Strategic Planning

Resource Person:
Gerry Padernal
Preparing and Managing
Departmental Budgets

How to tell the money where to go

& stop wondering where it went
Learning Objectives

• Understand budgeting
• How to budget
• How to manage budgets
 n in g
P l an
rt o f
is p a
et i ng
ud g
B

ISO steps for Continual Improvement

What is a budget?
What is budgeting?
Definition

• Budget (from French
 bougette, purse)
Definition
• It is a list of all
planned
expenses
&
revenues
• A BUDGET is an
organizational plan
stated in monetary terms.
Definitions

• The process of making

the list is BUDGETING
 Purpose of Budgeting
Purpose of budgeting is to:
• Provide a forecast of revenues and
expenditures
(i.e. a model of how a business might
perform financially speaking if certain
strategies, events and plans are carried
out)

It is a MODEL!
• To assess performance by
comparing actual
operating results against
the forecast / budget.
(Model vs. Actual)

It is a METRIC!
 Simply put:
A budget is a practical means of telling the
money where to go, rather than simply
wondering where it went. 

Telling the money where to go

And knowing where it went
Surely, there are many who wonder
where the money went.

Because they were spending without a

plan in mind. Without a budget!
Other uses
• For a loan or
other financing
for business
purposes
(One is expected to
produce a business
plan, which includes
information concerning
projected income and
expenses.)
Caveat! ey !
t i ng is k
ud g e
• No business B
should ever
proceed without
planning, and a
budget
is the financial plan
for conducting
business in the
near future.
 No w :
t i n g !
ud g e
B
 Types of Budgets
• An operating budget 
• A capital budget 
• A cash budget 
The operating budget
• An operating budget consists of three
parts:
– The statistical budget
– The revenue budget
– The expense budget
The statistical budget
• The statistical budget, which is the
best available projection of
business activity for the coming
year (units or pieces to be
produced, contracts to be secured,
estimated business activity, etc.).
Elements
• Sales volume
• Production volume
• Inventory volume
• Headcount
The revenue budget
• The revenue budget, which is a projection of
estimated income for the coming year.
 Elements
• Sales • Marketing expenses
– Gross • Gross profit
– VAT • Levels:
– Net – Division
– Withholding taxes – Product
• Commissions – Location
• Incentives/promo – Profit center
• Allowances
Bases
• Often, good
indicators of future
revenues are:
past sales
(adjusted for whatever is
known about the coming
period, such as changes
in business activity and
expected price increases
and the like).
The expense budget

• The expense budget, which consists of

all anticipated costs of operating the
business and conducting the projected
level of business.
 Elements
• Salaries & wages • Travel
• Payroll taxes • Supplies
• Insurance • Taxes & licenses
• Training & seminars • Rent
• Publications • Miscellaneous/Others
• Memberships • Levels:
– Division
• Fringe benefits
– Department
– Medical
– Cost center
– Others
• Depreciation • Headcount
• Amortization
Bases
• Most accurate
indicators of future
costs are:
past costs
(adjusted for whatever is
known about the coming
period, such as changes in
business activity and expected
price increases and the like).
• A breakdown of the expenses
charged to a department or activity,
such as salaries, benefits, supplies,
travel, postage and such, is essential.
• One must keep track of how
much money is going into
each category of expense, as
well as how much one is
spending in total.
The capital budget
• A capital budget accounts
for potential expenditures
for major fixed equipment
(for example, a building, a boiler, a new roof,
etc.) and major movable equipment (copy
machines, computers, etc.).
The cash budget
• A cash budget is usually prepared last
in the budgeting process and consists
of estimates of the business' cash
needs for the year, as compared with
projections of the cash receipts for the
year.
• Operating cash • Operating cash
receipts payments
• Receivables • Payables
• Loans • Capital
• Equity infusion expenditures
• Periodic
amortization
 Levels (of accumulation)
• Section
• Departmental
fi ne d
• Division
e d , r e
• o ll a t
Corporate
te d, c !
•
ula
Regional
m a l iz ed
c cu fi n
A and
• Global
• Profit or Cost Center
• Project
• Event
•Controllable
•Uncontrollable
•Variable cost
•Fixed cost
Corporate budget

• The budget of a company is compiled

annually. A finished budget usually
requires considerable effort and can be
seen as a financial plan for the new
financial year.
• The Finance department compiles
the company's budget, but today

• modern software allows hundreds or
even thousands of people in the various
departments (operations, human resources, IT
etc) to contribute to the final budget.
Budgeting
Principles
(Some only)
Timing
• A budget cannot
be adequately
prepared during
the final week or
two before the
new budget
period begins.
Preparation

• You should collect information

used in preparing the budget,
especially information
concerning expenses, several
months ahead of time.
Some principles and practical
rules of budgeting:

• Expenses must always be

charged to the department
or activity incurring the
expenditures.
• Every item of expense in the
business must be under
someone's direct control.
• Managers responsible for
complying with an expense
budget must participate in
preparing the budget.
• No one should be held
responsible for expenditures
over which he or she has no
control.
• Unused funds budgeted for
expenses may not be carried
over from one year's budget to
the next.
• Unused capital-budget funds may
not be transferred into operating
expenses or vice versa.
• All individual expenditures
must be approved by the
appropriate levels of
responsibility.
Narrative
• A budget narrative is useful in
defining the costs included in a
budget. It can also be used to
explain variances.
• A budget narrative often is
used to explain line items in the
budget.

• It can be structured in one of two ways.

You can create "Notes to the Budget" with
footnote-style numbers or letters on the
line items in the budget keyed to
numbered or lettered explanations.
 Examples

• An operating budget 
Excellence Corp
Proposed Budget

Volume Amount

Sales 60 5400
Production 70 3780
Inventory 5 315

Sales 5400
Discounts 216
Net Sales 5184

Cost of sales 3780

Gross Margin 1404

% sales 26%
You and your budget
• Actions
–Right

•Impact
You and your budget
• Actions
– Not right

• Impact
 You and your budget
• Effectiveness

• Efficiency
 You and your budget
• Inaction / Omission

• Impact
Communication!
Frequency
Variance
s!
• Variances against budget
• Variances against history
(usually prior year)
Periodic
Reports
 Periodic Reports
• Example
Excellence Corp.
Period ended 31 Oct 2008
To-date Budget Variance % Remarks
('000 Php)

Volume (Units) 50 48 2 46 Due to marketing efforts

Net Sales 4,750 4,608 142 0 Discounts given

Gross Margin 1,568 1,521 47 0 Production on the dot

%Sales 0 0 0

Marketing (255) (250) (5) 0

G&A (220) (225) 5 (0)

Net Operating Income 1,093 1,046 47 0 Still on track

Excellence Corp.
Period ended 31 Oct 2008 For the
Month Budget Variance % Remarks
('000 Php)

Volume (Units) 6 5 1 4 Due to marketing efforts

Net Sales 570 480 90 0 Discounts given

Gross Margin 188 158 30 0 Production on the dot

%Sales 0 0 0

Marketing (23) (25) 2 (0)

G&A (22) (19) (3) 0

Net Operating Income 143 114 29 0 Still on track

 Corrective

• Increase sales/revenues
• Reduce cost
• Postpone cost

• Eliminate cost
• Control cost
• If the actual results are close to
the budget, this shows:

understands its business & has

been successful in driving it in the
direction planned!
• No one knows for sure what the
future will bring, but a good
budget will not leave one
wondering where the money
went.
Because:

You told the money

where to go
So, you know where it went
Summary
Thank you
&
Good Luck!