Welcome to: FNSACC402 Prepare Operational Budgets Lisa Genna - - PowerPoint PPT Presentation

Welcome to:

FNSACC402 Prepare Operational Budgets

Lisa Genna

lisa.genna2@tafensw.edu.au

Monday – Room H.G.11 – 6:00 pm to 9:00 pm

AMEG ¡House ¡Rules ¡

— Be punctual (teacher included!) — Come to every class (if possible) (especially if the

Tigers are playing)

— Come to class prepared (students & teacher) — Bring textbook (might help a bit) — Create and maintain a safe and supportive learning

environment (there is no such thing as a silly question!)

— Eating and drinking in class totally permitted J

Lesson 1 – Chapter 1

FNSACC402 Prepare Operational Budgets

Overview

• 1. What is a budget?
• 2. What is a budget used for?
• 3. The pros and cons of budgets
• 4. Approaches to budgeting
• 5. Budget classification
• 6. Types of budgets à MASTER BUDGETS
• 7. The budget development process
• 8. The behavioural and ethical aspects of

budgeting (to be covered in lesson 2)

What is a budget?

A BUDGET is:

— a written statement — of management’s strategic plans for

achieving the organisation's key

• bjectives

— expressed in financial terms

What is a budget?

Put very simply, a BUDGET is …

• an itemised forecast
• of money coming in and money going
• ut
• for a specified period of time
• for either a specific activity, department,

product or the organisation as a whole.

What is a budget used for?

Budgets help the leadership team of an organisation to COORDINATE and CONTROL key activities across the

• rganisation, enabling the goals of the organisation to be

reached. Budgeting is:

— an integral part of the organisation’s planning process. — Involves the allocation of resources across the

• rganisation

— used to support management decision making in

relation to the allocation of scarce resources to facilitate goal achievement.

Specifically, budgets are used by management as a tool for:

• 1. Planning
• 2. Organising
• 3. Controlling
• 4. Motivating

• 1. PLANNING:

>> is defined as: the set of actions taken to formulate the scope and direction of future activities and operations. >> requires goals to be set and decisions to be made as to what action needs to be taken to reach those goals (i.e. where are we going and how are we going to get there?) >> forces all involved to plan ahead and set their KPIs and targets in line with the organisation’s overarching goals and strategies. >> The planning process may include doing a SWOT analysis as well as a risk assessment.

• 2. ORGANISING:

>> The finance team is responsible for coordinating the budget between different departments and work groups. >> Doing so enhances the consultative process and promotes cooperation between these groups. >> It also helps ensure that the budget accurately reflects the goals of the organisation and that certain milestones are met along the way.

• 3. CONTROLLING: is the process of:

— setting standards (e.g. budget) — measuring current performance

(comparing actuals versus budget à variance)

— taking remedial action if required.

(i.e. monitor progress & make adjustments if necessary). >> Budgets provide estimates of expected performance. >> They serve as a control tool when compared to actual performance and any variations from the plan are identified and any necessary corrective action is taken.

The planning cycle (budgetary control)

PERFORMANCE ¡REPORT ¡ BUDGET ¡ Comparison ¡of ¡ACTUAL ¡results ¡to ¡BUDGET ¡à à ¡VARIANCE ¡

(ref. diagram on previous slide)

• 1. Plans, including budgets are prepared.
• 2. Action is taken to implement these plans.
• 3. Performance is measured by comparing actual

results to the budget.

• 4. Differences or variances are analysed so that

corrective action can be taken.

• 5. If necessary, plans are reviewed and assessed.

The planning cycle (budgetary control)

• 4. MOTIVATING:

>> The budget can be used as a motivational tool for managers and their staff. >> The employees of an organisation can be motivated to work towards achieving the goals set out in a budget if these goals are effectively tied to some sort of reward e.g. bonus or stock options. >> It is important to allow key staff members to participate in and contribute to the budget setting process and then hold them accountable for budget

• utcomes on a periodic basis.

Benefits of budgets

1.

Forces management to do some planning.

2.

Provides realistic performance targets (if done properly involving the appropriate personnel).

3.

Basis for controlling what happens within the

• rganisation.

4.

Helps co-ordinate the activities of the various departments that make up the business.

5.

Promotes communication – managers exchange information on ideas, business goals etc.

6.

Motivational tool – if appropriate staff are involved in the budget-setting process

Limitations of budgets

1.

Only estimates, not statements of facts.

2.

Costly and time-consuming to prepare, implement and monitor.

3.

No substitute for sound management practices.

4.

Need to be amended if circumstances change.

5.

Preparation does not guarantee success.

6.

Aspects of people’s behaviour may undermine the value of the process.

Approaches to budgeting

Approach used depends on the SIZE and

STRUCTURE of the firm and the type of ENVIRONMENT in which it operates.

e.g. organisations planning a change of focus or strategy cannot rely on established budgeting processes & procedures.

Approaches to budgeting

— Standard approach:

— Historical figures (actual or budget) are used and adjusted for any

likely future events.

— Not recommended as past inefficiencies may be perpetuated and

funds may not be allocated to activities designed to meet the

• rganisation’s objectives.

— Zero-based approach:

— The initial figures for each activity are set to zero. — To receive funding, each activity must be justified in terms of how

it meets the organisation’s objectives.

— The dollar figure attached to that activity is then based on the

resources needed to make that activity happen.

Budget classification

ClassificaBon ¡by ¡ Types ¡ Period ¡ Period ¡budget ¡ Form ¡ Rolling ¡or ¡con8nuous ¡budget ¡ Ac8vity ¡level ¡ Sta8c ¡budget ¡ Flexible ¡budget ¡

Budget classification

Classification by PERIOD:

• 1. PERIOD budget:

à à developed for a specific (and generally shorter) period of time e.g. a quarter.

— Short term budgets:

span up to 1 year (detailed; represent current operations of the business; may be broken down into smaller periods e.g. months)

— Medium term budgets:

span 6 months to 5 years (represent current operations + impending changes e.g. new products, equipment upgrades etc.)

— Long term budgets:

span 3 to 10 years (more strategic in nature)

Budget classification

Classification by FORM:

• 2. ROLLING (CONTINUOUS) budget:

à à continually updated so that it always reflect plans for the same length of time e.g. 12 months. This is done by periodically adding a new time period to the forecast and dropping off the equivalent period just completed.

Budget classification

Classification by ACTIVITY LEVEL:

• 3. STATIC (fixed) budget:

à prepared for one level of planned activity e.g. a particular level of sales, say, $75,000.

• 4. FLEXIBLE budget:

à a series of budgets that show how costs vary at different levels of activity within which the organisation may operate.

Types of budgets

— Revenue budgets: (LESSON 3)

Provide estimates of the income of an organisation from the sale of goods and/or provision of services for a specific period

• f time.

— Operating budgets: (LESSON 4)

Provide an estimate of the activities that will affect net profit including purchases, COGS and operating expenses.

— Budgeted financial statements: (FNSACC503)

Show the estimated results and projected financial position of a business and include the budgeted income statement, balance sheet and cash flow statement.

Master budgets

Ø a combination of all the budgets of an organisation Ø reflects the integrated plans and expected financial

results of all operations and departments of the

• rganisation

* Starting point à sales / revenue budget * Other budgets are then prepared in line with the budgeted level of sales.

Master budgets ¡

The budget development process

The organisation’s leadership team has to work out:

• 1. Where are we now?
• 2. Where do we want to go?
• 3. How are we going to get there?

The budget development process

— Allow enough time to

prepare the budget.

— Involve appropriate staff.

The budget development process

• 1. Set and communicate process guidelines
• 2. Prepare budget
• 3. Approve budget
• 4. Communicate final budget
• 5. Monitor actual performance versus budget

The budget development process

Continuous improvement

— Effective feedback system required so continuous

improvement initiatives can be shared and implemented.

— Needs everyone across the organisation to

participate fully.

Budget milestones

Why break budget period up into several manageable chunks e.g. months or quarters?

— Makes it easier to:

— monitor and measure actual performance

— spot issues or problems early on so that countermeasure

plans can be made (before it’s too late!)

Ti Time to get pra practical l

Activity instruction: Have a go at preparing this simple budget for Turner Home Building Products by using some of their historical data that is simply adjusted in line with some anticipated changes for the upcoming period. A solution has been provided so that you can check your answer…

Example : Simple budget

Turner Home Building Products manufactures bricks and tiles. Their Brisbane branch has to prepare its budgets for the coming year and they will be presented to head office for approval. The Admin. department’s actual figures for last financial year ended June 30 were as follows: Item $ Salaries 323,400 Stationery 14,000 Telephone 15,120 Electricity 15,850 Rates 7,780 Depreciation 12,600 Total 388,750

After carefully considering all relevant factors, it was estimated that the following changes are likely to occur for the next financial year:

— Salaries are expected to increase by 5% — Due to a new online facility installed by Turner, stationery is

expected to decrease by 10%

— Tarrif increases will mean that electricity will increase by 6% — Rates will increase by 8% — Telephone and depreciation should remain the same

Required: Prepare next year’s budget for the Admin. department of Turner’s Brisbane branch.

Solution : Example

Turner Home Building Products : Brisbane Branch : Admin. Dept Budget for year ending 30 June 2017

Item Last year actuals Budget workings Budget for next year Salaries $323,400 X 1.05 $339,570 Stationery $14,000 X 0.9 $12,600 Telephone $15,120 $15,120 Electricity $15,850 X 1.06 $16,801 Rates $7,780 X 1.08 $8,402 Depreciation $12,600 $12,600 Total $388,750 $405,093

Other Important Concepts

For this unit, it is important that you are able to identify and explain the key principle and practice of DOUBLE-ENTRY BOOKKEEPING

Double-entry Bookkeeping

— The double-entry system:

>> used to process the information from SOURCE DOCUMENTS to the stage of FINANCIAL REPORTS. FOR EACH TRANSACTION: Value of DEBITS = Value of CREDITS

This week’s homework

— Get a copy of the recommended text — Checkout — Download and read a copy of the DELIVERY AND

ASSESSMENT GUIDE for this unit

— Work through all lesson materials and only the relevant

bits in CHAPTER 1 à summarise the main points

— Complete the Australian Federal Budget online activity

(ref. next slide) à bring what you found to class next week

This week’s homework

Copy and paste the following link into your Internet browser. Here you will find information on Australia’s 2016-2017 Federal Budget:

http://budget.gov.au/2016-17/content/glossies/overview/ html/

Watch the short video clip and then read the information presented just below the video clip before answering the following questions:

This week’s homework

Question 1: The Federal Budget provides us with information on how the Australian public’s tax dollars will be spent throughout the year. Choosing just one area of the economy, summarise how our tax dollars will be/ have been spent. Question 2: Identify at least two (2) stakeholders who have a vested interested in the Federal Budget

You are now ready to start the next lesson on:

Fo Forecasting Sales s and revenue Budgets