budgeting 101

Budgeting 101

Kevin Derrivan

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Today’s Speakers

Kevin DerrivanAccounting Management

Solutions, Inc

Hosting: Sam Frank, Synthesis Partnership

Budgeting 101

Kevin Derrivan

Accounting Management Solutions, Inc.

December 15, 2010

Kevin Derrivan

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Senior Consultant/Engagement Manager


About Us

• For more than a decade,

Accounting Management

Solutions, (AMS) has provided

accounting support and financial

management leadership at the

consulting CFO, controller and

accounting manager level to

dynamic companies throughout

the Northeast.

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Agenda

• The basics of budgeting.

• Why budgets are important for control

purposes.

• Various types of budgets.

• When each type of budget is used.

• How to prepare and address some of the

important parts of a budget.

• What are their limitations?

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• Budgets are summaries of short-term operational

activities of a organization.

• For example, a organization may prepare a cash

budget to predict cash inflows and outflows.

• Budgets are quantitative representations.

What is a Budget?

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Budgeting vs. Forecasting there is a difference!• A forecast is a prediction.

• There are many hypothetical's before a forecast

looks like a budget.

• A forecast can only predict.

Budgeting vs. Forecasting: There is a Difference

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• …. a strategic organizational plan.

• …. based on facts, events in progress and actions planned.

• …. a collaborative effort by finance and the departments affected by obtaining input before preparation.

• …. managed by department heads to make the required steps to achieve the budget.

• …. necessary for planning and for controlling.

Budgets are…

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Various Types of Budgets

• Operating Budgets

Two Major Types:

• Capital or Investment Budgets

• Stated in monetary units however, could contain non-

monetary items such as units produced, sold, no. of

items processed etc.

• Usually, short-term (one year) but could be

extrapolated from or to the longer term.

• Senior management must be involved in the process

and must approve it.

• Most important – budgets must be compared to actual

and the variances must be investigated.

Characteristics of a Budget

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• Management should review Budget on a monthly basis

• The Board should receive a copy on a monthly basis

• Managers should meet with finance on a monthly basis to discuss the financials and any unbudgeted expenditures.

Critical to Forecast & Create a Plan

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• Know your goals and objectives

• Upper Management Support and “Buy In” on your process

• De-centralize the budgeting process

• Involve staff at other levels

• Create Strong Tools and Training (as needed)

• Work closely with revenue-generating staff

• Budget capital expenditures

• Budget a surplus

• Project cash flow

• Budget temporary and permanently restricted revenue

• Manage your operating budget & your audited financial

statements

The Budget Process: Best Practices

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• PLANNING and GOAL SETTING MUST be completed BEFORE the budgeting Process BEGINS

• Lack of proper planning/goal setting may lead to poor budgeting

• If people do not know their goals they may not know how to start or may repeat current mode of operations

• May miss substantial changes - may budget too little or too much, causing a lot of rework and frustration

Best Practice: Know Your Goals & Objectives

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If they don’t care - no one else will. They need to:

• Lead approval of Organization Goals and Operations Plan

• Be involved/leaders in the budget process

• Support the process by MANAGING their staff to the

timelines and product completeness and accuracy

• Approve all budgets prepared by those they supervise

Get Upper Management Support & Create “Buy-In”

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• Every manager who has a responsibility for a budget should

be involved in the process

• Understanding the rationale for their budget enables them

to “own” it and act as stewards of their department

expenses; since they understand the costs of running their

program, they also become better fundraisers

• The finance department can help coordinate the budgeting

process but should not be putting together program

budgets; they are not the individuals responsible for the

budget

Holds everyone accountable for day to day activities!

De-centralize the Budget Process

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Get their buy-in and delegate projects for them to plan and

budget; the more they are involved, the more they will work

to help the organization succeed

• Example: Budget for a Special Event – the Event Planner

reports to the Director of Fundraising; while the Director of

Fundraising is the manager involved in the budget process, the

Event Planner also needs to be part of the budget process

• Example: A Day Care Center has 4 breakfasts a year for the

mother’s of the toddler group; the Assistant Toddler Teachers

are in charge of this; get them involved in how much the

breakfasts will cost and how much they need to spend

Involve Staff at Other Levels

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What can we do to involve others in

the budgeting process?

Create Strong Tools & Training

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• Host a Budget Training

• Create a Budget “toolkit” (typically your finance team would create this; starts with providing key assumptions and likely trends affecting the business environment during the budget’s timeframe)

• Provide Written Instructions & Timelines with Dates/Deliverables

• Budget Template (fill in the blanks) – managers fill in blanks and the template automatically calculates and assigns overhead and related costs


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Create a Budget “toolkit” (continued)

• Historical Info (Ops and Projects) and Year-to-date Info. -

adjust for any changes in the new budget (Incremental

Budgeting) Examples – COLA or inflation increases

• Some Research – For new programs or events, get estimates

and provide Narratives (Zero Based Budgeting - start from

scratch)

• Include any projects/costs for which you have received

restricted funds or grants


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Create a Budget “toolkit” (continued)

• Aligning the look and feel of your budget template to your

chart of accounts and the format of your financial statements

gets everyone on the page

• Some accounting software packages allow the importing of

budgets directly from Excel, so you may want to consider

using a worksheet in the template that allows each budget to

be automatically entered


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See example budget template in Excel:

• Has instruction page

• Fill in the blank format based on color codes

• Some info filled in for them

• Data entry creates final budgets (linked

worksheets) and import into accounting system

• Budget and GL should be in format that allows

easy reporting for UFR and audit

Budget Template

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Very Specific and easy to understand

Budget Template

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Historical Data

Automatically filled in from worksheets

Budget Template

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The Purple Areas automatically get created

Simply Fill In the Blue shaded area

Budget Template- Staff “Fill-In”

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Formatted to automatically upload into your accounting system

Budget Template- Import Page

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Summary by Program

Budget Template- Final Budget

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Work timeline back from final approval deadline

Budget Timeline

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• Historical Info

Provided

• Summary Page

• Salary, Benefits, Ops

Page

• Place for Narrative

information

• Projects

• Import Page into

Accounting System

Review the Template

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• Work closely with your development office to assist

with revenue piece if you are a grants-based

organization

• Work closely with your finance department if you are a

membership organization

• Weigh potential revenue sources by %’s (likelihood of

receiving X)

• Goal is to work with all staff throughout the org. to look

at external markets, including sources of funding at the

local, regional, and national economy

Revenue-Generating Staff

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Discussion on Participants Current Practices

• Do you budget cash or accrual basis?

• Besides the basic revenue and expense budgets – what

other things are included in your budget process?

Components of the Budget

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Besides the basic operating revenue and

expense, what are the different components of

your budget?

• Capital Expenditures/Fixed Assets/Construction in Progress

(CIP)

• Surplus

• Cash Flow Projection

• Temporarily/permanently restricted revenue

Budget Components

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Why budget for these items (capital expenses) if

they do not hit my income statement?

They will:

• Increase your budgeted depreciation expense

• Increase your overall expenses

• Thereby increasing needed operating revenue

• Increase your cash flow/cash outlays needed

Budget Capital Expenditures

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• Ensuring that your organization can sustain itself

during an unexpected change or difficult period

• Work with management to project a surplus;

identify other revenue sources

Why Budget a Surplus?

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• Prepare a cash flow projection with your budget

• Monitor and adjust monthly

• Review with management and the board

Project Cash Flow

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Why budget for these revenue sources if they do not hit my Unrestricted Column on my Statement of Activities?

They will:

• Affect your final organization surplus/deficit result

• Provide revenue goals and results for fundraising for future years

Budget Temporary & Permanently-Restricted Revenue

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• Don’t forget to budget for non-cash expenses

(depreciation expenses, vacation expenses, deferred

salary or benefits, etc.)

• Vacation accruals can turn a $10,000 surplus on an

operating budget into a deficit – don’t be surprised at

year end

• Understand the difference between the cash basis

and accrual basis of accounting; communicate this to

management

Manage Your Operating Budget & Your Audited Financial Statements

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• The budget process is not a once-a-year activity

• Management should be meeting with the managers

once a month to review the actual vs. budgeted

performance and plan (project) for the rest of the yr.

• Some organizations even re-budget mid-year if there

are substantial operational changes

On-going Activity

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Discussion on Participants Current Practices

• What are your organizations current policies on budget

adoption and changes (internal and the Board)?

Policies & Processes for Budgeting:Internal and the Board

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• Once all draft budgets have been analyzed, modified, balanced, etc. prepare an overall budget document and presentation

• This includes who presents, when they present, and what format they present the organization’s budget to the board of directors for approval

• The presentation should include the goals and objectives for the upcoming year

• A summary of the total income and expenses contained in the budget

• Have an Organizational Chart/Staffing Plan available for review

Policies & Processes

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• Have an summary of income by individual sources

• A summary of expenses by broad categories such as salaries and wages, consultants and contract services, supplies, facilities, materials

• Overall budget summary should have comparative data from the prior year and current year (with projections); include a column indicating total change either by % or $ amount

• Depending on the organization, the finance/executive committee should review and approve the budget before the full Board

• Provide guidelines on how changes to the budget are made an approved, how expenditures that exceed budgeted amounts are approved, etc.

Policies & Processes

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43%

12%9%

8%

7%

7%

6% 3%

2%

1% 1%1%

Budgeted Expense 2010

Salaries Payroll Taxes and benefits

Office expense Consultants

Professional fees Rent and building expense

Depreciation and amortization Program supplies and expenses

Training and travel Interest

Insurance Real estate taxes

Other Supplemental Data

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• If the organization reaches financial goals during the year, it can do more; build a flex budget into the budget process

• Flex budgets provide a financial management and motivation tool

• Gives the board comfort in knowing that the organization won’t risk financial operations to reach stretch goals

Policies & Processes: Flex Budgets

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• Work Plans – Every Department/Program should have

one at the beginning of each fiscal year; mirror

organizational budget plan

• Federal or State Grants – Any carryover funds,

if allowed, should be monitored; any budget

modifications should be requested in writing (any

budget changes from a prior fiscal year will affect this)

Other Policies & Processes

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Discussion- Sharing of everyone’s experiences

with Cash Flow and Budgeting

• What challenges have you faced in your experiences?

• What strategies have you used to meet those

challenges?

• What worked well vs. not well?

Group Discussion

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Contact Information

Kevin DerrivanSenior Consultant


[email protected]

781-419-9266

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