Board and Management Responsibilities on Budgeting

Board and Management Responsibilities on Budgeting : 

Board and Management Responsibilities on Budgeting

Learning Objectives : 

Learning Objectives What is a budget Purpose of budgets Importance of budgets Keys to effective budgets Budget calendar The budget process steps Determining break even The budget example

What is a Budget? : 

What is a Budget? A budget is a road map of where you want to go and how you expect to get there. Budgets are used for: Board Oversight Goal Focus Financial Control

Purpose of Budgets : 

Purpose of Budgets Planning Communication Motivation Control and Evaluation

The Importance of Budgeting : 

The Importance of Budgeting The more clear, accurate, and well-thought-out budgets are in the beginning, the more likely you will be able to: Adjust plans, activities, and spending as needed Spend money cost-effectively Reach the specific goals you have set Strengthen internal control system

Seven Keys to Effective Budgeting : 

Seven Keys to Effective Budgeting Know your organization’s mission, goals Evaluate existing and potential programs Assign responsibilities Keep the process simple and realistic Get your budget approved Keep score Review and revise as needed

Developing the Budgeting Calendar : 

Developing the Budgeting Calendar The Five Steps List major budget development tasks Establish overall time frames and specific deadlines Identify those responsible for each task Seek review and comment from board and staff Revise and distribute the final budgeting calendar

THE ACTIVITY BASED BUDGET PROCESS : 

THE ACTIVITY BASED BUDGET PROCESS Budget Expenses Determine Programs and Activities Budget Revenues Assemble Draft Budget Review and Modify Draft Budget Present Budget Draft for Board Approval Monitor and Amend Budget

Step One: Determine programs and activities : 

Step One: Determine programs and activities As beginning steps in the budget process: The board has the responsibility to review the organization’s mission statement and its specific goals, develop strategies and activities for achieving the mission, and goals. The board should create a statement of strategic program and service priorities to guide resource and allocation decisions during the budget process. The Executive Director and staff should arrange an early strategic planning sessions with the board.

Step One: Determine programs and activities (cont) : 

Step One: Determine programs and activities (cont) Once the mission statement has been reviewed and strategic direction has been developed: The ED working with the board has the responsibility for evaluating current programs, assessing needs for new programs or services, and developing long-range financial forecasts and operating plans. The Program Managers should provide information on current program needs and the costs and effects of reducing or expanding their individual operations.

Step Two: Budget expenses & revenues : 

Step Two: Budget expenses & revenues After determining current program and activity needs, we are now ready to budget for the upcoming fiscal year’s revenues and expenses. The first step in this process is for the board to establish general budget policies, such as: Requirements for a balanced budget. Decisions about salary increases, hiring, layoffs, new programs, capital projects, and major fundraising efforts or capital campaigns.

Step Two: Budget expenses & revenues (cont) : 

Step Two: Budget expenses & revenues (cont) Once general budget policies have been established, the ED working with the CFO should do the following: establish draft budget guidelines by setting expense and income targets for the organization as a whole or for specific departments or programs establish guidelines or formats for the budget document itself Additionally, the ED should prepare options and recommendations to guide budget development and the CFO should create a budget development calendar to ensure deadlines are met

Step Two: Budget expenses & revenues (cont) : 

Step Two: Budget expenses & revenues (cont) After the CFO has developed the budget calendar, he or she has the following responsibilities: communicating budgeting policy and procedures to managers and line staff establishing the format for draft budgets collaborating in setting expense and income targets in line with strategic plan for programs or units developing income and expense forecasts based on reviews of external, economic and competitive trends

Step Two: Budget expenses & revenues (cont) : 

Step Two: Budget expenses & revenues (cont) Once the departmental and program managers receive the budget calendar, budget policies and procedures, and draft budget format from the CFO, they can now develop draft budgets for their areas.

Step Three: Assemble draft budget : 

Step Three: Assemble draft budget Once departmental and program manager’s draft budgets have been developed and submitted to the CFO, the CFO should evaluate draft budgets for accuracy, reasonableness, adherence to guidelines, and anticipated resources. The CFO should then assemble an organization-wide draft budget to present to Executive Director for review.

Step Four: Review and modify draft budget : 

Step Four: Review and modify draft budget Once the organization-wide draft budget has been submitted to the ED: First, the ED should review the draft budget and make resource allocation decisions. Afterwards, the CFO should discuss draft budget with the ED. Then, the CFO should write recommendations for reducing, increasing, or allocating requested resources. Lastly, the CFO should prepare the budget document once the E.D.’s budget decisions are made and may help present it to the board.

The purposes of budgets include which of the following? : 

The purposes of budgets include which of the following? Control Planning Evaluation Motivation All of the above Answer: E. All of the above

True or FalseSpecific strategies should be in place for meeting only long-range goals. : 

True or FalseSpecific strategies should be in place for meeting only long-range goals. Answer: False. Strategies should be in place for meeting long-range and short-range goals.

All of the following are responsibilities of departmental managers EXCEPT: : 

All of the following are responsibilities of departmental managers EXCEPT: Collaborating with the CFO in reviewing draft budget Providing information on current program costs Establishing the format for draft budgets Developing draft budgets for their departments Answer: C. The CFO should establish the format for draft budgets.

True or FalseIn the planning phase of developing a budget, you compare results to your plan and investigate any variances. : 

True or FalseIn the planning phase of developing a budget, you compare results to your plan and investigate any variances. Answer: False. In the planning phase you identify goals, resources, and expected results. In the control and evaluation phase, you compare actual results with expected results and investigate variances.

All of the following are responsibilities of the Board EXCEPT: : 

All of the following are responsibilities of the Board EXCEPT: Developing budgeting policies Communicating budgeting policies to line staff Developing the organization’s mission statement Creating a statement of strategic program Answer: B. The CFO should communicate the budgeting policies and procedures to managers and line staff.

In addition to presenting an organization’s annual plan presented in dollars, a budget may also be used for the following: : 

In addition to presenting an organization’s annual plan presented in dollars, a budget may also be used for the following: To convey a plan to the organization To establish an oversight of the organization’s operations To ensure resources are used as intended A and B All of the above Answer: E. All of the above

In order for an organization to maintain its focus on its mission, its budget should have which quality? : 

In order for an organization to maintain its focus on its mission, its budget should have which quality? Consistency Flexibility Realistic Simplicity Answer: A. Consistency. The budget must be consistent with the organization’s long-term objective to maintain its focus on its mission.

True or FalseThe budget does not help control finances by setting practical limits on the amount that can be spent on specific programs and activities. : 

True or FalseThe budget does not help control finances by setting practical limits on the amount that can be spent on specific programs and activities. Answer: False

True or FalseFinancial control involves ensuring that program and activity costs are consistent with revenue. : 

True or FalseFinancial control involves ensuring that program and activity costs are consistent with revenue. Answer: True

All of the following are responsibilities of the Executive Director in the budgeting process EXCEPT: : 

All of the following are responsibilities of the Executive Director in the budgeting process EXCEPT: Formally reviewing and approving the budget Preparing recommendations to guide budget development Arranging and staffing early strategic planning sessions Making resource allocation decisions Answer: A. The board formally reviews and approves the budget.

Cash is the most desirable asset... : 

Cash is the most desirable asset... because it is readily convertible into any other asset.

Slide 28: 

Illustration 7-5

Slide 29: 

Illustration 7-13

Reporting Cash : 

Reporting Cash Cash is recorded in both the balance sheet and the statement of cash flows. The balance sheet shows the amount of cash available at a given point in time. The statement of cash flows shows the sources and uses of cash during a period of time.

Use of a Bank... : 

Use of a Bank... is good internal control. minimizes the amount of cash that must be kept on hand. provides a double record of all bank transactions one by the business one by the bank helps a company safeguard its cash by using a bank as a depository and clearinghouse for checks received and written.

Company Balance and Bank Balance of Cash Usually Differ Because... : 

Company Balance and Bank Balance of Cash Usually Differ Because... Time lags that prevent one of the parties from recording the transaction in the same period. Days pass between the time a check is written and dated and date it is paid by the bank. A day may pass between the time receipts are recorded by the company and the time they are recorded by the bank. A time lag may occur when the bank mails a debit or credit memo to the company. Errors by either party in recording transactions.

Reconciliation Procedure : 

Reconciliation Procedure reconcile balance per books and balance per bank to their adjusted or correct balances the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash

Terms : 

Terms Deposits in transit - deposits recorded by the depositor that have not been recorded by the bank. Outstanding Checks - checks issued and recorded by the company that have not been paid by the bank. NSF Check - a check that is not paid by the bank because of insufficient funds in the customer’s bank account. Adjusted balance - same as true cash balance, correct cash balance

Slide 35: 

Illustration 7-8

Session Objectives : 

Session Objectives Learn techniques to better understand financial statements Understanding the relationship between the basic financial statements Analyzing the key ratios used in assessing the financial health of an organization

Financial Statements (Nonprofit) : 

Financial Statements (Nonprofit) Statement of Financial Position Statement of Activities Statement of Cash Flows Schedule of Functional Expenses Notes to the Financial Statements These basic financial statements Provide information on the organization as a whole Provide comparative figures for analysis

Statement of Financial Position : 

Statement of Financial Position Previously known as the Balance Sheet Shows financial position of an organization at a particular point in time Presents information about the organization’s resources, debts and net worth Assets = Liabilities + Net Assets

Statement of Financial Position : 

Statement of Financial Position Present in order of liquidity or length of time it takes to convert them to cash Current assets: typical useful life < 1 year Fixed Assets: typical useful life > 1 year Depreciation: non-cash asset that reflects the decline in an asset’s useful life Assets

Statement of Financial Position : 

Statement of Financial Position List in order of nearness to maturity Accounts Payable: amount owed to business creditors on open accounts (e.g.: utilities, supplies, rent, etc.) Notes Payable: more formal, longer term debt owed to banks or other lenders Accrued Expenses: estimates of liabilities not paid as of the statement date Deferred Revenues: liabilities that have not been “used” for the purpose intended at that point in time Liabilities

Statement of Financial Position : 

Statement of Financial Position Difference between assets and liabilities equals net assets or net worth of the organization Net assets increase or decrease based on the operating results from the fiscal year Net Assets

Sample Statement of Financial Position : 

Sample Statement of Financial Position

Statement of Activities : 

Statement of Activities Previously known as the Income statement Presents changes in each class of net assets – unrestricted, temporarily restricted, and permanently restricted Shows types of support and revenue received by the organization Shows amounts incurred for various program activities and supporting services

Statement of Activities : 

Statement of Activities States operational activities from beginning to end of the fiscal year Provides information about cost of services Shows how an organization utilizes its revenues and public support Reflects whether an organization is operating within the constraints of its financial resources

Sample Statement of Activities : 

Sample Statement of Activities

Statement of Cash Flows : 

Statement of Cash Flows Shows funding activities and how cash is spent Grants, fees & contributions Program expenses, supplies, payroll Sale of property, maturity of investments Purchase of property Short or long term loans Payment on debt, mortgage payments Operating Investing Financing

Example Statement of Cash Flows : 

Example Statement of Cash Flows

Schedule of Functional Expenses : 

Schedule of Functional Expenses Expenses are categorized by type (e.g. salaries and employee benefits, rent, supplies, and depreciation) Program Services Organization’s major programs or activities Select functions that are significant to the entire organization Supporting Services Oversight, finance and business management Fundraising

Statement of Functional Expenses : 

Statement of Functional Expenses

Notes to the Financial Statements : 

Notes to the Financial Statements Provide information about the nature of an organization’s work Summarize significant accounting policies Provide explanation of amounts shown on the face of the financial Discuss concentrations of risk, commitments and contingencies, related party transactions, and other significant items

Ratios – What They Indicate : 

Ratios – What They Indicate Ability to pay current liabilities as they mature (higher number is better) Ability to pay current debt with only cash and cash equivalents (higher number is better) Indicates the balance between equity and debt The greater the number the “more leveraged” is the organization Quick Ratio Current Ratio Debt to Equity Ratio

Ratios – What They Indicate : 

Ratios – What They Indicate Balance spent on mission in relation to total expenses (higher number is better) Relationship between overhead expenses to total expenses (varies depending on activities among similar entities lower is better) Ratios less than 1 but closer to 1.0 indicate a fairly healthy financial picture Program Services to Expense G&A to Total Expense Total Expense to Total Revenues & Support

RESPORCE AND REFERENCES : 

RESPORCE AND REFERENCES LifeWay Stewardship Development Association GuideStone Internal Revenue Service Social Security Administration National Association of Church Business Administrators “Budget Building for Nonprofits.” by the American Institute of Certified Public Accountants. “Planning and Budgeting.” by the Legislative Budget Board and Governor’s Office of Budget and Planning. “Basic Nonprofit Accounting.” by Mary Bird Bowman & Company. “The Budget Process” by Cheryl A. Hartfield, CPA and Winford L. Pascall, CPA. “Production/Operations Management” by William J. Stevenson

Thank You : 

Thank You