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Chapter Two Lecture Notes

Chapter Two Lecture Notes. Planning for Success: Budgeting. Overview of Financial Management. Plan Implement Control Measure Results and Report. Planning .

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Chapter Two Lecture Notes

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  1. Chapter Two Lecture Notes Planning for Success: Budgeting

  2. Overview of Financial Management • Plan • Implement • Control • Measure Results and Report

  3. Planning • Establish the organization's mission. What is an example of an organizational mission? • Develop a strategic plan to meet that mission. The strategic plan is a broad set of organizational goals and the primary approaches for reaching them. • Set long-range plans for achieving the goals defined in the strategic plan. • Prepare budgets that show how management expects to obtain and use the resources needed to meet those goals.

  4. Why do organizations use budgets? • The Budget Cycle - Preparation • based on guidelines • normally done by responsibility center managers - Review and Adoption - Implementation and Control • Evaluation of Results and Feedback • The political and behavioral realities of budgeting The Budget Process

  5. Master Budget • Operating Budget • revenues and other support • expenses • Cash Budget • Capital Budget Special types of budgets • Special Purpose Budgets • Performance Budgets • Flexible and Zero-based Budgets Types of Budgets

  6. The Operating Budget • Revenue and Other Support is a forecast of resource inflows into the organization. • Revenues are earned from the sale of goods and services. Support refers to contributions and grants. • Expenses represent the resources that an organization uses up in carrying on its activities. • A surplus or profitis the excess of revenues and support over expenses; a deficitor lossis an excess of expenses over revenues and support.

  7. Revenue Net patient revenue $ 97,980,000 Gift shop revenue 120,000 Endowment earnings 50,000 Total revenue $ 98,150,000 Expenses Salaries $ 78,900,000 Supplies 15,400,000 Bad debts 2,200,000 Interest 400,000 Rent 3,100,000 Total expenses $100,000,000 Profit/(loss) $ (1,850,000) Operating Budget Example

  8. Cash Versus Accrual Accounting • The term "recognition" means that there is an acknowledgment that some financial event has occurred. • Cash Accountingrecognizes revenue when payments are received in cash and expenses when a resource is paid for in cash. • Accrual Accounting recognizes revenue when the goods or services have been delivered and the organization has earned the right to be paid. Expenses are recognized when a resource has been used in the operation of the organization.

  9. Cash vs. Accrual Example Assume that an organization charges $5,000 for its services, but only collects $3,250 this year. The remainder will be collected next year. The organization's only cost is the salary of its manager who earned $4,500, but was only paid $3,750. The balance will be paid next year. What is the impact on how the organization appears if it uses cash and if it uses accrual? Which would give a better picture of the organization's results from its activities over the full two years? CashAccrual Revenue $3,250 $5,000 Expense 3,7504,500 Surplus/(Deficit) $ (500)$ 500

  10. Why Use Accrual Accounting? • Accrual accounting helps an organization match the revenues that it has earned with the resources required to produce those revenues. • Accrual accounting is more appropriate for measuring the profitability of an organization and is (sometimes!) more difficult to manipulate.

  11. Cash Budgetsplan for an organization's cash inflows and outflows. The Cash Budget Beginning Cash Balance + cash receipts Subtotal: Available Cash - cash payments Subtotal: Total Cash Balance before Financing + borrowing or – repayments or investments Ending Cash Balance Note distinction between accrual-based revenue and expense versus cash receipts and payments!

  12. Cash Budget Example Millbridge’s urban planner for social services is working on the budget for the town’s day care center. The center allows lower income citizens to hold jobs. The Center is paid each quarter by the county and state to care for children. The state pays 50% of the amount that it is billed in the quarter immediately following billing and 50% two quarters after receiving a bill. The county pays 100% of the amount it is billed three quarters after receiving the bill. Parents are also required to pay the Center for caring for their children. Parents pay the full amount that they owe on the first day of the quarter that it is due. Based on the operating budget on the next slide, how much cash can the Center expect to collect in the 4th quarter?

  13. Revenues by Quarter RevenueQuarter 1Quarter 2Quarter 3Quarter 4 State $ 20,000 $15,000 $10,000 $ 5,000 County 25,000 30,000 35,000 40,000 Parents 5,100 4,800 5,200 5,000 $50,100$49,800 $50,200$50,000 Cash Collection for Fourth Quarter Cash State 50% of 2nd Qtr. $ 7,500 + 50% of 3rd Qtr. 5,000 County 100% of 1st Qtr. 25,000 Parents 100% of 4th Qtr. 5,000 Total $42,500 Note the difference between the cash and revenue for the quarter!!!

  14. The Capital Budget • Capital Budgets plan for the acquisition of high-value, long-term (> 1 year) assets. • Accrual Accounting and Capital Assets • Accrual expenses reflect the use of a resource. - Since capital assets last for many years, it would be inappropriate to show their entire cost as part of the operating budget at the time they are acquired. - We show one year's share of the cost in the operating • budget each year it is used, and show the full cost on • the capital budget the year the capital asset is acquired.

  15. Special Purpose (Ad-hoc) Budget – Example Charity Church sponsors a three-day youth camp in Bear Mountain Park. Charity provides a $500 grant for the event and collects $130 from each camper. The camp director expects 40 campers to attend and anticipates the following expenses: Campground fees $350 For 3 days Bus transportation $1,225 (60 rider capacity) Equipment rental $40 Per camper Meals $65 Per camper Determine the special purpose budget for the camp. Show revenues and expenses by line item, and show the expected profit or loss.

  16. Budget - 40 Campers Revenue Camp tuition $ 5,200 Church subsidy 500 Total revenue $ 5,700 Less Expenses Campground rental $ 350 Bus transportation 1,225 Equipment rental 1,600 Meals 2,600 Total Expenses $ 5,775 Surplus/Loss $ (75)

  17. Behavioral Aspectsof Budgeting • People’s “buy-in” is the key to success in budgeting • Goal Divergence vs. Goal Congruence • Motivation is critical • Allow staff input in budget process • Provide incentives • Raises • Bonus • Promotions • Praise and reputation

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