Course 2 - 203 - Building Operating Plans (A.K.A. Budgets) Flashcards
What is an Operating Plan / Budget?
A budget is a realistic estimate of operating receipts and expenditures for a given period of time to be used as a plan of operation, and a monitoring tool to measure performance.
What are some of the primary objectives of a budget?
The budget reflects the decisions and responsibilities that translate into specific programs and activities. The budget forces us to prioritize tasks, projects, and objectives to achieve desired goals. The budget establishes performance targets and serves as a mechanism for obtaining involvement and commitment. The budget will serve as a means to define and assign fiscal responsibility, helping to establish stronger control over departmental expenditures.
How does a budget link our allocation of resources with the day to day operations of the department?
Our goals and objectives, programs and activities are ultimately dictated by the level of funding allotted to our department and controlled by the budget, and the budget process helps us to allocate resources to the programs and services that generate the greatest benefits.
When reviewing previous performance as part of budget development, what are some common questions that we should consider?
From an overall perspective, how has the department performed? This shouldn’t be viewed in terms of accolades or excuses, but rather in terms of strengths and challenges. What resources have provided the greatest benefits? What has led to our greatest opportunities? Why? How should this influence budget decisions?
What programs have been considered “successful”? How have we defined that success, and how might that model be modified moving forward? Programs should and will evolve with the needs of the business and we must consider how this will impact costs, return on investment, and other essential success metrics.
What tools and technologies have proven most valuable? Which have not? Which should be retained, expanded, modified, or eliminated? Will equipment need to be replaced? Do we need to consider other sources or providers? Have we discussed those options with our providers?
Have we considered staffing needs, challenges, effectiveness, and opportunity? Are there circumstances (For example, store openings or closings) that will require staff modifications? Do we have a need for position modifications based on program changes (For example, Corporate Analysts, Auditors, etc. addition or elimination)? Can we reward performance?
What else can we do better? How can we improve other controllable expenses? How can we eliminate wasteful or unproductive expenses? We should always identify and weigh the risk of change or reduction, and develop a contingency plan that will define the roles and responsibilities of the staff, train with concise communication, track results, and hold individuals accountable.
What else have we done well? Where can we continue to invest resources to make the entire department more productive?
Why is it important to establish goals and objectives as part of the budget development process?
Providing specific direction for the department, the process itself will help assess strengths, needs, priorities, challenges, and opportunities. We have specific policies, plans, programs, and management strategies that define how to achieve our goals and we will use the process to develop management strategies and implement programs and services that lead to measurable results. A well-conceived budget provides a financial plan that encourages the achievement of goals in the overall best interests of the organization and within the constraints of available resources. We must define strategic processes or projects that will help resolve identified problems or challenges and find solutions that reach beyond the box. Program and financial performance should be continually evaluated, and adjustments made, to encourage progress toward goal achievement. The budget process should include incentives to monitor, measure, and evaluate performance, and make necessary adjustments as needed.
In general terms, what are some of the factors that our budgets will be based upon?
Those numbers may be based on head counts, store counts, company performance, anticipated company growth, markets, or other factors defined by the organization.
What is a Cost Center?
a cost center is a grouping of items or activities that are consolidated into a coherent financial unit.
What is a Line Item?
“Line Items” are the actual items listed in the budget with each kind and quantity of expenditures detailed as a single item on one line of the budget.
What are the broad categories that typically comprise our budgets? Examples of items that might fall within those categories?
Payroll Costs - these are the costs for your core staff, to include salaries and any other benefit-related payments for which the department is responsible. Most often our highest expense line, payroll costs also require strict management, as payroll adjustments may be necessary due to turnover, staffing modifications, and other related issues. Payroll budgeting must also incorporate annual merit increases set at the company average, market-specific salary adjustments, turnover rate adjustments and any other adjustments identified by the company in the budget process. Managing the salary budget may also consider salary caps for specific positions and/or scheduled reviews by the designated supervisor.
Operational Costs - These are the direct costs associated with performing specific job responsibilities. It may include all our various travel costs, the costs of hiring a venue or printing a publication, training and other materials, equipment, and services directly related to the operation of the department. Often these costs are expensed monthly to the location or department.
Organizational/Core Costs - These are the costs associated with the organizational base of the department, including management, administration, and other departmental governance such as staff meetings, internal training programs, and other core projects and programs.
Capital Costs - These are costs associated with large departmental investments, typically new equipment that is considered a fixed asset that will add value to the business and will be depreciated over a period of time (most often 5-10 years) depending on the life span of the equipment. Alarm equipment, EAS systems, hardware and software, Exception Report programs, laptops, vehicles, and other equipment such as desktop computers and photocopiers may fit here.
What are some of the steps in a typical budget review process?
Depending on the type of budget and the needs of the particular organization, this may require review, feedback and approval from the finance or accounting offices, a department head or other budget administrator, and/or the company Board of Directors.
Each step of the budgeting process is important. Why?
By dissecting several key aspects of the process, we can better develop a plan that will provide the best budget/financial solutions while also improving efficiencies.
Why is planning/forecasting such an important aspect of the budget process?
As discussed, forecasting is a means of analyzing current and historical data to predict many future aspects of the business. We attempt to identify trends and patterns using available data to help map a plan for the upcoming year. When used as a basis for management planning and decision making, forecasting allows us to establish a viable budget strategy that not only provides a map, but lays a foundation for departmental operations.
What are some of the elements elements that go into the budget planning process?
Quantitative Forecasting methods are typically used when historical data is available concerning the areas of interest. With the hope of revealing distinguishable patterns that can be used to predict future results, past trends may be used to directly forecast future trends on a particular variable, or we may examine the “cause and effect” relationship between one variable and other relevant variables.
Qualitative Forecasting techniques generally explore the judgment of experts to generate forecasts. In some cases, even when historical data is available, situations and circumstances may limit the relevancy and/or usefulness of past data and restrict its value in forecasting future events or results. By utilizing expert profiles, ideas and experience, qualitative forecasting can be applied in situations where data is limited or not otherwise available.
When coordinating the budget process, we should ensure that our budgets reflect:
The costs of recurring core requirements and capital expenditures
The funding needs of various tools, programs, initiatives, and other supporting resources and operations
Any other contingencies that may potentially result in future spending needs and requirements
The budget is a necessary tool in helping us to communicate and execute our business plan. Explain and expand…
It helps map financial strategies, manage and allocate available resources, and organize our operational approach. By the same respect, every map is intended to provide direction, and communication must serve as the compass. Communication gives us a point of reference, and a clearer perspective of the path that we want to follow.
What are some of the key messages that our budget should communicate?
We must be able to drive our points economically, summarizing important information in a way that ensures a clear financial picture without our message getting lost in too much detail.
We must provide relevant information, using both financial and operational metrics to present comparable information that reflects a broad perspective and helps us build our case.
We must present information in the right context, assuring efficiency in understanding as we communicate our position. Presenting data within the proper context supports better financial analysis and decision making, and can make all the difference in the world.
We must present strategic plans that set goals and objectives that echo company missions. If we fail to show a relationship between the deliverables of our plan and the benefits to the company our requests may appear futile and unnecessary.
Why is it important to have contingency plans?
The contingency is an amount added to the budget to allow for those items, conditions, or events that will likely result in additional costs.
What is a contingency allowance?
A contingency allowance is a planned cost allotment within the budget used to cover unexpected and unforeseeable conditions or events that may occur over the course of the year.
What is Budget Monitoring?
Budget monitoring is the continuous process of assessing the status of budget implementation in relation to the approved budget plan.
What are some of the primary objectives of Budget Monitoring?
To stay informed – This type of reporting ensures that we remain appraised of budget implementation and are aware at an early stage of actual and potential problems so that appropriate action can be taken. It is imperative that budget trends are closely monitored to afford the opportunity to quickly identify variances and adjust the forecast accordingly for the remaining fiscal year.
To validate requests for additional funding - By keeping informed of all aspects of budget implementation and maintaining appropriate documentation, we can ensure that disbursed funds have been properly used before requesting any further release of funds. We want to show genuine need and responsible spending, which can help to reinforce our position and expedite requests.
To provide an audit and evaluation trail - Maintaining a record of the actions taken during budget implementation provides a valuable resource for assessing the efficiency, appropriateness, and effectiveness of our plan.
To serve as a reference for future budget projects - Monitoring and review can provide a vital resource for ensuring that lessons learned (successes, failures, best practices) through budget implementation are available for consideration when formulating and implementing future budgets.
To report to the company on the department’s progress - Monitoring and budget reviews provide a communication vessel on departmental spending and efficiency. Our companies want to see that we are spending money wisely and making progress towards goals.
