NUT 468 Chapter 8, Spring 2017

Financial Resources (The Budgeting Process & Financial Management) NUT 468 Financial Resources 1. Budgeting (Budgets, Process, Types, …) a. Definition b. Purpose of Budgeting c. Types of Budgets d. Operating Budgets e. Capital Budgets 2. Financial Reports a. Operating Statement b. Profit & Loss Statement c. Balance Sheet A-Budgeting Process What is a budget??? A budget is the organization’s business plan expressed in financial terms. It should be based on the mission, goals, and objectives of the organization Why do we create budgets??? Purpose of Creating a Budget  Budget helps set parameters for activities to be done during the budget period  Gives managers guidance about what financial resources are available to carry out their work  Allows managers to plan and think ahead about certainties and risks associated with their decisions  Budgets also act as a control device for regulating spending in an organization Purpose of Creating a Budget  Budgets provide an objective set of criteria  Budgeting is synonymous with forecast, which involves “forecasting” (predicting) what expenses, revenues, … can be Types of Budgets Operating Budget Capital Budget Cash Budget Budgeted Balance Sheet Master Budget Important to NOTE!  The difference between a fiscal year and a calendar year:  A calendar year begins on January 1, XXXX and ends on December 31, XXXX  A fiscal year can begin on any date and end 365 days later Cost Center VS. Revenue Center Cost Center Not expected to generate profit of break even Examples include payroll, human resources, material management Revenue Center Any department that can generate some income Examples include clinical nutrition service and foodservice  Once income exceeds cost by a substantial amount, the revenue center is also considered a profit center Cost Center VS. Revenue Center Reporting Periods  Some organizations use a calendar month as an accounting period (that is twelve reporting periods in a year)  Other organizations use four weeks blocks that start on Sundays and end on Saturdays (that is thirteen reporting periods a year) I-Operating Budget  Operating budgets are those budgets that: 1. Project the income of the organization 2. Allocate the funds for the accomplishment of work  They can be prepared for: 1. Entire organization (Ex: Operating Budget of Rizk Hospital) 2. Separate departments (Ex: Dietetic Unit at Rizk Hospital, Cardiology Unit, etc…) I-Operating Budget  Operating budgets are normally prepared and planned for a whole year  They do not carry over from year to year (ex: if the manager at Rizk Hospital saves money this year they can not carry it and spend it next year)  When preparing an operating budget it is in the best interest of every manager to be as ACCURATE as possible I-Operating Budget- Types Operating budgets are of TWO types: 1. Incremental a. Fixed b. Variable 2. Zero Based a. Fixed b. Variable I-Operating Budget- Types  The typical procedure to prepare an operating budget includes: 1. Project revenues (volume of work to be done, price of the product, anticipated price increase, …) 2. Estimate labor needs and costs 3. Estimate non-labor expenses 4. Combine parts of the budget to project profit or loss I-Operating Budget- Preparation I-Operating Budget- Preparation A B C D E F A: Revenue budget makes up the Revenue part of the Operating Budget ONLY. B, C, D, E, F: All these sections make up the Expenses part of the Operating Budget Revenues A: Revenue Budget  The projection of the income of an organization or a department based on the sale of products (part of operating budget)  Prepared only for revenue centers, not prepared for departments that are solely cost centers  Thing to take into consideration: 1. Prices and sales volume 2. Money from non-sales sources 3. Bad debts Expenses B: Expense Budget  Component of the operating budget that deals with all anticipated costs, which can be further divided into a number of sub-budgets Expenses C: Direct Labor Budget  Labor costs that are related to the actual performance of work.  Example 1. Base pay 2. Overtime 3. Pay in lieu of benefits  These are the projections that get written into the labor budget Expenses D: Direct Material Budget The estimate of cost for raw materials to be used in the production of goods This part of the operating budget is computed for departments that produce a tangible product Expenses E: Overhead Budget General expenses associated with the operation of a facility such as: Rent Taxes Utilities Repairs Maintenance Expenses F: Other Operating Expenses  Part of the operating budget that encompasses all other anticipated costs of operation such as: 1. Telephone bills 2. Copying charges 3. Printing 4. Office supplies 5. Books 6. Travel 7. Journals 8. Postage 9. Fees 10. Licenses Expenses F: Other Operating Expenses  This category basically covers everything else a department plans to spend for operations II-Capital Budget  Other part of the master budget  Investments in things like land, buildings, major pieces of equipment are all considered CAPITAL expenditures  Examples of such items include:  Ovens  Dishwashers  Computer systems  Heavy machinery  Food processing plant  MRI machines  Radiology equipment II-Capital Budget  These items are expected to last for a long time  Several organizations set a dollar value for capital goods  Usually there is an organization-wide system for allocation of funds  Managers write proposals to request funds II-Capital Budget- Preparation  The preparation of the capital budget is a FIVE step process 1. Determine capital goods needed 2. Prioritize items a. Most time/energy spent justifying most-needed items 3. Estimate costs a. Cost is likely to change between time of budget preparation and time of funding b. Probably too early to choose specific product II-Capital Budget- Preparation 4. Write budget request using organization-specific format a. Justification usually most crucial part of document 5. Submit paperwork on time and in correct form II-Capital Budget- Preparation B-Financial Reports 1. Operating Statement/performance report 2. Profit & Loss Statement (P&L) 3. Balance Sheet Operating Statement  Also known as a performance report  Compares fiscal /actual performance to the budget  Information on the operating statement includes:  Budget for the accounting period  Amount budgeted from the beginning of the fiscal year  Should be generated promptly so that results can be used to make adjustments  Example: increased membership revenues for health club = more customers, more staff needed to maintain level of service Operating Statement  Prepared by the accounting department in an organization  These are internal departmental tools used by managers Explanation required if variance is 5% or more Profit & Loss Statement (P&L)  P&L statement generally prepared by accounting department  P&L normally prepared for the entire organization  Generally used as tools for upper management  Document used as a tool to report on organization’s financial performance to:  Employees  Bankers  Stockholders  Investors Profit & Loss Statement (P&L)  The document lists the following:  Controllable as well as uncontrollable revenues  Controllable as well as uncontrollable expenses  Net profits or losses  Generated as a year to date document or on an annual basis  Document produced for an entire organization and not a department on its own Profit & Loss Statement (P&L)  P&L lists all revenues and expenses however these values are NOT compared with the budgeted amounts Balance Sheet  A financial report that summarizes an organization’s: 1. Assets 2. Liabilities 3. Equity  It provides the user with a snapshot of the organization’s financial status at a specific point in time Balance Sheet What is an ASSET ?  An asset is a FUTURE BENEFIT obtained or controlled by an entity as a result of a past transaction What is a LIABILITY ?  A liability is a FUTURE SACRIFICE of benefits arising from present obligations of an entity to transfer assets or provide services as a result of a past transaction or event What is EQUITY ?  Equity is the difference between TOTAL ASSETS and TOTAL LIABILITIES Balance Sheet  Balance sheets are used for:  Obtaining loans  Participating in mergers  Legal matters  Basic format of this tool is listing all of the assets and liabilities of an organization  This report is prepared by the accounting department