Handout 13: Managing budgets PowerPoint presentation Unit 320 (B&A 59): Principles of business Handout 13: Managing budgets

Reasons for monitoring a budget To ensure finance stays on target for the period Income and expenditure need to be compared against the budget in order to control finances To provide reliable information when the budget is analysed, eg for the following year’s provision An operational budget allocates funds for a fixed period, project. In order to ensure there are funds available for the entire period, it must be monitored to ensure expenditure has not outstripped revenue.

Monitoring a budget You will need to know: the amount of the budget the period it covers how it was built up – what activities/items it covers what has been spent against it what revenue there has been what future commitments there are against it.

Techniques to manage a budget Responsibility for a budget should be assigned to a named individual Accurately record income/expenditure Compare actual income/expenditure against forecast figures Review budget performance reports Control/manage resource usage – particularly consumables Regular meetings between budget-holders and line managers to identify any required corrective actions Review budget performance reports – these are usually generated regularly by computer to give budget-holders an overview of how the budget is performing against the original forecast.

Monitoring budgets – cost codes Income and expenditure must be recorded and this is usually by means of a cost or budget code Costs codes are used on invoices, timesheets, requisitions, etc Informs as to the amount left in the budgets In order to monitor the budget, income and expenditure must be recorded and this is usually by means of a cost or budget code. Income and expenses are usually identified by such a code used on invoices, timesheets, requisitions, etc, to show which budget they are to be applied to or charged against. Budget-holders can then be kept informed at interim periods as to the amount left in their budgets. Controlling income and expenditure against the budget assists the organisation in making the most effective use of resources.

Favourable budget variance indicates a gain Variances Variances are differences between initial estimations of ongoing costs and actual costs Variances need to be investigated and analysed and action taken if possible Favourable budget variance indicates a gain Unfavourable budget variance means a loss or shortfall  Often due to recording errors or omissions The process of monitoring actual income and expenditure against the anticipated figures in the budget either confirms that the budget is being met or identifies variances. Variances need to be investigated and analysed and action taken if possible. Before any in-depth analysis is undertaken, it is important to check the budget carefully for errors or omissions, eg recording costs against the wrong budget code, or to determine whether there is outstanding income, eg in the form of unpaid invoices.

Budget revisions Serious variances require corrective action to: reduce costs follow up outstanding income negotiate a revision to the budget. External factors that may lead to the revision of a budget may include: economic factors, such as inflation, recession or growth employment factors legislative factors political factors. Internal factors may be, eg new product development structural industrial relations. Where a serious variance is identified, corrective action will need to be taken either to reduce costs, follow up outstanding income, or, in some cases negotiate a revision to the budget. Factors that may lead to the revision of a budget may be external or internal Of course, errors in estimating figures in the original budget preparation may also lead to the need for revision.