Operating financial budget preparation: the difference between a forecast and budget

In this guest post, One Direct Advisory principals Ron Thomsen and Lauren Talbot provide some timely advice to those preparing budgets, especially in the not-for-profit space. With increasing uncertainty in financial markets and continuing headwinds impacting the aged care sector, the paper outlines key elements of budgetary governance and a prudent approach.

The need for a financial budget as a management tool has never been more important. The recognition of an inflationary environment with concomitant cost increases requires close monitoring and control by all businesses.

In our experience with small to medium Corporates and NFPs, there is uncertainty on how to approach the traditional and annual forecast or budgeting process, if it is attempted at all.

This time of year is when Management and Financial Teams should start to prepare their financial projections for the coming financial year.

Firstly, and importantly, is to distinguish between what the Board requires between a forecasting exercise of the coming year and a management budget.

A forecast is largely an estimate of what can be expected for the coming year whereas a budget can be a Board/Management tool to focus on business improvement, cover new business plan implementation, and strategic plan implementation and provide the basis for Management KPIs, and, of course, cost monitoring and control

This paper focuses on budget preparation, which we believe is important to businesses, especially in a challenging and changing environment.

Our main thoughts, an aide-memoire, are summarised below:

  • The key is to get the budget assumptions agreed upon before the start of the number crunching.
  • Good research and input at the assumption stage will result in a more useful budget. Consulting with other departments for their input is essential so they have ownership and accountability.
  • Always look upon a budget as a management tool to align with strategies, objectives and KPIs, rather than an accounting estimation exercise.
  • From a Revenue perspective only include clearly identified income. If Government funds for an NFP are part of revenue only include contracted and not extrapolate recent years which may have included Government stimulus payments.
  • Specific grants are usually for specific expenditure items and should not be included in operating revenue.
  • If a specific new program has had a Business plan approved, then the planned income and concomitant costs should be included.
  • In expenses, review past costs and determine if the expense is still necessary, or may need increasing or decreasing. Be conscious of the inflationary environment prevailing and estimates for CPI increases.
  • Salaries and wages are the main outlay for a business and should be subject to a separate spreadsheet, denoting rates, hours, on-costs, staff entitlements, and the total annual remuneration.
  • Training and marketing expenditures should have separate detailed budgets. Training should include the course, who will attend and the cost. Marketing should include either the general or specific objective to be achieved by the expenditure.
  • The budget should recognise when the actual expenditure is to be incurred e.g. a different number of pay periods in different months.
  • Expenditure which is annual or quarterly payments, the expenditure recognition should be split over the year on an accrual basis rather than cash accounting. The same would apply also to income e.g. Government funding.
  • For organisations that have jobs or departmental accounting, budgets should be formulated in accord with the Board’s actual (monthly?) reporting requirements.
  • Regular reviewing of the budget against actuals will allow for positive remedial actions if necessary.
  • Budgets, once approved by the Board, should not be changed during the year for unexpected differences in the budget assumptions. It is important at financial year-end to recognise how variances to the budget have occurred and if the budget is amended throughout the year, it will be unclear if there has been an operational or budget assumption difference.
  • A Capital expenditure budget should be if needed, submitted with the operating budget at the same time for Board approval.

This is a Now exercise and is worthy of your attention. Once time is invested in completing a template in accord with Board reporting requirements for the budget, the format will be useful for future years and reduce the workload.

Build into your financial budget what you want to achieve for the business in the coming year, which will provide direction to the Management team and provide a valuable measurement tool.


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