Funding Exam 2: Chapter 6 - Budgeting

mentality by which managers are sure to spend all that is allocated to them in fear that if a surplus remains, their request for an incremental increase will be denied.

"spend it or lose it" mentality

Each part of the organization where budget decisions are made

decision units

constant within a range of use but differ between ranges of use

step costs

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

strategic planning horizon

Typical line items

supplies, personnel, travel, and operational expenditures.

in addition to providing a comparison of income and expenses, a budget can also serve several other functions

to motivate, coordinate, and communicate

Whereas traditional budgets, such as line-item budgets, focus on input, this type of budgeting approach focuses on outputs, or the goals and objectives the organization hopes to achieve.

PPBS

In a typical organization, each department submits one, which, once approved, is incorporated into the organization's annual operating budget.

annual budget recommendation

this becomes the basis of authority for the financial operation of each department during the fiscal year.

annual operating budget

require managers to submit "decision" or "add packages" for discrete activities or programs that need funding above a predetermined reduced level.

athletic departments and public-sector organizations that use MZBB

First created at the decision unit and contains the expenditure levels necessary to maintain last years' service level at next years' prices.

base budgets

why do inefficiencies tend to grow in an organization that uses incremental budgeting

because the inefficiencies are hidden

considered to be a set of financial statements based on projections resulting from a particular scenario - generally, the most likely or hoped-for scenario. Reflects management's opinions about future financial circumstances.

budget

facilitates the control process and helps with coordination of an organization's financial activities

budget

financial plan for receiving and spending money

budget

financial plan that quanitfies planned revenues and expenses for a period of time

budget

financial plan that sets out a business' financial targets expressed in monetary terms

budget

includes planned changes to assets, liabilities, and cash flows

budget

quantifies planned revenues and expenses for a period of time

budget

for management to be effective, subordinates need enough information about organizational goals to be able to act appropriately. Superiors need up-to-date information about progress and results

budget as a means of communication

because the development of a budget provides an opportunity to consider an plan for the future, the process helps management understand and overcome challenges in earning a profit

budget as a means of coordination

because budgets aid in performance measurement, performance evaluation, and the determination of pay, a carefully considered budget directs managers toward the company's goals

budget as a means of motivation

the immediate future, which can be predicted with a reasonable degree of certainty on the basis of past business decisions and commitment. Generally considered to be the next 12 months.

budget time horizon

- Created by the decision unit manager - Building blocks of ZBB and are linked to the organization's goals and objectives. - Within are specific additions to the reduced-level budget, ranked in priority order, based on what is viewed to be most critical to the organization.

decision packages

are evaluated and ranked in order of importance.

decision packages

Purpose of program budgeting

is to highlight the units of activity that the line items support.

A technique in which line items are the main focus of analysis, authorization, and control.

line-item budgeting

achieved prominence with the establishment of the executive budget, which assigned responsibility and accountability for spending to the organization's chief executive. This gave the chief executive a powerful instrument for controlling departmental and agency demands for money.

line-item budgeting

Created by the decision unit manager that defined a predetermined percentage by which the unit must cut the budget; for example. 50%.

reduced level budgets (RLB)

includes services considered critical or essential to the unit, and it may include either new or existing programs.

reduced level budgets (RLB)

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

revenue budgets

Usually the highest ranking in the decision package for an athletic department

salaries and benefits for the administration, coaches and staff.

Advantages of PPBS

- By connecting the budget to a plan, it enables an organization to allocate its scarce resources purposefully. This clarity of purpose in turn enables managers to understand how the work of their particular unit contributes to the work of the organization as a whole. - Staff involvement in the initial stages of the project. The personnel involved often have significant input, and their needs form the basis of the final budget. - For the larger, government-funded sport entity, program budgeting provides a visible and concrete expression to the citizens of how their tax dollars are being spent.

the budget formulation process should:

- Define financial objectives, which determine the direction and thrust of each department's operations - Establish goals for achieving these objectives within the budgeted time frame - Identify the activities and quantify the elements needed to achieve established goals - Describe the factors and situations that may affect planned activities

guidelines for forecasting

- Extend past trends and make adjustments for known changes - Consider developing several forecasts under different potential scenarios (sensitivity analysis) - Consider shortening planning period - Conduct a forecast of large interrelated items rather than specific itemized amounts

advantages of MZBB

- Focuses on budget setters on variable costs (The portion of the budget that has flexibility rather than the entire budget.) - Allocates resources based on results and variable needs - Fosters a questioning attitude - Encourages managers to look for alternative - Has strong evaluation component - Is less time consuming than ZBB

disadvantages of PPBS

- For managers, PPBS limits their flexibility in shifting dollars from one person to another. - Quite time consuming - Evaluation process is often weak. The length of the budgeting process seems to limit the evaluation process, especially after completion. - A budgeting system like PPBS sometimes allows athletic departments to support irrational objectives

PPBS integrates into the planning and budgeting process a number of techniques for:

- Identifying, costing, and assigning a complexity of resources, - Establishing priorities and strategies in a major program, and - Forecasting costs, expenditures, and achievements in the immediate financial year or over a longer period.

Disadvantages of ZBB

- It increases paperwork and requires time to prepare - Managers tend to inflate the benefits of activities that they want funded - The eventual outcome may not differ much from what would occur with an incremental budget.

disadvantages of MZBB

- May result in an emphasis on short-term benefits to the detriment of long-term planning - Does not consider previous money outlays - May be unrealistic, because some programs (sports) cannot be eliminated - Is affected by internal politics and can lead to annual conflicts over budget allocation

elements 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

advantages of ZBB

- ZBB process of setting priorities provides significant accountability to the administrators, coaches, and staff who develop the criteria. - In cases where revenues are flat or decreasing, the lowest-ranked priorities may be eliminated, and conflicts and resistance should be less than under other budgeting systems.

key elements of the ZBB system

- decision units - base budgets - reduced level budgets (RLB) - decision packages

steps in the financial planning process

- gather information - forecast sales - determine expenses - project profits and losses - compare with industry norms - determine capital needs

best practices in budgeting

- link budgeting to strategic planning since the strategic decisions usually have financial implications - make budgeting procedures part of strategic planning - during the budgeting process, spend less time collecting and gathering data and more time generating information for strategic decision making - Get agreement on summary budgets before you spend time preparing detail budgets. - Automate the collection and consolidation of budgets across the organization. - Set up budget so that it will accept changes quickly and easily. - Design a budget that will give lower-level managers some form of fiscal control over their own areas of responsibility. - Leverage your financial systems by establishing a data warehouse that can be used for both reporting and budgeting.

what is a budget?

- policy and planning document - financial document - operations guide - communication instrument

4 requirements of ZBB

1. Each budget period starts fresh 2.Budgets are zero unless managers make the case for resources. The relevant manager must justify the whole of the budget allocation. 3.Every activity is questioned as if it were new, before any resources are allocated to it. 4.Each plan of action has to be justified in terms of total expected cost and benefit, with no reference to past activities.

keys to successful budgeting

1. Input from the entire organization 2. A means of sharing the budget across the organization 3. A budget must be sustainable

incremental spending is usually associated with a top-down management style and has two important characteristics:

1. funds are allocated to departments or organizational units, and the managers of these units then allocate funds to activities as they see fit. 2. an incremental budget develops out of the previous year's budget, and only the incremental change in the budget request is reviewed.

steps in MZBB

1. identify expenses as fixed, mixed or variable 2. allocate fixed and mixed expenses 3. Once you have allocated the fixed expenses, circle back to identify any fixed expenses that could be eliminated. 4. average the mixed expenses to determine the average amount spent per month over the last six to nine months. 5.Address and prioritize the variable expenses. 6. The variable expenses must be offset against anticipated revenues.

four approaches to budgeting

1. incremental budgeting 2. program planning budgeting system (PPBS) 3. zero based budgeting (ZBB) 4. modified zero based budgeting (MZBB)

An appropriate starting point for a department or program might be

80% or 85% of current spending levels.

Spending levels are matched with services to be performed

MZBB

Under ZBB, a great deal of effort can be devoted to documenting personnel and expense requirements that are readily accepted as necessary, such as travel expenses for required road games, utility expenses for home games, and staff expenses for home games. What reduced this effort by starting at a base that is higher than zero?

MZBB

asks managers to reduce their budgets to a predetermined level (a percentage of the previous year) and then add back requests for funding. Although this process places some existing programs in competition with new programs, it saves managers the strain of justifying all costs for all programs from the ground up.

MZBB

focuses on variable expenses, and this is why it is a practical approach to budgeting

MZBB

focuses time, energy and management decision making on the area above this budgetary starting point

MZBB

Based primarily on units of work and secondarily on the character and object of the work.

PPBS

Emphasis is on organizational effectiveness, not spending.

PPBS

The goal is to link planning with budgeting systemically in the service of clearly identified goals.

PPBS

A budgeting approach and a financial management strategy intended to help decision makers achieve more cost-effective delivery of goods and services.

ZBB

Been a common approach to budgeting in the service industry for over 50 years. Originated with Peter Phyrr at Texas Instruments in the late 1960s

ZBB

Helps to prevent budgets from creeping up each year with inflation and also shifts the "burden of proof" to the manager, who must justify why his or her department or sport should receive any budget at all.

ZBB

Sport is a fast-changing environment and this has become a staple budgeting approach for administrators who want to control costs and achieve operational efficiency in this kind of environment.

ZBB

This is the opposite of incremental budgeting, and it is designed to attack the major drawback of incremental budgets - the fact that resource allocation tends to become routine and inefficient.

ZBB

requires all managers involved in the budget process to agree to the priority and ranking of their departments and activities.

ZBB

requires building a budget from a "zero base." That is, the budget is not based on the previous year's budget but rather starts all over again from a clean slate.

ZBB

_____ focuses time and effort on all expenditures; _______ is more efficient in focusing time and effort on variable expenses and accepting fixed expenses as necessary

ZBB; MZBB

often called the object-of-expenditure budget was the earliest type of budget format used in private, public, and non-profit entities.

a form of line-item budgeting

When revenue may be insufficient to meet demand for spending, it is useful for the organization to have

a ranking of sports, programs, and activities based on their effectiveness, as well as potential alternatives to expensive or ineffective programs.

Within each budget type are

additional budgets

In a typical incremental budget , nothing ever gets cut. because top management looks only at the requests for incremental changes, money may be provided for

an activity long after the need has passed.

based on the objectives of the business and are intended to show how policies are to be pursued in order to achieve objectives

budgets

prepared in advance of the time period they cover

budgets

the period over which forecasts can be made with a reasonable degree of confidence - generally, 3-5 years. ( Ex. How ticket sales have changed over the past year 2 years, 3 years and 5 years and use the pattern to make forecasts and produce short- and long-term budgets.)

business planning horizon

- Investments in real estate, stadiums, arenas, buildings and major equipment - Typically, substantial expenditures, in terms of both magnitude and duration. Their magnitude and duration can justify the development of separate budgets for each of these expenditures - allow management to forecast future capital requirements, to keep on top of important capital projects, and to ensure that adequate cash will be available to meet expenses as they become due.

capital expenditure budget

- Forecasts how much cash the organization will have on hand and how much it will need to meet expenses. - This budget can reveal potential shortages or the availability of surplus cash for short-term investments.

cash budget

The organization's policy decisions lead to a specific budget and specific multi-year plans. PPBS therefore,

contributes to the organization's planning process.

- Found in all units within a firm and in non-profit an profit-making organizations alike. - For each unit, lists its primary activities and allocates a dollar amount to each - Sport managers give particular attention to so-called fixed and semi-fixed expenses - those that remain relatively unchanged regardless of volume. - As attendance drops or increases, variable expenses tend to control themselves because they change with volume.

expense budget

secondary data or data obtained from other sources

external data

involves maximizing revenue sources and minimizing expenses and is often based on previous behavior

financial planning process

do not vary with volume

fixed costs

Costs are identified as

fixed, variable, mixed, or step costs.

may be conditional

forecases

may also predict a one-off event, such as the outcome of free agency or the performance of a new recruit

forecast

may project distribution, such as locations of potential security risks or the sales of merchandise among different age cohorts.

forecast

relates to events in the environment, relevant to the implementation of the plan, over which the business has no control or only very limited control. The environment considered may be internal, external, or person - all have effects on decision making.

forecast

difference between a forecast and a plan

forecast is simply a prediction, whereas a plan defines actions to be taken

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

forecasting

concerned with what the future will look like, whereas budgeting is concerned with what it should look like, from a management's point of view.

forecasting

two major activities in the financial planning process

forecasting potential revenues and budgeting for future exxpenses

often for a time series, such as the number of tickers that will be sold in a year or the likely demand for season tickets.

forecasts of future values

The most important items are

funded, whether they are existing or new, and in lean years funding for the lower-ranking items can be reduced.

first step toward sustainability

gaining a "buy-in" from the administration and department heads

if the sport organization does not like the forecast what can it do?

generate other plans until one is found that leads to acceptable outcomes

why is it important to involve each department, coach and employee in development and maintaining the budget

helps ensure buy-in, congruency and efficiency

not recommended, as it fails to take into account changing circumstances. Moreover, it encourages managers to "spend up to the budget" to ensure a comparable allocation in the next period.

incremental budget approach

Based on projected changes in operations and conditions. This approach tends to lead to budgetary increases over time.

incremental budgeting

Often called the "fair-share" approach because no one sport program or department is increased or cut at a different level than others.

incremental budgeting

a form of 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

incremental budgeting

particularly troublesome when top management seeks to identify inefficiencies and waste.

incremental budgeting

primary data or data generated by the business itself

internal data

Budgetary decisions should be made in accord with

management's priorities and desired revenue growth to attain the goals of the organization.

a tax that governing authorities have the right to tax property owners and businesses

millage rate

possess both fixed and variable elements

mixed costs

Produces a plan that, along with information about the environment, provides information for the forecasting process.

planning

the establishment of objectives and the formulation, evaluation, and selection of the policies, strategies, tactics and actions required to achieve those objectives

planning

usually the first step, prior to forecasting and budgeting

planning

The ranking list results in a priority order for

the allocation of resources.

Underlying the MZBB process is the concept of the going concern -

the assumption that the entity will operate indefinitely

Individuals involved in budgeting should consider three distinct time periods:

the budget time horizon, the business planning horizon, and the strategic planning horizon.

change with volume

variable costs

when is budgeting an easy process?

when revenues are increasing