Page 51 - Site Visit

3/8/2021
Module 5 Budgeting
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 Define budgeting in the finance
environment,
OBJECTIVES  Discuss effective budgeting steps, and  Develop a draft budget
 Relate cost cutting tips which could be
helpful in tough economic times.  Review/modify your draft
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What is a budget?
 A budget is management’s forecast of
revenues, expenses, and profits in the future.
 A budget should:
 Directly reflect organization’s mission, vision
& priorities
 Chart a direction for allocating and
maximizing use of resources
 Tend to history of finances and future
projections
 Be tailored according to the scope & size
of program/project
 Be compared to actual performance of
projects
 Allows staff to isolate gaps/misdirected
funds
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Top-down vs. Bottom-up
Top-down budgets: Bottom-up budgets (participative
budgeting):
• Knowledge: Top management can • Knowledge: Lower levels have more
make accurate aggregate forecasts. knowledge than top.
• Decision rights: Begin with aggregate • Decision rights: Person being held
forecasts for firm, and then responsible for meeting the target
disaggregate down to lower levels. makes the initial budget forecast.
• Control more important than • Decision making more important
decision management. than decision control.
Steps to preparing a budget
 Determine programs & activities for the budget period
 Budget expenses and revenues
 Based on historical data, forecasts & economic climate
 Include previous yr. budget, current yr. and cash flow
 Have board review and approve
 Revise if necessary
 Monitor and record budget activity
Building the Budget
 Building the budget:
 Step 1 : Construct budgets in operational terms (Lowest levels of the
organization).
 Step 2: Develop a financial plan based on the operational plan from
Step 1.
 Budgets should be used for financial planning (decision making),
but not for performance evaluation (control).
 Units should be judged by comparing their actual performance with the
actual performance of defined “peer units”.
 Rewards can include consideration of both financial and non-financial
performance measures.
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