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1 Chapter Two Lecture Notes Planning for Success: Budgeting Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Chapter Two Lecture Notes
Planning for Success: Budgeting
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Overview of Financial Management
Plan
Implement
Control
Measure Results and Report
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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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.
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Budgets
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
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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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 and the receipt of contributions and grants. Support refers to just contributions and grants.
Expenses represent the resources that an organization uses up in carrying on its activities.
A surplus or profit is the excess of revenues and support
over expenses; a deficit or loss is an excess of expenses over revenues and support.
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Operating Budget Example 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)
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Cash Versus Accrual Accounting
The term "recognition" means that there is an acknowledgment that some financial event has occurred.
Cash Accounting recognizes 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.
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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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? Cash Accrual Revenue $3,250 $5,000 Expense 3,750 4,500
Surplus/(Deficit) $ (500) $ 500
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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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 more difficult to manipulate.
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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The Cash Budget Cash Budgets plan for an organization's cash inflows
and outflows. Beginning Cash Balance + cash receipts Subtotal: Available Cash - cash payments Subtotal: Total Cash Payments Balance before borrowing, repaying or investing + borrowing or – repayments or investments Ending Cash Balance
Note distinction between accrual-based revenue and expense versus cash receipts and payments!
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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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?
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Revenues by Quarter Revenue Quarter 1 Quarter 2 Quarter 3 Quarter 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!!!
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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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.
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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The Budget Process
A process of planning and control.
A look ahead at what an organization can and can't do.
The Budget Cycle - Preparation
– based on guidelines – normally done by responsibility center managers
- Review and Adoption - Implementation and Control - Evaluation of Results and Feedback
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Special Purpose 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.
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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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)
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
Behavioral Aspects of Budgeting
People are the key to success in budgeting
Goal Divergence vs Goal Congruence Motivation is critical Allow staff input in budget process Provide incentives – carrot or stick Raises Bonus Letter reviewing performance
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Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Developing a Government Budget
Prepare budgetary policy guidelines. Prepare a budget calendar. Prepare and distribute budget instructions. Prepare revenue estimates. Prepare departmental (or program) expenditure
requests… Consolidate departmental expenditure requests….and
revenue estimates… Prepare the budget document. Present the budget document to the legislative body… Determine the property tax (millage) rate.[1]
[1] Martin Ives, Joseph R. Razek, and Gordon A. Hosch, Introduction to Governmental and Not-for-Profit Accounting, 5th Edition, Pearson Education, Upper Saddle River, NJ, 2004, p 71.
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Supplemental Notes
The remaining pages in this set of notes for Chapter 2 are supplemental notes. At the end of the class notes for some chapters we have included supplemental notes. These notes highlight areas in the text that we consider important, but which are either descriptive rather than analytical, or relatively basic.
If time permits, we will cover these in class. However, if there is not enough time, we believe that you can read these slides and the book and learn this material on your own.
You may ask questions about these notes (or any other material in the course) during office hours.
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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The Holy Land Trip Budget
The Budget Question: Can the church successfully run a teen trip to the Holy Land?
The Issues: - Does the trip fit within the church's mission? - What is the market for such trips? - How many teens will come on the trip? - How much revenue can the church expect to
collect? - What will the expenses be?
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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The Holy Land Trip Budget
The Process: - Do a first estimate of the budget. - Examine the assumptions and develop alternatives. - Ask what happens if your forecasts and key
assumptions are wrong.
Lessons from the Case - Budgeting requires thought. - Budgeting requires estimating. - The more facts that are available the better.
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Holy Land Trip Receipts
Projected # of People
Per Person
Total
Projected Receipts Charges 50 $2,500 $125,000
Less Uncollectibles
3,750
Net Charges $121,250 Fundraising 50 $250 12,500 Total Receipts $133,750
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Holy Land Trip Payments
# 0f People Per Person ($) Total
Receipts (previous page) $133,750
Projected Payments
Airfare 54 600 32,400 Hotels 50 600 30,000 Chaperone Salaries 4 Food 54 600 32,400 Admission Fees 54 125 6,750 Guide 1 3,000 3,000 Local Transportation 2,500 2,500 Entertainment 54 300 16,200 Other 54 200 10,800 Contingency 2,500 Total Payments $136,550
Surplus/(Deficit) $ (2,800)
0 0
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
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Changes in Budget Assumptions
1st Budget 2nd Budget
Price $2,000 $2,500
Number of Teens 30 50
Airfare $1,000 $600
Hotel $80 $40
Chaperones’ Salaries $3,000 $0
Admission Fees $250 $125
Finkler: Financial Management For Public, Health, And Not-For-Profit Organizations, 3rd Ed. © Pearson Education 2010
