DMS Managing Resources Agenda: Financial management presentations (informal) Budgetary Planning and Control frameworks Assessment specification

Last time we said ‘The questions that might be asked of finance include: Has a surplus or deficit been made? (income statements) What is the value of assets and liabilities (balance sheet) What has happened to cash? (cash flow statements) How are individual figures made up? (notes) What do the figures mean? (analysis: ratios, interpretation) How will money be spent? (budgetary planning) How was money spent last year in comparison with the plan?(budgetary control) What do we need to do to break even? (break even) What is the effect of doing X? (marginal analysis) Is it worth investing? (investment appraisal) …and…What financial statements can you bring in to explain to the class?’

Budgetary Planning and Control frameworks 1.Definition, need 2.Basic behavioural model 3.Subsidiary and master budgets, including cash budgets 4.Special situation budgets: Break even Investment Marginal Etc

Definition of budgetary planning & control (BPC) Budgeting is the process of forming & reviewing financial plans It summarises activity by: –Time period (monthly, quarterly, annually) –Types of spending (budget lines) –Responsibility –Amounts planned –Activity level

Need for BPC BPC provides a process for: –Quantitative goal setting –Allocation of responsibility –Quantitative performance review & control –Replication of learning This essential process helps the organisation to achieve: –its goals –financial control of its affairs

Budgetary planning process The board appoints a budget committee BC sets parameters, e.g. grow 10% BC asks budget holders for (subsidiary) budgets Budget holders: MBO: Gather information (predetermined or otherwise) Order information (contingency allowance) Negotiate BC forms master budget from subsidiary budgets

Budgetary planning application What is the budgetary planning process for your organisation? What is the timescale?

Budgetary control process BC authorise budget holders to spend to budget Budget holders process includes: Implement spending plans Compare actual spending with budget Reporting to BC MBE: check use of budget headings, control overspending, duplicate costs savings where possible, vire differences between budgets Inform BC to enable better planning for following budgetary plans

Budgetary control application What is the budgetary control process in your organisation?

Annual BPC Subsidiary budgets: –Revenues –Manpower –Consumables –Overheads –Charges –Capital –etc Master budgets: –Cash –Income and Expenditure Account –Balance Sheet –(Cash flow statement)

Subsidiary budget formation: manpower Issues include: –Grades –Quantity –When required –Remuneration & reward rates –Training –Alternatives –Absenteeism –Leave –Demand pattern –Demand shifting –Productivity –Etc

Manpower planning in your organisation What manpower issues are controllable, and what are not, in your organisation?

Typical subsidiary budget report Month 4 CodeDescrMonthly Budget Monthly Actual Monthly Variance YTD Budget YTD Actual YTD Variance 5BDACH A05R AT 4 PtE (50) BDACH A06R AT 4 PtD (120) (220) 5BDACH A07R AT 4 PtAE BDACH A08R AT 4 PtAE (610) Totals (390)

Cash budget layout Receipts Payments The cash budget Completed period by period Exclude non cash items such as: –Provisions for depreciation –Provisions for bad and doubtful debts Focus on timing of cash flows!

Cash budgetary issues Planning issues include: Agreeing suitable parameters: –Growth –Capacity –Economic variables –Competitor behaviour –Customer requirements Obtaining information: –Revenues –Materials –Labour –Administration –Transport, etc Using information to form a budget Negotiating to maintain suitable: –Margins –Uncommitted spending Control issues include: Implementing approved budget to achieve required outcomes: –Seasonality –Committed vs.. uncommitted spending Timely invoicing, coding, recording and production of budget reports Comparison with actuals: –Identifying trends early –Correcting coding errors –Controlling changes to specifications –Controlling unforeseen events Vire, planned or otherwise

Specific issue budgets Reasons may be: –Planned –Unforeseen Categorised as: –Break even –Investment –Marginal –Make or buy –Special orders –Limited factors –Etc Other areas to consider include: –Tenders –Quotations –Costing –Capital management –Foreign exchange –Pricing –Etc

Break even analysis Short term analysis of a product or service Considers cost and revenue behaviour in fixed & variable terms Focuses on total £’s and quantity Tells profit or loss at different levels of output Shows effect of changes

Break even calculations Representative table Calculations: –c = p-vc –BEQ = FC/c –Necessary qty = (fc+desired surplus)/c –Contribution to sales ratio = c*100/s –Margin of safety = qty*100/qty

Break even examples Project X: –Price £12 each –FC £10,000 –VC £8 –Expected demand 3,000 –Required MOS 20% –(Required surplus £1,000) Project Y: –Price £10 each –FC £12,000 –VC £8 –Expected demand 8,000 –Required MOS 20% –(Required surplus £2,000)

Investment appraisal Implies large quantities of capital with a long life Invariably assessed by a capital committee Problems include shortage of cash for competing projects, estimating difficulties, & post audit Summarise cash flows in a cash flow table Assess with comparison of ARR; payback; NPV, IRR

Investment examples Project A –Cost £100,000 –WCR £50,000 returnable –Tax relief 100% in year 1, tax rate 30% –Cost of capital 8% –Cash savings £40,000 pa for 5 years Project B –Cost £110,000 –WCR £60,000 returnable –Tax relief 100% in year 1, tax rate 30% –Cost of capital 8% –Cash savings £60,000 pa for 3 years

Marginal analysis Only considers impact of change on operations; does not consider full costs and revenues Each (different) situation follows concept that C = MR-MC However, in the long run R>costs!

Event budgetary issues Planning issues include: Estimating costs of: –Administration –Transport –Accommodation –Entertainments –Refreshments –Presents Estimating revenues –Charging structure –Charging certainty –Privatisation Forecasting cost pressures Identifying KPI’s, timescale Control issues include: Management inc KPI’s Timely invoicing, cost recording and control Controlling changes to specifications Controlling unforeseen events Post audit, reporting

Any questions? Finally, assessment handout, discussion