1. The Budgeting Process Dr. Steven M. Hays Bishop Kearney High School Introduction to Business Freshman Seminar

2. Basic Budget Characteristics  Revenue and expense plan.  Includes all income statement revenues and expenses.  Budgeting horizons.  Strategic planning.  Used in planning and control

3. Definitions  Budget: The actual financial plan; a formal statement for sales, production of services, revenues, expenses, investments, and financial transactions; a tool for planning and control – helps facilitate administrative control and optimum use of inputs, and helps to facilitate operational efficiency and effectiveness

4. Budget Facts  Statement of management policy for a finite period of time  Translates policies into actions to achieve the policies  Provides a standard of comparison with results actually achieved

5. Types of Budgets Budget Capital Operation

6. Operating Budgets  Used for:  Production  Sales  Materials  Labor  Maintenance  Administrative  Reserves

7. Capital Budgets  Used for:  Major Capital Improvements  Normal annual additions  Reserves  Sources of funding

8. Benefits of the Budgeting Process  Must examine alternatives.  Provides a standard.  Enables management to look forward.  Can involve all levels of management.  Provides a communications channel.  Provides estimates of future expenses.

9. Major Elements of Operations Budget  Financial objectives.  Revenue forecasts.  Expense forecasts.  Net income forecasts.

10. Operations Budgeting  Allows management to accomplish planning, execution, and control.

11. Roles and Responsibilities  CEO enlists controller to coordinate budget preparation process  Controller facilitates budget preparation process by providing information to operating managers.  Managers work with lower level managers to give input on budget.  Controller formulates input into budget.  CEO and Controller present budget to Board of Directors

12. Steps in the Budgeting Process  Step 1: Establish financial objectives  Step 2: Forecast revenues  Step 3: Estimate expenses  Step 4: Determine the bottom line

13. Financial Objectives  Board of Directors establish financial objectives for the organization (long- term profit maximization, for example)

14. Estimating Revenues  Profit center managers use information regarding economic environment, marketing plans, capital budgeting, and historical financial operating results to forecast revenue for their departments.

15. Estimating Expenses  Profit center managers use expected cost increases for supplies, etc, and labor cost increases (including cost of benefits and payroll taxes) to estimate expenses; estimate expenses in relation to projected revenue.

16. Projecting Fixed Charges  Fixed charges (depreciation, property taxes, rent expense, insurance expense) are projected on basis of experience and expected changes; determined by management and/or Board of Directors.

17. Operations Budgets as Tools  Timely budget reports indicate variances.  Absolute and percentage variances.

18. Benefits of Budgeting  Translates policy into action  Encourages delegation – clear idea of what is expected  Facilitates internal communication and coordination  Helps establish standards of performance  Facilitates process of change  Forces managers to become better administrators