Budget setting Nursery Management Understanding and Managing Finance

How are Budgets created?  The budget-setting process is quite complex, and often very time-consuming.  It involves a number of stages, some of which ask the business to question precisely what it is doing, and where it is going – almost at a ‘philosophical' level  Other stages involve detailed calculations of amounts of money and negotiations about who gets what.  A complex budget may take six months to one year to produce.

Budget Setting  This is often an annual process linked to a review of long- term plans – Planning and Control  It is an iterative process. Tentative plans are created, which are thrown open to discussion. These discussions then lead to modifications and further discussion, and so on until the budget is set.  Should be participative – all interested parties involved, with the process ‘transparent’.  A combination of top-down(i.e. agenda-setting) and bottom-up (i.e. recognition of needs) approaches is required.

1.Identify business objectives 2. Identify available options 5a.Collect information on performance 4. Prepare detailed plans or budgets 3. Evaluate and select options The Planning and Control Process 5b. Identify and respond to variances 5c. Revise Plans if necessary

1. Identifying Business Objectives Business Aims and Objectives are normally encapsulated in a Mission Statement. Such statements often aspire to ideals: Liverpool Hope University College aspires to: “educate students in mind, body and spirit” Railtrack plc had a vision of : “a safe, reliable, efficient and modern railway” On the other hand, some companies take an altogether more pragmatic view. Cadbury Schweppes plc has a mission statement committed to: “..growth in shareholder value” What about your organisation, does it have a Mission Statement?

1. Identifying Business Objectives Objectives are normally more specific than the aims. These vary, but will include consideration of such things as: The kind of child care the business seeks to provide The market share it aspires to The level of operating efficiency The kind of services it offers The level of growth to be attained The level of profit required These objectives should be quantifiable and be consistent with the Mission statement.

2. Identifying Available Options To achieve the business objectives, a number of strategies may be available. In order to uncover these, information will need to be collected, This process may be time-consuming The information will include an analysis of the external competitive environment, and an analysis of the internal resources and capabilities of the business

2. Identifying Available Options External considerations might include: Market size, growth Level of competition Threat of newcomers Relative powers of trades unions, interest groups etc. Internal Considerations might include: Culture within the organisation Marketing, distribution issues Curriculum development Finance and administration Research and Development Human Resource Management

3. Evaluating and Selecting Options During the evaluation phase, Managers must examine the available information on each option to determine which one most closely fits with the objectives that have previously been set. NB Research suggests that too much information may produce ‘information overload’, where managers become confused and distracted by irrelevant data. Sometimes this is called ‘paralysis by analysis’.

3. Evaluating and Selecting Options During the selection phase, the options chosen will form the basis of the long-term plan These options will specify things such as: Products or service to be offered Sources of finance and the amounts Capital investments Personnel requirements

4. Setting the Budget A budget is basically a short-term plan (normally one year) which is expressed mainly in financial terms. Budgets will normally define precise targets for such things as: Cash Receipts and Payments Sales targets for each item or department Stock requirements Labour requirements Predicted levels of children being cared for

5a. Collecting Information on Performance The main aim of budget setting and the entire planning process in general is control, the process of making planned events actually occur. Accounting is very useful in this context. Plans are set in accounting terms, and outcomes can then be matched against targets. Where differences occur, these are highlighted as variances.

5b. Responding to Information on Performance Managers will be alerted to variances between the budgeted amounts and the actual figures. Action will be needed in order to get the business on track towards achieving targets set within their budgets. For example if sales targets have not been achieved, the manager may need to review the sales strategy, to discuss alternative forms of marketing or to make concerted efforts to find new customers.

5c. Revising Plans and Budgets If variances continue and are not rectified, or figures are produced on the basis of incorrect assumptions, or circumstances alter, then a revised budget may need to be published. This new budget will set different targets, and reallocate the remaining funds in order to respond to the new circumstances.

1. Identify key objectives 2. Identify available options 5.Collect information and control 4. Prepare detailed plans or budgets 3. Evaluate and select options The Planning and Control Process – a summary Mission, Aims, Objectives Market, Products, Services Sales, Costs, Profits, Returns Limiting factors: External and internal Environment - market size, production capability, competition Markets, products, financing, physical resources, human resources Short-term plans: Sales, Cash, Stock, Labour, Production  Master budget Identify variances and respond as appropriate

Activity a. In essence, all that we are doing in a budget is setting targets and allocating money. Why do you think is it necessary to go through such a complex process each year? b. Why could we not, for example, use last year’s targets with a little it added on for inflation?

Activity a - Solution We do this because the business conditions will almost certainly have altered since the last time we created a budget. Some factors might include: Economic Climate – good/bad Prices changes (raw materials/finished stock) Competitors New products available Changes to customer needs Changes to production methods

Activity b - Solution Some budgets are set via this method; this is called ‘incremental budgeting’, and most budgeting would in essence be done by taking last year’s budgets as a starting point. However, because of all the reasons on the previous slide, we cannot take this as the final answer. We need to respond to new conditions, set new targets, and that means reducing some budgets and increasing others.