PRESENTATION 6 OUTLINE
The following areas are covered in this presentation:
• Delegation
• Responsibilities
• Authority
• Funds Allocation
• Allocating Costs
• Master Budget to Cost Centres
• The Time Dimension
• Best Practice Budgeting
DELEGATION
• Each department should base the appropriate levels of resource
delegation on its business activities, structure, size, procedures
and capabilities
• Departments should reassess their management structures to
ensure that the financial, administrative and personnel authorities
delegated to the managers responsible for service and
expenditure decisions are consistent.
• With effective communication, training and management
information systems, departments can progressively implement
the full flexibility and efficiency that the budget offers.
• Managers must ensure that key elements are in place as more
authorities are delegated
RESPONSIBILITIES
• It is important that everyone who needs to understand and
implement the budget is clear on their actual responsibilities.
Responsibility indicates the duty assigned to a position.
• The person holding the position has to perform the duty assigned.
It is their responsibility.
• The term responsibility is often referred to as:
An obligation to perform a particular task assigned to a subordinate. In an organisation, responsibility is the duty as per the organisational
guidelines issued.
AUTHORITY• An organisation cannot survive without authority. It indicates the right
and power of making decisions, giving orders and instructions to
subordinates
• Authority is delegated from above but must be accepted from below i.e.
by the subordinates. In other words, authority flows downwards
• All delegation and accountabilities should be provided in writing well in
advance of the implementation of the budget or financial plan with clear
understanding from all parties involved
• The use of duty statements with clear lists of accountabilities and
responsibilities is an excellent way to ensure that the message you are
driving is received and understood
• As the manager you should also continually update your team by memo
and email with progress on the targets and budgets and regular
meetings which are noted and formalised for future reference
FUNDS ALLOCATION• The funds required for a section of the organisation will have been
allocated in the budget. The funds must be allocated and distributed
for the smaller budget sections to work, thus enabling the bigger
elements to work and the overall plan to be carried out.
• It is important to be fair and appropriate when you allocate your
funding based on the budget requirements.
• You need to look at the budget parameters which have been set and
ensure that they are realistic and that there are sufficient funds
available to meet those objectives.
• Prioritising your objectives will be a major consideration when
determining the allocated funds
• Everyone involved will argue the need to be in the top priority for
funding but use the realistic approach and refer to previous budgets
to determine where the most practical place for the funds will be.
FUNDS ALLOCATION
• Consider the growth of the organisation and the funds needed to
promote and expand the current business if it has been included in
the operational strategies and business plan
• You need to allow for emergencies or unplanned events. As
mentioned you will have contingencies in place for such effects
but you need to ensure that funds have been allocated as well.
• Remember when allocating your funds you meet all the legal and
regulatory requirements of the industry and sector.
• The use of company funds for personal use or without company
approval is considered embezzlement and should be avoided at all
times. If you are unsure about where particular funds need to be
allocated, seek the advice of a qualified accountant or financial
expert for clarification.
ALLOCATING COSTS
• To facilitate planning and control, the budget process needs to
match costs with the business’s productive activities, and with
those managers responsible for the productive activities of the
business
• Activity-based costing (ABC) is a special costing model that:
− identifies activities in an organisation
− assigns the cost of resources via these activities to all
products/services provided to customers
− supports strategic decisions regarding pricing, outsourcing and
process improvement initiatives.
ALLOCATING COSTS• The ABC model assigns more indirect costs (overheads) into direct
costs compared to conventional costing models. With ABC an
organisation can better estimate the cost elements of products and
services.
• This can assist in:
− identifying and eliminating products and services that are
unprofitable
− raising/lowering the prices of products and services that are
under/overpriced
− identifying and eliminating production or service processes that
are ineffective, and
− promoting processing concepts that lead to the very same
product or service but at a better yield.
MASTER BUDGET TO COST CENTRES
In order to break up a firm’s master budget into the various cost
centres you will need to determine the following:
• The basis of cost centre splits, i.e. by location or by function type.
• The name and number of cost centres.
• The metrics for each cost centre, e.g. customer number,
production numbers, sales amount, sales units.
• The basis for allocating overheads, e.g. per client, by use, equally
between the cost centres.
• When splitting a master budget into cost centres, the first aspect
to focus on is the revenue or production details. These will help
determine the allocation of overheads.
MASTER BUDGET TO COST CENTRES
• Consider the example below:
Sales team
Sales % % Break upAllocating $10,000
telephone
Central 450,000 45% $4,500
North 250,000 25% $2,500
South 300,000 30% $3,000
Total 1,000,000 100% $10,000
MASTER BUDGET TO COST CENTRES
Other types of budgets:
1. The Marketing Manager’s budget will specify the financial resources
available for sales staff salaries, advertising and promotions
expenditure...but will include sales and revenue targets too.
2. The Operations Manager’s budget may specify the financial resources
available for raw materials, staff salaries, and equipment...but may
include production, cost and efficiency targets as well.
3. The Finance Manager needs to control and manage the flow of money
in and out of the company...and use a cash flow budget to do it.
4. The Finance Manager will also assist the CEO manage the MASTER
BUDGET...the one that brings all the contributing budgets together to
help ensure that the profit objectives of the business plan are being
met.
THE TIME DIMENSION
Cash vs. Accrual Accounting
• Another problem in allocating costs is the need to take into
account when costs (and revenues too) are associated with the
productive activities of the business. To deal with this problem,
Accountants distinguish between two approaches to accounting,
that is, Cash vs. Accrual Accounting.Cash accounting – this method is usually used by sole traders,
partnerships and small businesses. In cash accounting,
only the revenues actually received and the expenses
actually paid are recognised in the financial statements for the
relevant accounting period.
Accrual accounting – this method is generally used by medium to large businesses.
Revenues are recognised in the accounting period in which they
are earned (regardless of whether the payment has been
received) and expenses are recognised in the accounting
period in which they are incurred (regardless of whether payment
has been made).
THE TIME DIMENSIONCash vs. Accrual Accounting
• Accrual accounting is the preferred method as it allows for the matching of
revenues with the expenses incurred in earning that revenue in any given period
(known as the matching principle). This allows for more accurate evaluation of
the performance of the business as a whole, and individual managers.
• In order to accurately reflect the revenues and expenses for a specific period the
following accounts are needed:
− Accrued revenue (asset) – revenue that has been earned but the cash has
not yet been received
− Accrued expense (liability) – an expense that has been incurred but not yet
paid
− Prepaid revenue (liability) – cash has been received but the revenue has not
yet been earned
− Prepaid expense (asset) – an expense that has been paid for but has not yet
been incurred
THE TIME DIMENSION
Budget Cycle
Budget cycles can be:
• SHORT TERM (monthly or quarterly e.g. sales budgets)
• MEDIUM TERM (annually e.g. the business plan)
• LONG TERM (three to five years e.g. the strategic plan)
There is an example of a business plan and budget process cycle in
the following slide.
THE TIME DIMENSION
JulyNew Fiscal Year
BeginsAugust-September
Review actual results from prior year for inclusion in Business
Plans
September – DecemberDepartments update business plans and develop Operating
Budget requests
September – DecemberCIP Team meets with
Departments
MayFormal presentation of
recommended Operating and Capital Budgets
FebruaryDepartments submit Operating
Budget Requests for Budget Analysis Review
JuneCommissioners hold public
hearing, work session, and adopt Operating and Capital
Improvement Plan Budgets
JanuaryBoard of Commissioners
Retreat
JanuaryMid-Year Budget
Projections
Business Planning & Budget Process Cycle
Note: This Chart depicts the integration of the annual budget cycle and business planning process
BEST PRACTICE BUDGETING
Link budget development to corporate strategy
• Clearer understanding of corporate goals
• Greater support for goals
• Better coordination of tactics
• Stronger companywide performance
• Fewer revisions
• Faster and less costly budget process
• Less frustration
BEST PRACTICE BUDGETINGAllocate resources strategically
• Within companies, managers compete for scarce resources
• Budgeting involves making choices between alternatives
• Best practice requires:
− careful evaluation of operational plans and operational budget
submissions
− evaluation of risk
− cost-benefit analysis
− contingency planning
Tie incentives to performance measures not budget targets
• Budgets are a means to an end, not an end in themselves
• Incentives for managers should be tied to strategic objectives
BEST PRACTICE BUDGETINGLink cost management efforts to budgeting
• Accurate cost information is essential to the budget process
• Activity-based costing (ABC) identifies the real costs of producing, selling and
delivering products and services
• Variance analysis examines differences between budgeted and actual costs
and supports the identification of weaknesses and opportunities for
improvements in productivity or efficiency
Reduce budget complexity and cycle time
• Streamlining the budget process saves time, money and disruption to core
activities
• Avoid unnecessary complexity
• Avoid excessive detail
• Use information technology to automate budget processes
• Train staff in budget processes and techniques
BEST PRACTICE BUDGETING
Develop budgets that accommodate change
• Faster and more effective response to competitive threats and
opportunities
• Flexibility increases the scope for managers’ initiative
• Flexibility reduces incentives for managers to build safety margins
into budget estimates and promotes more accurate and more
efficient budgeting
• Report changes in business conditions at the same time that
budgets are reviewed
• Encourage contingency planning to facilitate budget flexibility