Budgets and Financial Cost Analysis chapter 13 Hurd PP, AU CE check, chapter 13

Budgets Budgets serve as a financial plan for the year. Budgets reflect the priorities of an agency. Budgets also reflect the effectiveness and efficiency of the use of resources in an organization. Without a strong understanding of budgets, a manager can make uninformed decisions and encounter a host of problems.

The Budget Cycle Step 1: Develop a budget calendar. Step 2: Develop a departmental work plan. Step 3: Develop an expense budget. Step 4: Develop a revenue budget. Step 5: Modify and finalize the budget. Step 6: Present, defend, and seek approval for the budget.

Cutback Management Cutback management involves having to reduce an approved budget because of unforeseen factors, such as economic decline. Cutbacks can be made in three main areas: Workforce reduction Work redesign Systematic change

Politics of Cutbacks Cutbacks often result in agency politics. Political aspects of the cutback process include the following: Reactions from special interest groups Council or board elections City or regional priorities

Types of Budgets Capital budgets: Capital improvement plans Operating budgets Line-item budgets Object classification budgets Program budgets Performance budgets

Approaches to Budgeting Zero-based budgeting starts from scratch each budget cycle. All programs are treated equally, and the process focuses on how a program meets organizational objectives. However, this type of budgeting is time consuming and can result in politicking. Incremental budgeting is based on the previous year’s figures. The process is simple to learn and relatively quick, but it is not outcome focused. In this type of budgeting, it is not easy to add new activities or change current activities. (continued)

Approaches to Budgeting (continued) Activity-based costing is budgeting that attempts to assign and identify the true cost of providing a service. This proves difficult to do in a service-based environment. Multiyear budgeting encompasses two to five years. This decreases the time spent on budgeting, integrates financial and strategic planning, and reduces incrementalism. However, this process makes it difficult to project into the future, can be very time consuming when first done, and lacks the ability to respond to environmental changes.

Purchasing Petty cash Purchasing procedures Bids Invitation for bid Request for proposal Request for quotation

Financial Analysis and Reporting Break-even analysis Balance sheets Income statements Cash-flow statements Budget statements

Break-Even Analysis BE = F / (P − V) BE = break-even point F = fixed costs P = selling price per unit V = variable costs per unit

Table 13.5 Sample Balance Sheet Assets Liabilities Current assets Current liabilities Cash and investments $3,546,975 Accounts payable $25,729 Accounts receivable $1,243,785 Long-term debt Total current assets $4,790,760 Mortgage $376,971 Total liabilities $402,700 (continued)

Table 13.5 Sample Balance Sheet (continued) Assets Liabilities Fixed assets Equity $5,175,923 Store fixtures $243,876 Office equipment $7,659 Rafting inventory $543,987 Total fixed assets $787,863 Total assets $5,578,623 Total liabilities and equities

Table 13.6 Sample Income Statement Revenues Trips $12,320 Concessions $2,486 Store receipts $3,345 Total revenues $18,151 (continued)

Table 13.6 Sample Income Statement (continued) Expenditures Staff $9,562 Supplies $527 Utilities $452 Mortgage $2,342 Marketing $732 Maintenance $622 Total expenditures $14,237 Net revenue $3,914

Table 13.7 Sample Cash-Flow Statement Feb. Mar. Apr. May June July Total Net revenues $1,276 $4,985 $8,076 $12,486 $16,958 $18,151 $61,932 Expenses $4,978 $6,890 $7,013 $9,213 $11,345 $14,237 $53,676 Monthly cash flow $(3,702) $(1,905) $1,063 $3,273 $5,613 $3,914 Cumulative cash flow $(5,607) $(4,544) $(1,271) $4,342 $8,256 Cash position at beginning of month $12,000 $8,298 $6,393 $7,456 $10,729 $16,342 Cash position at end of month $20,256 Numbers in parentheses indicate a negative balance.

Table 13.8 Sample Budget Statement Actual Budget Committed % Balance Revenues Trips $42,113 $72,500 $0 58.1% $30,387 Concessions $8,671 $14,000 61.9% $5,329 Store receipts $11,148 $20,000 55.7% $8,852 Total revenues $61,932 $106,500 58.2% $44,568 (continued)

Table 13.8 Sample Budget Statement (continued) Actual Budget Committed % Balance Expenditures Staff $35,963 $52,100 $1,500 71.9% $14,637 Supplies $2,147 $3,100 $0 69.3% $953 Utilities $1,610 $2,430 66.3% $820 Mortgage $8,051 $16,000 50.3% $7,949 Marketing $2,684 $4,300 $500 74.0% $1,116 Maintenance $3,221 74.9% $1,079 Total expenditures $53,676 $82,230 $2,000 67.7% $26,554

Key Financial Indicators Liquidity ratios Activity ratios Profitability ratios