Professional Documents
Culture Documents
What is a budget?
For example, if you plan to buy a new car with a bank loan (the decision), you may
calculate whether you will be able to pay the loan repayment instalments (one of the
financial outcomes). Another example might be if a Recreation organisation runs a
particular event will there be any resultant profit? These questions cannot be answered
unless someone does some financial calculations. These calculations will involve
working out our likely revenues (income) and our likely expenditures. By comparing
revenues and expenditures the answer to the question "Can I afford the car?" or "Will we
make a profit from the event?" will be answered.
Budgets are more than just a few calculations that we throw away when the questions are
answered. In a business context, a budget, once constructed, becomes an essential tool for
the financial management of the business. In fact operating a business without a budget is
very bad management. In order to make sound financial decisions it is necessary to
review the budget to determine whether a proposed course of action fits within our
planned financial strategies or not. If the answer is in the affirmative, i.e. the item is
"budgeted", then there is a great deal of confidence about continuing to pursue the
strategy, provided the item is kept "within budget". If the answer is in the negative, then
there is an understanding that continuing to pursue that strategy has a higher degree of
risk. That does not mean, however, that any departure from the set budget is inadvisable.
It may be that "unbudgeted" strategy or event has obvious financial benefits. Furthermore
it may also be the case that the budget itself was incomplete.
Forecast of income
and expenditure
Budgeting is a
critically important
part of the business
planning process.
Business owners
In constructing a Business Plan, the manager attempts to
and managers need
forecast Income and Expenditure, and thereby profitability.
to be able to predict
whether a business
will make a profit or
not. A budget is
basically a model of
how the business
might perform,
financially
speaking, if certain
strategies, events,
plans are carried
out.
Monitoring
business
performance
Once a budget is in
place, it enables the
actual financial
operation of the
business to be
measured against
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Budgeting Principles
1 Principle of Conservatism
Don't budget on the basis that everything will turn out as expected. Build in a safety factor by tending
to underestimate your income and overestimate your expenses.
2 Principle of Involvement
One person may be responsible for the compilation of the budget but one person should not be
responsible for all the work involved. Budgeting requires teamwork. The task of budget should split
and allocated among those individuals who have the best chance of knowing what expenditure is
likely to be needed and what income is reasonable to expect. Involvement by many people in
budgeting might slow the process down, but the answer is far more likely to be accurate and
dependable.
3 Principle of Retraceability
Budgeting is not an activity that is completed in a few hours. A good budget may be worked on for
several weeks if not months, adding and changing figures as new information comes to light. It is
very important that the author of the budget can retrace his/her steps. It would be much less efficient
if budget calculations were difficult to understand and figures impossible to find out from where they
came.
One of your first and most important tasks is to develop a budget. You
cannot really organise such an event without a budget. It would be like
planning a holiday and not knowing how much it would cost!
So, the question is how are you going to develop a budget? No need to
worry, really, it is basically a common-sense process. You should
never imagine that you are on your own in this task. Budgeting is very
much a task shared among work colleagues. So talk to people, talk to
colleagues!
As time goes by, and more information comes to hand, your budget
will hopefully become increasingly accurate.
• Government Funding
• Sponsorship
• Money paid by event participants (e.g. registration fees)
• Money paid by event spectators (e.g. entry fees, food/drink
sales)
• Money paid by a parent organisation (e.g. state association)
Let us suppose that the starting point is that you know that the State
Association guarantees funding of $1,000 towards the cost of staging
the event. In discussions with the state association you also find out
that there will be 100 competitors and each will pay a $20 registration
fee to enter the event. Participants will therefore contribute $2,000 in
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event income.
Now you need to take a look at what costs the event will incur. Again,
if you are not sure what types of expense will occur then ask people!
You can probably think of some things yourself but not necessarily
everything.
Okay, so you have done some talking, some probing and you have
identified at this early stage that the major costs will include
advertising, officials, equipment, programmes, trophies and catering
and maybe some costs associated with the venue.
You now need to get some costings. Make some telephone calls!
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Put all this information (income and expenditure) together and what
have you got?
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Answer - A deficit!
Well, you have 12 months to sort the problem out! At least you have
made a start. You have some rough estimates to work with and to
discuss with colleagues.
Sources of Information
The following diagram illustrates where information comes from in the process of
constructing a budget.
Acknowledgement
This diagram was constructed with the help of Erin Smith
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Costing Programs
and Services
Your job, as an administrator of a sport or
recreation organisation, is to:
Direct Costs
• Trophies
• Hire of staff specifically for an event
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Click on the link below to download a spreadsheet that provides an example of how to set
out a program budget with income and expenditure shown.
Income
Fees $ 3,200.00
Merchandising $ 400.00
Sponsorship $ 4,910.00
Total Income $ 8,510.00
Expenses
Referees $ 900.00
Venue and Equipment $ 1,230.00
Telephone and postage $ 150.00
Newspaper Advertising $ 450.00
Event Insurance $ 1,100.00
Catering $ 3,300.00
Printing $ 875.00
Trophies $ 480.00
Total Expenses $ 8,485.00
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Cashflow Forecasting
Many business, during the course of a year, will fluctuate between positive and negative bank
balances. The chart below depicts a business that has a positive bank balance in January, April,
May, June, October, November and December. It also has a negative bank balance in
February, March, July, August and September.
So how can a business have a negative bank balance? What does this mean?
The answer is that a business can have a negative bank balance if it has an Overdraft. An
Overdraft is a facility whereby a bank allows a business to continue to draw funds even when
it has exhausted all the funds in its account. In such a situation, where the business's bank
account goes below zero, the business is in fact using the bank's money to pay its bills.
Usually a bank imposes an Overdraft Limit, that is a limit to how much the business goes
below zero in its bank account. If the overdraft limit is set to $10,000, then the business must
not go beyond a negative $10,000 bank balance.
A bank is in business to make a profit, and so businesses that want to set up an overdraft are
usually charged a fee by the bank for this priviledge.
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The main purpose of cashflow forecasting is to predict what will happen to the bank balance.
It is important for a business to know when it is likely to run out of funds in its bank account,
and by how much.
If the business knows (by creating a cashflow forecast) when it will run out of funds,
arrangements for an overdraft facility can be made in a timely fashion.
Generally, a bank will not create an overdraft facility unless it feels that the business has the
capacity to repay the borrowed money.
In the illustration above, the business slips into a negative bank balance at the end of June, but
recovers and moves back to a psotive bank balance in October.
Cashflow Budget
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The table below is the typical way that a Cashflow Budget is set out.
There are 13 columns and the first column is a Year Total column.
It is important to note at the outset that in each row the Total column
equals the sum of all the months. If you look at Sponsorship, the total
is $9,000 for the year, and this comes all in the month of April.
Similarly, the Total for Athlete Development is $5,000 and this comes
in two months, February ($3000) and April ($2000).
Salaries on the otherhand is $3,000 every month, and since there are 12
months, the Total for the year is $36,000.
Look in the left column and you will see 'Opening Balance', 'Total
Income', 'Total Expenses' and 'Closing Balance'. These are the main
components that enable a calculation that predicts what the Bank
Balance will be at the end of each month.
Opening Balance (what you have in bank at the start) plus Total
Income (what money comes in) minus Total Expenses (what money
goes out) equals Closing Balance (what money you have left).
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Total Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov D
Balance 1,000 1,000 6,182 8,654 9,931 18,769 12,246 17,084 16,921 16,399 15,236 13,418 9
36,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3
6,000 500 500 500 500 500 500 500 500 500 500 500 5
ying 1,800 127 127 127 127 127 127 127 127 127 127 400 1
1,440 360 360 360 360
1,080 71 71 71 71 71 71 71 71 71 71 300 7
g 3,200 100 100 2,100 100 100 100 100 100 100 100 100 1
on Costs 10,800 1,543 1,543 1,543 1,543 1,543 1,543 1,543
1,440 120 120 120 120 120 120 120 120 120 120 120 1
ding 7,000 7,000
evelopment 5,000 3,000 2,000
Renewals 840 210 210 210 2
e 1,200 100 100 100 100 100 100 100 100 100 100 100 1
rges 360 30 30 30 30 30 30 30 30 30 30 30 3
enses 76,160 4,258 7,408 7,591 7,591 12,951 5,591 5,591 5,951 5,591 4,258 5,120 4
alance 7,040 6,182 8,654 9,931 18,769 12,246 17,084 16,921 16,399 15,236 13,418 9,298 7
Expenditure.
February Opening The Opening Balance of February will
Balance be the same as the Closing Balance for
January. The Opening Balance of any
month will always be the same as the
Closing Balance of the previous month.
Events Income In a Cash Flow forecast the Total
column will equal the sum of all of the
months. In the situation of Events
Income, this organisation plans to obtain
$3,429 per month for seven (7) months.
The other months there is no Events
Income. Therefore the Total of Events
Income for the year is $24,000. How
does the organisation know or guess
what income it will achieve in any one
month. Well, the organisation will need
to work out what events it will stage
each month and calculate the likely
income it will receive.
Sponsorship In the case of Sponsorship Income, the
organisation believes it has a sponsor
who will pay up $9,000 in April.
Other Income The Cash Flow forecast shows an
amount of $1,000 per month for "Other
Income". When preparing a Cash Flow
forecast it is not always possible to have
an idea of how much income will be
received in any month. Therefore it is
simpler to divide the Total by the
number of months and every month has
the same figure.
* Note:
Break-Even Analysis
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Joe is a voluntary club administrator and he has the responsibility to organise a sporting event.
At event, however, there will be other costs which will be dependant upon the number of
people who turn up and participate. These costs are as follows:
The term break-even means that all event costs will just be covered by all event income.
This problem is an every-day problem for businesses of all types but fortunately it is not a
difficult one.
In solving this type of problem it is necessary to distinguish between fixed and variable costs
(as above). This is how Joe calculates the solution:
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The above a solution is a commonsense way of putting it but if you would like a formula this
one is an easy one to remember:
Fixed Costs
Formula for Break-
Price - Variable
Even Point
Costs
Variance Report
The purpose of a "Variance Report" as shown below is to identify differences between the
planned financial outcomes (the Budget) and the actual financial outcomes (The Actual). The
difference between Budget and Actual is called the 'Variance". The Variance is depicted
below in dollar ($) and percent (%) terms. Calculating the variance in percent (%) is useful as
it gives the relative size of the variance. When calculating the Variance in percent (%) - divide
the Variance in dollars ($) by the Budget (and not by the Actual).
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Income
Govt Grant $ 15,000.00 $ 20,000.00 $ 5,000.00 33%
Sponsorship $ 3,500.00 $ 3,750.00 $ 250.00 7%
Membership Fees $ 2,800.00 $ 2,650.00 -$ 150.00 -5%
Events Income $ 4,200.00 $ 7,735.00 $ 3,535.00 84%
Profits from Trading $ 14,800.00 $ 12,900.00 -$ 1,900.00 -13%
Other Income $ 280.00 $ 570.00 $ 290.00 104%
Total $ 40,580.00 $ 47,605.00 $ 7,025.00 17%
Expenditure
Advertising & Promotion $ 1,500.00 $ 200.00 $ 1,300.00 87%
Athlete Development $ 1,650.00 $ 4,700.00 -$ 3,050.00 -185%
Bank Charges $ 160.00 $ 400.00 -$ 240.00 -150%
Competition Costs $ 1,000.00 $ 2,100.00 -$ 1,100.00 -110%
Management Committee $ 160.00 $ 230.00 -$ 70.00 -44%
Photocopying & Printing $ 430.00 $ 570.00 -$ 140.00 -33%
Postage $ 650.00 $ 1,150.00 -$ 500.00 -77%
Rent $ 1,300.00 $ 1,000.00 $ 300.00 23%
Repairs & Renewals $ 300.00 $ 225.00 $ 75.00 25%
Salaries $ 18,300.00 $ 18,300.00 $ - 0%
Stationery & Computer $ 500.00 $ 630.00 -$ 130.00 -26%
Team Funding to Nationals $ 1,650.00 $ - $ 1,650.00 100%
Telephone $ 1,000.00 $ 1,665.00 -$ 665.00 -67%
Total $ 28,600.00 $ 31,170.00 -$ 2,570.00 -9%
Reason 1
5. Ensure full compliance with tax, gaming and other laws and as
a result incur financial penalties for their organisations.
Reason 2
THE TRAUMA
In April 2003 it became widely known that Black Stump Soccer Club was in very bad
financial shape. There were a spate of resignations on the committee, and a virtually new
committee took over.
The extent of the financial disaster took everyone by surprise. All concerned were
overwhelmed.
• The club was heading for $200,000 projected loss for financial year
• The cash position had plummeted from +$70,000 to -$30,000 in one year
• The club’s debts were over $100,000 including unpaid taxation and
superannuation
Needless to say, the internal politicking in the club at this time was very destructive.
THE FIX
Turning the club’s financial position around took approximately 18 months. Harsh,
unpopular, politically difficult decisions had to be made. Internal politicking was rife
within the club at this time.
Strategy Raised
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Requested a return of the fees paid to the Auditor, and he obliged! $4,000
Loss of bar and gaming income due to shorter trading hours -$22,000
CREDITORS
Trade creditors
Former employees
Making arrangements with trade creditors and former employes (those who had just been
retrenched) was extremely important. Generally, creditors will allow extra time to pay if
it means they are more likely to get their money back. However, you have to make a
point of calling them, explaining the situation, and making an appointment to see them.
Provided you keep good communication, creditors will often provide the necessary
lifeline.
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1. Collect and store data that can be used to predict next years
income and expenditure
2. Consult widely within organisation and obtain views from
organisation personnel as to probable changes in programs in
next financial year
3. Develop a detailed forecast of income and expenditure for next
financial year
1. Cash balance
2. Total wages costs and hours worked
3. Key sources of income e.g. gaming machines, bar sales,
canteen sales
Rule 4
The process should start before you enter into a trading relationship i.e. before you sell
something to someone on credit.
Credit Checks
The first aspect of credit control is to perform credit checks on any entity, person or
organisation, that wishes to obtain goods and services from you without paying at the
time of the transaction.
A credit check is a process of asking the potential customer to supply several credit
references and possibly a bank reference also. The entails the customer supplying you
with names and addresses of a number of businesses with whom they have purchased
goods on credit. Your task is to call these referees and ask whether your potential
customer has paid promptly, stayed within the agreed terms of trading and has, in general,
conducted business honourably.
It is commonplace for all businesses to have a “Credit Account Application Form”, the
purpose of which is to ensure that referees are supplied, to make a note of the results of
your credit checks and to standardise procedures in setting up a credit account.
It is important to consider that such credit checks are not fool proof. Often a customer
will supply you with only the names of businesses that have had no problems with the
customer. The customer will not disclose the names of businesses where they have failed
to pay debts on time.
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Debt Recovery
When debtors look like they are having difficulty with paying their debts to you, the
sooner you act the more likely you are to recover your monies.
We are often able to recover the debt without ever going to court, but if we do issue court
proceedings, the costs and time involved are much less than you think.
• Send a reminder
• Telephone and/and write to the debtor asking for payment (you can also get in your
car and go around to them)
When dealing with a debtor that cannot or will not pay it is necessary to consider whether
it is worthwhile to pursue the matter. It is often the case that the costs of recovering the
money through debt collectors and/or law courts outweighs the possible benefits you
might gain if the debtor pays up finally.
It is necessary to use tact when dealing with debtors and to know when they are lying
about that “cheque in the mail”.
Suzanne Tuck , the wife of the Treasurer of the Ravenswood Over 50's Club
(Ravenswood is in Launceston, Tasmania), was convicted of stealing approximately
$53,000 in cash between 1st July 1993 and 30th August 1994.
The club conducted bingo sessions virtually every Thursday and Sunday nights
throughout the year. The takings from this activity, along with other takings from raffles
and other games of chance, were entrusted to Suzanne Tuck and her husband and taken
by them to their home for banking in the club's account the following day.
Prior to leaving for home, Tuck and her husband each night counted the notes, while
other club members counted the coins, but no record of the actual takings appears to have
been made before the Tucks removed them for banking.
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After August 1994, club officials commissioned an audit and by comparison with the
takings for previous years, the auditors expressed the opinion that there was a probable
deficiency of $40,000 - $50,000 for the year ending 30 June 1994.
Suzanne Tuck was interviewed by the police and made a number of admissions. She
admitted that she regularly went to the Launceston Casino on Thursday and Sunday
nights after returning home with the evening's takings from the club and extracting there
from, on average, $1,000 per night in the first twelve months, which sums she invested in
gambling. She admitted to losing a large amount of the money.
Nobody likes to think that a friend or colleague in a club or association would ever
embezzle money from the organisation. However, embezzlement (the fraudulent mis-
appropriation of money by a person who was trusted to handle the money) is much more
common in non-proft organisations than people would suspect.
Committees have a duty to ensure that the procedures for the collection of cash and the
managment of funds in an organisation are rigorous enough to desuade people form
embezzlement. People who volunteer should not be put at risk of breaking the law in this
way.
Spreadsheets, such as Microsoft Excel, are an invaluable tool for the construction of
budgets because in the hands of the experienced operator they allow:
Calculations to be stored and viewed for future reference and amended if necessary
The second important technique is to link each worksheet with the summary sheet so
that any changes to any of the worksheets will be immediately reflected in the summary
sheet. If this does not happen there is potential for errors. The summary sheet is in fact
the Income and Expenditure Budget - the document that is finally published. It would be
embarrassing to publish a budget that when questioned did not relate to stored
information and calculations.
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A B C D E F G
1 Weeks Hrs/wk Rate/hr Salary SGL Total Cost
2 7%
3
4 Executive Director $ 35,000.00 $ 2,450.00 $ 37,450.00
5 Activities Manager $ 30,000.00 $ 2,100.00 $ 32,100.00
6 Administrative Assistant 52 20 $ 13.00 $ 13,520.00 $ 946.40 $ 14,466.40
7 Activities Assistant 52 38 $ 15.00 $ 29,640.00 $ 2,074.80 $ 31,714.80
8
9 Total $ 108,160.00 $ 7,571.20 $ 115,731.20
Figure 2
In figure 2, the worksheet for salaries, the information stored is the job titles, their
respective salaries or wage rates. The calculations include working out the
Superannuation Guarantee Levy for all employees, the annual cost of employment for
each employee and the total cost of all employees. The total of $115,731.20 is the
amount to be transferred (and linked) to the summary sheet.
The summary worksheet should be linked to each and every worksheet for individual
items appearing in the summary. You should pay particular attention to not “embedding”
figures in any worksheet. For example if you need to find out the total of membership
fees by multiplying 200 members by $20 fees each:
But instead use relative references of cells containing figures you wish to multiply. "A2"
is an example of a relative reference.
A B C
1 Members Fees Total
2 200 $20 =A2 * B2
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Linking figures on the summary sheet to their respective worksheets is a simple process.
On the summary sheet in the cell where the total of salaries is to appear, type an equal
sign i.e. type "=". All formulas must begin with = . Then, when you have typed the "="
sign, point with your mouse to worksheet containing the answer and the cell where the
answer can be found. In figure 2, the answer for salaries can be found in cell G9. As a
result of this simple procedure the formula that should appear in the cell for total
Salaries on the Summary sheet is "=Salaries!G9". This formula denotes a link to cell G9
on the Salaries worksheet.
Armed with these two techniques, spreadsheet users can prepare a budget workbook
much more quickly than can be produced by working with pencil and paper alone. Of
course, the really important aspect of budgeting is that the figures are well researched,
informed, reliable and accurate. No budget will be able to accurately predict the future,
but the more work that goes into research and preparation, the more accurate it is likely
to be.
Finally, spreadsheet users should make an effort to format each worksheet to give a
professional appearance. The following formatting features should be employed where
possible:
Budgeting Exercises
The menu on the right provides you with ten (10) budgeting exercises that have been
developed to illustrate typical scenarios in a sport and recreation situation.
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You should endeavour to use Microsoft Excel to prepare your answers to these exercises
as Excel is the tool of choice for most people in budgeting.
Interactive Quizzes