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Continuous budgeting breaks down time-consuming annual budgeting processes into twelve easy-to-manage increments that produce more accurate and effective resource allocation, the author explains how to: separate controllable, ...
Continuous budgeting breaks down time-consuming annual budgeting processes into twelve easy-to-manage increments that produce more accurate and effective resource allocation, the author explains how to: separate controllable, semi-controllable, and fixed expenses; take corrective actions during the year to offset budget shortfalls; define the roles of the CEO, CFO, the staff, and volunteer leaders; establish expense reduction plans before they are needed; and prepare and present such top-notch budget documents that budgets will be approved the first time.
A WELL-RUN ORGANIZATION must have an efficient financial operation in place to
implement an effective budgeting program. An effective financial operation should
integrate the following:
* Accurate financial data
* Understandable financial statements that meet the organization's needs
* Timely financial statements
* Actual versus budget figures for the period presented
* An annual audit by an independent certified public accountant (CPA) firm
Accurate Financial Data
Financial statements are prepared by one of two accounting methods:
* Cash basis of accounting-recognizes revenues when cash is received and expenses
when cash is disbursed.
* Accrual basis of accounting-recognizes revenues when they are earned and
expenses when they are incurred. The actual receipt and disbursement of cash
generally does not result in recognizing revenues and expenses. Accrual accounting
also attempts to match revenues with corresponding expenses in the proper
Unless an organization is very small or is a true cash business, the accrual
method of accounting results in muchmore accurate and meaningful financial statements
than the cash basis does. Accrual-based financial statements are more difficult
to prepare, but the resulting accuracy is crucial to good budgeting.
Understandable Financial Statements
Financial statements should be constructed to provide management with what it
needs to effectively control the organization. The statements should compare actual
versus budget data for both the current month and the year to date. They should be
understandable to nonaccounting management and easy to interpret. In addition,
the statements should be streamlined, relatively brief, and not bogged down with
unnecessary detail that will frustrate the reader.
Timely Financial Statements
Internal financial statements should be prepared and distributed monthly and
within 10 business days after the close of the prior month. When the statements are
prepared other than monthly and it takes longer than 10 days to prepare and distribute
them, management's ability to take well-thought-out action to correct problems
diminishes. Rather, decisions are likely to be based on old data, problems may
worsen, and valuable time that could have been used to correct the problem will
have been lost.
Internal financial statements should include, at a minimum, the two primary
* The Statement of Financial Position (the balance sheet)
* The Statement of Activity (the income statement)
Statement of Financial Position
The Statement of Financial Position shows the overall financial health of an organization
at a point in time by comparing the organization's assets, liabilities, and net
assets. It usually does not reflect actual versus budget goals. The Statement of Financial
Position illustrates an organization's solvency and cash position but does not
reflect profitability. A sample Statement of Financial Position for a typical not-for-profit
organization is shown in Exhibit 1.1.
Statement of Activity
The Statement of Activity shows the profitability of an organization for a specific
period by comparing revenues and expenses. It does not reflect the organization's
solvency. The Statement of Activity illustrates both current-month and year-to-date
figures to help management understand the financial condition of the organization.
It also serves as a budgeting tool. A sample Statement of Activity for a typical not-for-profit
organization is shown in Exhibit 1.2.
An effective budget is based on accurate financial data. Management can ensure
records are accurate by having the records audited by an independent CPA firm. The
audit process requires the CPA firm to advise and make recommendations to management
as to weaknesses and problems with accounting systems. Management may
not be aware of these problems, and the audit will afford an opportunity to correct
deficiencies. In addition, an audit will include an internal control survey and a management
* An internal control survey is designed to expose weaknesses surrounding the
safeguarding of cash and other assets and is an annual requirement of a CPA's
* A management letter is the vehicle CPA firms use to alert management to inefficiencies
that come to light during the audit. The management letter also includes
recommendations for improvement.
Organizations that cannot afford a full audit should at least consider a less costly
review or compilation.
Excerpted from Not-for-Profit Budgeting and Financial Management
by Edward J. McMillan
Copyright © 2003 by Edward J. McMillan.
Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
|List of Exhibits|
|Ch. 1||Basic Accounting and Financial Operations||1|
|Ch. 2||Effective Use of Footnotes and Financial Ratio Calculations for the Statement of Financial Position||7|
|Ch. 3||Controllable and Uncontrollable Expenses||13|
|Ch. 4||Controllable, Semi-Controllable, and Fixed Expenses||17|
|Ch. 5||Noncash Expenses||21|
|Ch. 6||Natural and Functional Statements of Activity||25|
|Ch. 7||Internal Financial Statements||29|
|Ch. 8||Budgeting Philosophy||37|
|Ch. 9||Continuous Budgeting System Overview||39|
|Ch. 10||The Executive and the Budget Process||43|
|Ch. 11||Expense Reduction Plans||47|
|Ch. 12||The Monthly Budget Process||51|
|Ch. 13||The Cash Flow Budget||65|
|Ch. 14||Getting the Budget Approved||69|
|Ch. 15||Suggested Format of Budget Documents for an Approving Body||71|
|Ch. 16||The Role of the Budget Coordinator||87|
|Ch. 17||Accounting and Budgeting for Fringe Benefits||91|
|Ch. 18||The Capital Budget and Depreciation||93|
|Ch. 19||Inventory Purchases and Calculation of Cost of Goods Sold||97|
|Ch. 20||Accounting and Budgeting for Dues||99|
|Ch. 21||Capital Assets: Lease-or-Buy Decisions||105|
|Ch. 22||The Long-Range Plan||107|
|Ch. 23||Financial Ratios||109|
|Ch. 24||Zero-Based Budgeting||113|
|Ch. 25||Putting It All Together||115|