1. Nursery Management Understanding and Managing Finance Session 10

2. Budgets - definitions  A budget is defined as a financial plan for the future. “A plan, qualified in money terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period, and the capital to be employed to attain given objectives” (CIMA definition)

3. Budgets - intentions  Clearly, in planning for the future, a budget will contain an element of forecasting, but a budget is not simply a forecast.  A budget will contain financial and other numerical predictions. These are targets, and are ‘statements of intention’ that events will occur as planned in the budget.  This implies an element of control; this in turn means that a budget targets need to be monitored closely and managed effectively.  How are budgets approached in your organisation?

4. What exactly is a Budget? A budget: Predicts the contribution to income which will be expected to be generated by each department and each project. Allocates to each room or activity an appropriate share of the of funding in order to enable that income to be generated.

5. What exactly is a Budget for? A budget: enables a business to plan appropriately for the future Important tool for management agenda-setting and control sets targets in monetary terms for departments and projects provides a way of sharing out resources to departments and projects so that they can have continued existence.

6. An Example of a Budget In the previous weeks, we have examined how we might wish to manage the cash element of working capital - carefully controlling the the levels of stocks, debtors and creditors. One of the tools for doing this is a Cash Budget, which attempts to plan for the predicted cash inflows and cash outflows of the working capital cycle. This allows us to set cash targets, and ensure that we do not encounter cash flow problems.

7. Creating the Budget – an Example For each month or week, we document: Cash In Receipts Expected from Trade Debtors and Cash Sales Cash Out Planned Payments to Creditors, Salaries and other overheads Net Cash Flow We use these to calculate the net cash inflow or outflow for that period. Cash Balance We then consider the consequences to the cash balance.

8. Example of a Cash Budget Receipts (£000)JanFebMarAprMayJun Debtors606055455050 Cash Sales1010 5151010 Total707060606060 Payments (£000) JanFebMarAprMayJun Creditors3030352530 30 Salaries101010101010 Electricity1515 Other overheads 5 5 5 5 5 5 Loan repayments151515151515 Total payments606080556075 Cash-flow10+10+20-5+ -15- Opening Balance203040202525 Closing Balance304020252510 This example budget shows how we set targets, allocate money, make predictions and set targets.

9. Example of a Cash Budget Receipts (£000)JanFebMarAprMayJun Debtors606055455050 Cash Sales1010 5151010 Total707060606060 Payments (£000) JanFebMarAprMayJun Creditors3030352530 30 Salaries101010101010 Electricity1515 Other overheads 5 5 5 5 5 5 Loan repayments151515151515 Total payments606080556075 Cash-flow10+10+20-5+ -15- Opening Balance203040202525 Closing Balance304020252510 These are predictions about the cash inflow. These will become monthly targets for sales and for debt collection.

10. Example of a Cash Budget Receipts (£000)JanFebMarAprMayJun Debtors606055455050 Cash Sales1010 5151010 Total707060606060 Payments (£000) JanFebMarAprMayJun Creditors3030352530 30 Salaries101010101010 Electricity1515 Other overheads 5 5 5 5 5 5 Loan repayments151515151515 Total payments606080556075 Cash-flow10+10+20-5+ -15- Opening Balance203040202525 Closing Balance304020252510 These are predictions about the cash outflow. Most of these are fixed and will be paid at the times stated.

11. Example of a Cash Budget Receipts (£000)JanFebMarAprMayJun Debtors606055455050 Cash Sales1010 5151010 Total707060606060 Payments (£000) JanFebMarAprMayJun Creditors3030352530 30 Salaries101010101010 Electricity1515 Other overheads 5 5 5 5 5 5 Loan repayments151515151515 Total payments606080556075 Cash-flow10+10+20-5+ -15- Opening Balance203040202525 Closing Balance304020252510 This is our predicted monthly net cash inflow/outflow. We can use this to detect peaks and troughs. These are targets.

12. Example of a Cash Budget Receipts (£000)JanFebMarAprMayJun Debtors606055455050 Cash Sales1010 5151010 Total707060606060 Payments (£000) JanFebMarAprMayJun Creditors3030352530 30 Salaries101010101010 Electricity1515 Other overheads 5 5 5 5 5 5 Loan repayments151515151515 Total payments606080556075 Cash-flow10+10+20-5+ -15- Opening Balance203040202525 Closing Balance304020252510 Finally we can monitor the cash balance on a month by month basis. We can predict for example where overdrafts are needed.

13. Activity 1 Suggest some advantages and disadvantages of using budgets in your organisation.

14. Activity 1 solution Advantages Each area of the business knows exactly what they need to achieve Everyone knows precisely what resources are available to work with The business can plan effectively for expansion and be proactive, not reactive. Disadvantages Targets tend to be met, but not exceeded Resources tend to be ‘used up’, even where they are not required. The business finds it hard to respond to new initiatives, since the resources are already set.

15. What budgets are actually used in practice?  The actual budgets that will be used by different businesses will clearly depend on the business.  High street retailers will normally have little use for a ‘Trade Debtors’ budget, but will be very concerned with a Stock Budget and Trade Creditors, especially (as is generally the case) their business is seasonal.  A manufacturing company such as Jaguar will have a production budget, where the number of vehicles produced will be planned; however this type of budget would be completely pointless for the Cats Protection League, who might a ‘donations and endowments’ budget, which would be equally irrelevant to Jaguar.

16. Activity 2 Working Capital Budgets 1.In terms of managing Working Capital on a week-by-week (or possibly month-by-month) basis, what budgets do you think it might be important to create? 2.Could you list these in order of importance?

17. Activity 2(1) Working Capital Budgets Some Comments  It is probably important to create a Sales Budget, which is subdivided into Cash and Debtors.  It is also important to budget for Purchases; again these might be subdivided into Cash and Credit.  There might be a separate Cash budget which summarises cash movements, and most companies would expect to work towards some sort of budgeted Profit and Loss Account.

18. Activity 2 (2) Working Capital Budgets Some Comments We might reasonably expect:  Cash Budget  Sales Budget (Cash + Trade Debtors)  Purchases Budget (Cash + trade Creditors)  Stock Budget (could be summary of Sales + Purchases)  Budgeted Profit and Loss

19. Budgets - Purpose  Encouraging forward planning and identifying any possible future problems to enable solutions to be implemented in advance  Ensuring co-ordination across the organisation so that all departments are able to fulfil organisational objectives  Motivating managers to improved performance against set benchmarks  Providing a basis for control systems  Providing a basis for a system of authorisation, so that managers know exactly what are the limits to their authority, manage within them.