are the two keys to successful budgeting?

It forces prioritization

What is an important characteristic of zero based budgeting?

A forecast is simply a prediction, whereas a plan defines actions to be taken (a budget is technically a plan

What is the difference between a forecast and a plan?

1. Define financial objectives 2. Establish goals for achieving these objectives within the budgeted time frame 3. Identify the activities and quantify the elements needed to achieve established goals 4. Describe the factors and situations that may affect planned activities

The budget formulation process should do what four things?

Decision Unit Base Budget Reduced Level Budget Decision Packages

The four key elements of Zero Based Budgeting?

True

True or False: Forecasts may be conditional

True**

True or False: Forecasts of large interrelated items (entire season) are more accurate than forecasts of a specific itemized amount (one specific game)

Reduced-level Budget

defines a predetermined percentage by which the unit must cut the budget

Revenue Budget**

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

Program Planning Budgeting System (PPBS)**

an approach to developing a program budget that focuses on outputs rather than inputs, with an emphasis on organizational effectiveness, not spending

Variable Costs

costs that change with volume; may include cost of goods sold, wages for part time employees, and opponents share of gate receipts

Fixed Costs

costs that do not vary with volume; may include administrative salaries and benefits, property insurance, property taxes, payroll taxes, and depreciation

Mixed Costs

costs that possess both fixed and variable elements; may include utilities, repairs, and maintenance

1. Uses cost identification and behavior techniques. 2. Begins with a floor of expenses. 3. Includes decision or add packages. 4. Requires managers to reduce their budgets by a predetermined percentage. 5. Puts existing programs in competition with new ones.

5 characteristics of Modified Zero Based Budgeting?

1. Each budget period starts fresh - not based on past budgets. 2. Budgets are zero unless managers make the case resources. 3. Every activity is questioned as if it were new. 4. Each plan of action has to be justified.

Four requirements of Zero Based Budgeting?

The Budget Time Horizon The Business Planning Horizon The Strategic Planning Horizon

Individuals involved in budgeting should consider what three distinct time periods?

Salaries and benefits for administration, coaches, and staff

Who usually are the highest ranked in the decision package for athletic departments?

Program Budget**

a budget in which expenditures are based primarily on units of work and secondarily on the character and object of the work

Zero-Based Budgeting (ZBB)**

a budgeting approach and a financial management strategy intended to help decision makers achieve more cost effective delivery of goods and services; the budget starts all over again from a clean slate; question of why they are doing what they are doing and whether they should be using their resources to do something else

Budget

a financial plan that sets out a business's financial targets, expressed in monetary terms; it facilitates the control process and helps with the coordination of an organization's financial activities

Incremental Budget**

a form of line-item budgeting in which next year's budget is the result of either decreasing or increasing last year's budget for each line item by the same percentage; "fair share" approach

Forecast**

a prediction and quantification of future events for the purpose of budgeting

Capital Expenditure Budget**

allow management to forecast future capital requirement to keep on top of important capital projects, and to ensure that adequate cash will be available to meet expenses as they become due

Step Costs

costs that are constant within a range of use but differ between ranges of use; example is cost for a security firms based on different attendance bench marks

Decision Unit**

each part of the organization where budget decisions are made

Strategic Planning Horizon

extends far into the future; planning for this time period focuses on the long term aspirations of the sport organization and management

Base Budget

first created at the decision unit and contains the expenditure levels necessary to maintain last year's service level at next year's prices

Cash Budget**

forecasts how much cash the organization will have on hand and how much it will need to meet expenses

Expense Budget**

found in all units within a firm and in non-profit and profit-making organizations; for each unit this lists its primary activities and allocates a dollar amount to each

Modified Zero Based Budgeting**

in this approach spending levels are matched with services to be performed

Going Concern

the assumption that the entity will operate indefinitely

Decision Packages

the building blocks of Zero Based Budgeting and are linked to the organization's goals and objectives

Line-item Budgeting**

the earliest type of budget format, a technique in which line times (objects of expenditure) are the main focus of analysis, authorization, and control; typical line items include supplies, personnel, travel, and operation expenditures

Planning

the establishment of objectives and the formulation, evaluation, and selection of the policies, strategies, tactics, and actions required to achieve those objectives, usually a first step prior to forecasting and budgeting

Budget Time Horizon

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

Business Planning Horizon

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

Strategic Planning

the process of defining a vision for your organization and creating goals and objectives to help achieve this vision

Sensitivity Analysis

the process of developing several forecasts under different scenarios and assigning probabilities to each scenario to arrive at an acceptable forecast