Presentation on theme: "Www.pwc.com Beyond Sport Online Learning Session Toolkit: Budgeting and Forecasting."— Presentation transcript:
1Beyond Sport Online Learning Session Toolkit: Budgeting and Forecasting
2What is financial management? Financial management can be defined as managing the finances of an organisation in order to achieve financial and strategic objectives. Done effectively, this should include a view of the past and a plan for the future...Financial statements and reports are backward looking, summarising income and expenditure over a certain period of time.Financial planning and budgeting is forward looking, forecasting what is going to happen and what resources will be required in the future....are delivered efficiently....are within budget....deliver expected financial benefits.Establish...Monitor...Control...The purpose of financial management is to......financial resources of an organisation in order to ensure that activities / programmes...
3Why is financial management important? Financial management helps organisations to...Make optimum use of their money to achieve maximum returns.Understand if they have the resources to meet their objectives.Identify short term financial issues and address them as early as possible.Express their intentions, and explain what resources are required to achieve them.Inform all levels of the organisation about what needs to be achieved, and the resources available for doing so.
5Income and expenditure statement An income and expenditure account should only contain information regarding cash flow: money in and money out.It provides a summary of income and expenditure over a specified time (usually one year).It includes only revenue items.The balance at the end shows the net operating result in the form of surplus (i.e. excess of income over expenditure) or deficit (i.e. excess of expenditure over income), which is transferred to the capital fund shown in the balance sheet.OutInCash inflows payments into an organisation from members or other sourcesCash outflows... payments made by an organisation
6Example: income and expenditure statement 2011 (£)2010 (£)IncomeFunctions Income4,5002,000Donors10,0008,500Sponsorship5,0003,000Total Income19,50013,500ExpenditureWages9,5006,000Rent4,0003,750Utilities900800Travel1,000Net Surplus (Before Tax)4,1002,010Net Surplus (After Tax)It should refer to a specified period (usually 12 months).Different ‘types’ of income should be listed in the left hand column. There are no rules around what these categories can be - you may find it easier to have lots of different categories or you might wish to to group similar items under one heading.Expenses are then listed – categorised appropriately.Income minus expenses gives a net surplus (if income has been greater than expenses) or deficit (if expenses were greater than income).The net figure is stated before tax and after tax.NB: tax exemptions may differ in accordance with location of operation - contact local charity commission and / or HMRC for further details.
7Balance sheetAn organisation’s balance sheet is a snapshot of assets and liabilities and gives a view financial health at a specific point in time.An organisation should ideally have more assets than liabilities - similar to the income and expenditure account.A version of the balance sheet should be presented at monthly meetings to ensure that financial performance is being monitored.
8Example: balance sheet Assets are listed at the top of the balance sheet grouped into fixed and current assets.Current assets are cash or assets which are readily convertible to cash.2012 (£)2011 (£)Fixed Assets15,000Current AssetsDebtors450600Cash at Bank21002000Cash on Hand13501100Stock400350Current LiabilitiesOverdraftsVAT650500Creditors200Accrued Expenses375Excess of Current Assets over Current Liabilities27002975Total Assets less Current Liabilities1770017975Long Term LiabilitiesLoans35004000Net Assets1420013975Retained ReservesPrevious Balance12110Total ReservesCurrent liabilities are amounts that are due in the short term.The difference between the two gives us a quick measure of how well an organisation is doingTotal liabilities are deducted from total assets to give the net asset figure.Reserves show what investment has been made into an organisation. Reserves are not a pot of cash. They are calculated by taking last year’s closing balance and adjusting for this year’s surplus or deficit.
10Why is financial planning important? Financial statements (balance sheet, income and expenditure account) give a historic view of an organisation, but another source of financial information is necessary – budgeting and planning.Financial planning is essential because...Organisations need to consider what is likely to happen during the fiscal year, and plan accordingly.It is too late to discover at the end of the year that income was not sufficient to meet expenditure.There is no legal requirement to prepare financial plans (budgets), and no specific format that these plans should take. It is important for an organisation to choose a process that works for them, and allows them to obtain relevant information.Financial plans should not be too easily achieved, but also must not be too ambitious. This can be a difficult balance to achieve – the must remain realistic.
11Three steps in financial planning 1.PreparePlanning for the year – preparing the budget. What needs to be achieved? What resources are available to do so?MonitorRegularly reviewing performance – compare actual performance against budgeted performanceControlIf variances are observed, take corrective action where necessary2.3.
12What is a budget?A budget is a financial plan for a set period in the future.Organisations should consider what income they expect to receive and what expenses they are likely to incur during this time period.This information can be used to predict the surplus or deficit they expect to obtain during the budgeted period.A typical budget setting process could involve seven simple steps:145Agree objectives for the yearConstruct a draft budgetReview predicted budget surplus / deficit2367What income will be available?What expenses will be incurred?Make any necessary changesSeek formal approval sign / off
13There are two types of budgeting... Zero-based budgetingStart with a blank page.All income and expenditure will be considered & analysed in depth.Level of analysis allows for consideration on how appropriate each ‘spend’ isIncremental budgetingStart with budget from previous period (if there is one in place) and adjust accordingly – enabling ‘quick’ forecasting if performance has been consistent.Limited opportunities for research – particularly if significant changes may occur over the next fiscal year.Neither method is more or less appropriate. Many organisations employ a combination of the two – beginning incrementally and using zero-based techniques and analysis where necessary.
14Before setting a budget... Look at financial statements from the previous budgeting period (usually 12 months)....Consider income and expenditure from the previous 12 months (or length of budgeting period) – providing an idea of surplus / deficit that an organization can anticipate to generateSplit this information over the course of 12 months (or length of budgeting period) to anticipate when income is earned, and when expenses are incurred - depending on the nature of income or expenditure it might be split evenly over the year or associated with certain monthsRemember that the surplus / deficit on an income & expenditure sheet will be the product of 12 months of cash flow – whilst a budget may incur either surplus or deficit from month-to-month, before reaching the end of the fiscal year.
15The budget setting process (1/3) What needs to be achieved - the main driver for income & expense.Objectives should be clearly defined so success can be measured easily.Examples include: plans to grow, improve performance, coordinate events, fundraising, reach more people etc.Income to achieve objectives must be considered.For example, these may include: fundraising, grants, donations, sponsorship etc.Expenses for the year are likely to include: wages, rent, cash expenses, utilities, insurance etc.1Agree objectives for the year2What income will be available?3What expenses will be incurred?
16The budget setting process (2/3) 4After considering incomes & expenses, you should prepare a draft budget.Be realistic in your considerations.Be prudent - it is better to understate income & overstate expenses than vice versa.Are these reasonable?The draft budget should be reviewed to ensure everybody is happy with predictionsA surplus may be impossible to achieve – a deficit may be acceptable – make sure everybody is comfortable with targetsConstruct a draft budget5Review predicted budget surplus / deficit6Make any necessary changes
17The budget setting process (3/3) 7Not only should the budget be approved, everyone should accept the expectations to work within inWithout this, objectives will not be effectively achievedSeek formal approval sign / off
18Example budget: summary of expenses Item descriptionEstimated costLabour2. Materials & Supplies3. Facilities4. IT Infrastructure5. Software Licenses & Support6. Training7. Travel8. Administration9. OtherTotalComplete a summary table to ensure that goals for the fiscal year are clearly outlinedInput from stakeholders at all levels within an organisation should be considered and incorporated where appropriateEstimated costs must not be too generous – but they should also not be too stringent
19Example budget: drill down into each section 1. LabourRole & Name Internal programme staffDaysCostExternal specialist consultantsFree lancersVolunteer costsTotal labour2. Materials and SuppliesItem descriptionNamePurchase of new office equipmentAN otherTotal materials & supplies costBreak down the initial summary into smaller, more specific categoriesHighlight individual items (and groups of items)Provide detailed cost estimates for each itemDoes the sum of these estimates match your initial summary estimate? (They can total a sum which is lower, but they must not exceed that amount).
20Example budget: allocating cost & time 2. Materials and SuppliesItem descriptionNamePurchase of new office equipAN otherTotal materials & supplies costAprMayJunJulAugSepOctNovDecJanFebMarTotalAllocated cost and time by in monthly buckets allows an organisation to identify how much cash will be required at specific points during the budgeted periodCompleting this process can also help to commit resources for a specific amount of labour days
21Allocating time – staffing projections Staffing projections should be recorded – these can be recorded on a daily basis so all work is accountableProjections can be based upon work which has happened previously – how many hours were required from how many members of staff to see a project through to completion?Work around these estimates rather than on an ad-hoc basis – this will ensure an organization remains within budget
22Monitoring a budgetHaving set a budget, it is crucial to check actual performance against budgeted performance...Ideally, an organisation should review actual performance against budget on a monthly basisMonitoring must happen in a timely manner to ensure it is not too late to take corrective actionComparison of actual performance against budgeted performance is known as variance analysisIn the instance of a one off event, or embarking on a capital project that has its own individual budget it will require more regular monitoringUpon identifying instances where actual performance does not meet budgeted performance, an organisation must investigate the reasons for these variances, and take action
23Approaching & investigating variances Gather information on actual performanceDocument all income and expenditure – create new categories if necessaryEstablish actual figuresCompare these to budgeted information & calculate the differenceIf variances have occurred – establish where they occurredInvestigate reasons for variancesDifferences in budgeted volume or budgeted cost will account for some variancesWere facilities over utilised? Were rent or utility costs increased?Establish root cause of variance – develop better control techniques
2410 things to remember for successful budgeting... Involve as many people as possible in the budget setting processAllow sufficient time to complete the budget setting processLook ahead when budgeting – don’t base it entirely on the last 12 monthsMake budgeting a continuous processLearn from previous mistakes – don’t be detracted by themUse internal knowledge to make the budget as robust as possibleBe willing to challenge previous practiseRegularly review actual performance against budgeted performancePartner positive & negative variances with an explanationEnsure that key parties understand what is happening at every stage