1. Lecture 31

2. Chapter 8 Budgetary Planning and Control

3. Budget Definition “a financial plan that sets out in clear and concise terms the resources assigned to the delivery of service and operational targets for a defined period”

4. Budgets – what they are Forward planning allows the Trust to shape its future, rather than to react to events and is critical in the achievement of organisational objectives. Budgets are: -Financial and/or quantitative statements -Prepared and agreed for a specific future period -Designed to fulfil agreed objectives -Drawn up for separate activities/projects and for organisations

5. Reasons for preparing budgets Quantify the organisation’s future plans and commitments Review aims and ensure planned activities are achieved Determine the resources needed to deliver services Basis for controlling income and expenditure A yardstick for measuring performance To ensure statutory financial targets are met

6. When are budgets prepared ? Each year – linked to Directorate business plans, the Annual operating plan and Annual plan submission to Monitor For new services For major changes in the way in which services are delivered Dynamic not static.

7. The role of the finance department Lead by the Finance Director Responsible for: – Preparation of financial statements for external purposes – Transaction Processing – Providing management information, accounts and advice to the board, departments and budget holders. – Safeguarding assets – Cash Management – Assistance with business case preparation – Assess proposed capital developments – Liaise on financial contractual matters – Prepare & monitor budgets and financial forecasts

8. Budgeting approaches – Historic/incremental budgeting – Zero-based budgeting – Activity-based budgeting – Cash Budgeting – Research and Development Budgets – Capital Expenditure Budgets

9. Historic/incremental budgeting Current year budget Next year budget Set other reserves Create inflation reserve Less: cost improvement programme Adjust for changes in service Add: full year effects of recurring items Less: non-recurring items

10. Historic/incremental budgeting Essentially this basis for budget preparation takes the actual performance of the current period and uses it as the "base" from which to predict the performance in the next budget period.

11. Zero-based budgeting Review objectives of department Assume zero budget for next year Identify optimum staff, materials etc Set entirely new budget

12. Zero-based budgeting A method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one. ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations.

13. Activity-based budgeting Identify workload measure Estimate planned activity Identify fixed costs Identify variable costs Calculate marginal cost Flex variable budget by actual activity Calculate budget Measure actual activity

14. Cash Budgeting The cash budget helps the firm to plan for the actual receipt and disbursement of cash An estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities.

15. Cash Budgeting A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems. For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs.

16. Research and Development Budgets Investigative activities that a business chooses to conduct with the intention of making a discovery that can either lead to the development of new products or procedures, or to improvement of existing products or procedures. Research and development is one of the means by which business can experience future growth by developing new products or processes to improve and expand their operations. An outlay of cash for the Research and Development activities that is expected to produce a cash inflow over a period of time

17. Capital Expenditure Budgets A capital expenditure is an outlay of cash for a project that is expected to produce a cash inflow over a period of time exceeding one year. Examples of projects include investments in property, plant, and equipment, research and development projects, large advertising campaigns, or any other project that requires a capital expenditure and generates a future cash flow. Because capital expenditures can be very large and have a significant impact on the financial performance of the firm, great importance is placed on project selection. This process is called capital budgeting.

18. Budgetary control – what it is ? Budgetary control monitors actual results against the agreed budget Variances are identified Corrective action taken or budget revised Regular reports

19. Variance Analysis Variance measures the variability (volatility) from an average. Volatility is a measure of risk, so this statistic can help determine the risk an investor might take on when purchasing a specific security. Using the two-variance approach, the controllable cost variance shows how well management controls its overhead costs – Volume Variance – Spending Variance

20. Program Evaluation and Review Techniques he Program (or Project) Evaluation and Review Technique, commonly abbreviated PERT, is a statistical tool, used in project management, that is designed to analyze and represent the tasks involved in completing a given project. PERT is a method to analyze the involved tasks in completing a given project, especially the time needed to complete each task, and to identify the minimum time needed to complete the total project. PERT was developed primarily to simplify the planning and scheduling of large and complex projects.

21. Lecture Overview Budget Definition Budgets – what they are Reasons for preparing budgets When are budgets prepared ? The role of the finance department Budgeting approaches – Historic/incremental budgeting – Zero-based budgeting – Activity-based budgeting – Cash Budgeting – Research and Development Budgets – Capital Expenditure Budgets Budgetary control – what it is ? Variance Analysis – Volume Variance – Spending Variance