Budget settingNursery Management Understanding and Managing Finance

How are Budgets created?The budget-setting process is quite complex, and often very time-consuming.It involves a number of stages, some of which ask the business to question precisely what it is doing, and where it is going almost at a philosophical' levelOther stages involve detailed calculations of amounts of money and negotiations about who gets what. A complex budget may take six months to one year to produce.

Budget SettingThis is often an annual process linked to a review of long-term plans Planning and ControlIt is an iterative process. Tentative plans are created, which are thrown open to discussion. These discussions then lead to modifications and further discussion, and so on until the budget is set.Should be participative all interested parties involved, with the process transparent.A combination of top-down(i.e. agenda-setting) and bottom-up (i.e. recognition of needs) approaches is required.

1.Identify business objectives2. Identify available options5a.Collect information on performance4. Prepare detailed plans or budgets3. Evaluate and select optionsThe Planning and Control Process5b. Identify and respond to variances5c. Revise Plans if necessary

1. Identifying Business ObjectivesBusiness Aims and Objectives are normally encapsulated in a Mission Statement. Such statements often aspire to ideals:Liverpool Hope University College aspires to: educate students in mind, body and spiritRailtrack plc had a vision of : a safe, reliable, efficient and modern railwayOn the other hand, some companies take an altogether more pragmatic view.Cadbury Schweppes plc has a mission statement committed to: ..growth in shareholder valueWhat about your organisation, does it have a Mission Statement?

1. Identifying Business ObjectivesObjectives are normally more specific than the aims.These vary, but will include consideration of such things as:The kind of child care the business seeks to provideThe market share it aspires toThe level of operating efficiencyThe kind of services it offersThe level of growth to be attainedThe level of profit requiredThese objectives should be quantifiable and be consistent with the Mission statement.

2. Identifying Available OptionsTo achieve the business objectives, a number of strategies may be available. In order to uncover these, information will need to be collected, This process may be time-consumingThe information will includean analysis of the external competitive environment, and an analysis of the internal resources and capabilities of the business

2. Identifying Available OptionsExternal considerations might include:Market size, growthLevel of competitionThreat of newcomersRelative powers of trades unions, interest groups etc.Internal Considerations might include:Culture within the organisationMarketing, distribution issuesCurriculum developmentFinance and administrationResearch and DevelopmentHuman Resource Management

3. Evaluating and Selecting OptionsDuring the evaluation phase, Managers must examine the available information on each option to determine which one most closely fits with the objectives that have previously been set.NB Research suggests that too much information may produce information overload, where managers become confused and distracted by irrelevant data.Sometimes this is called paralysis by analysis.

3. Evaluating and Selecting OptionsDuring the selection phase, the options chosen will form the basis of the long-term planThese options will specify things such as:Products or service to be offeredSources of finance and the amountsCapital investmentsPersonnel requirements

4. Setting the BudgetA budget is basically a short-term plan (normally one year) which is expressed mainly in financial terms.Budgets will normally define precise targets for such things as:Cash Receipts and PaymentsSales targets for each item or departmentStock requirementsLabour requirementsPredicted levels of children being cared for

5a. Collecting Information on PerformanceThe main aim of budget setting and the entire planning process in general is control, the process of making planned events actually occur.Accounting is very useful in this context. Plans are set in accounting terms, and outcomes can then be matched against targets.Where differences occur, these are highlighted as variances.

5b. Responding to Information on PerformanceManagers will be alerted to variances between the budgeted amounts and the actual figures. Action will be needed in order to get the business on track towards achieving targets set within their budgets.For example if sales targets have not been achieved, the manager may need to review the sales strategy, to discuss alternative forms of marketing or to make concerted efforts to find new customers.

5c. Revising Plans and BudgetsIf variances continue and are not rectified, or figures are produced on the basis of incorrect assumptions, or circumstances alter, then a revised budget may need to be published.This new budget will set different targets, and reallocate the remaining funds in order to respond to the new circumstances.

1. Identify key objectives2. Identify available options5.Collect information and control4. Prepare detailed plans or budgets3. Evaluate and select optionsThe Planning and Control Process a summaryMission, Aims, ObjectivesMarket, Products, ServicesSales, Costs, Profits, ReturnsLimiting factors: External and internal Environment - market size, productioncapability, competitionMarkets, products, financing, physical resources, human resourcesShort-term plans: Sales, Cash, Stock,Labour, Production Master budgetIdentify variances and respondas appropriate

Activity

In essence, all that we are doing in a budget is setting targets and allocating money. Why do you think is it necessary to go through such a complex process each year?

Why could we not, for example, use last years targets with a little it added on for inflation?

Activity a - SolutionWe do this because the business conditions will almost certainly have altered since the last time we created a budget. Some factors might include:Economic Climate good/badPrices changes (raw materials/finished stock)CompetitorsNew products available Changes to customer needsChanges to production methods

Activity b - SolutionSome budgets are set via this method; this is called incremental budgeting, and most budgeting would in essence be done by taking last years budgets as a starting point. However, because of all the reasons on the previous slide, we cannot take this as the final answer. We need to respond to new conditions, set new targets, and that means reducing some budgets and increasing others.