Budgets IS 208A

What are the organizational functions of budgets? 1. Budgets as a planning process 2. Budgets as a priority setting process 3. Budgets as a resource allocation process 4. Budgets as a responsibility allocating process 5. Budgets as an evaluation process

Uses of Budgets  Budgets can be useful  To provide overview  To help allocate resources  To determine leverage points  In financial control

Budgets have a political side  Budgets are political documents and are often part of political processes—internal & external  Especially in choice of aggregation  In focus—changes versus totals –Accept the status quo vs. –Zero-based budgets  Functional vs. Divisional

Role of Costs (again)  Budgeting often involves (arbitrary) allocations of joint costs  Frequently through the use of "overhead rates"  Budgeting  Costing  Pricing  (Remember the telephone leased line example)  UCB per-line telephone and per-node data charges

Budgets reflect industry type 1.Governmental agencies & non-profits 2.For-profits 3.Startups

Agency & non-profit budgets 1. The Civil Service Model: most of the resources are committed to staff, therefore the budget issues tend to concern priorities for one-time money (grants, gifts, capital spending). 2. Budget cycle once a year  Causes difficulties for strategic (multi-year) planning 3. Implementation decentralized to "professionals”

For-profit enterprises 1. Two flavors of money: revenue and investment. 2. Budgets do not allocate "money," but allocate revenue projections. 3. Quarterly review of revenue vs. projections, continuous evaluation and problem solving. 4. Performance against the budget determines rewards.

A startup model  Funding from VC in a series of “rounds of funding” -- each with defined, measurable goals -- through an evolutionary path.  Friends & family  Angel  First round, second round  buyout or IPO  CEO goal: “drive valuation”

“Flavors of money”  Source and restrictions  One time and recurring

Technology budgeting 1. Startup:Defining the product Differentiating brand 2. For-profit: Controlling/reducing costs Analysis of what’s going on New products 3.Agency & n-p:Improving service Controlling/reducing costs w/o reducing staff

Planning horizon: motivation 1. Startup:differentiating brand creating market 2. For-profit:controlling costs and maximizing profit for shareholders 3. Agency & n-p:Quality of service, as defined by professionals, not customers

Incentives 1.Startup:Valuation of options 2.For-profit:Bonus Raises Promotion 3.Agency & n-p:Professional ethics, job security