Sanne Marie Mahilum ENCh5B

Basic Concepts
A budget is a tool for estimating expected income and expenses. It is normally defined as the
amount of money in a given year that an organization is allocated to spend. However, the budgeting
process runs much deeper than this superficial explanation. If done properly, the process of
budgeting can be one of the most powerful tools utilized to ensure the continued viability of your
department in a time of increasing demand for efficiency by those bodies responsible for allocation
of funds. Having a basic understanding of what a budget is and the process that occurs over a
budget period is important even for managers who are not directly responsible for the budget itself.

A budget can be defined as a planning and control system: a financial action plan that the
organization intends to follow for a specific period of time. Notice that this is an action plan that the
organization intends to follow for a specific period of time. This indicates that a budget is part of a
process that is initially developed, then continuously monitored over time, and is a monetary
declaration of action for that period. Your department’s budget will consist of several different
components:

Goals and
objectives

What you Cash-flow

Justification
hope to report
achieve
Budget
with the
funds
during the
upcoming
Capital needs
Operating budget assessment
budget period

Replacement of
items like vehicles
and building new
stations
Goals and objectives: What you hope to achieve with the funds during the upcoming budget period

Justification: Information that supports any requested increases in funding

Operating budget: What most of us are familiar with?—the daily expenses

Capital needs assessment: Replacement of items like vehicles and building new stations

Cash-flow report: A statement of the timing of cash inflows and outflows.

Reasons for Budgeting

Budgets
compel
planning

Improved
communication What you Cash-flow
and coordination report
hope to
Budget
achieve
with the
funds
during the
Capital
Operating upcoming
needs
budget budget
assessment
period

Replacement of
There are several important reasons for the development of budgets:
items like
Budgets compel planning vehicles and
building new
Budgeting will move your department from a reactive style to a proactive style of
stations
management by allowing the management team to spend more time on preventive measures
rather than spending time solving unanticipated problems.
 Improved communication and coordination

The process of formulating a budget forces management to communicate their individual

plans and coordinate activities. Ultimately, this communication and coordination should also be
filtered down to your employees in order to provide direction to your field staff.

A guide to action

The budget provides clear direction to your key officers, supervisors and employees
concerning expectations of performance during the period.

Budgets provide a basis of performance evaluation

This process is an important part of what is termed as management by exception, where

you are able, as the person responsible for the budget, to direct your attention to only those
activities not proceeding according to plan.

Terminology
There are a few helpful terms listed below that will be used to discuss budgeting.

1. Budget - A financial plan describing the expected revenues and/or disbursements for a
particular time period

2. Cash Budget - A budget planning for expected cash receipts and cash disbursements. This
type of budget tracks cash flow -- where your money comes from, where it goes, and, of
course, how much.

3. Expense Budget - A budget chiefly for planning what you spend your money on. This type of
budget tracks your expenses. It is typically not concerned with things like appreciation or
repayment of liabilities. However, it would account for interest charges. For example, if you
buy $100 worth of groceries with your credit card, you incur an $100 expense for groceries,
and a $100 liability to your credit card company. When you pay the credit card bill for $110,
you are incurring an additional interest expense of $10. An expense budget plans for the
transaction of buying the groceries and paying the interest, but not the transaction of
repaying the credit card company.

4. Capital Budget - A budget that describes a plan for paying for a large future expense, often
through a combination of saving and borrowing money. Note: Capital budgets can
sometimes get quite complex because they can try to answer the question "Can we afford to
 do such-and-such?" by exploring various hypothetical scenarios that can involve hypothetical
accounts.

5. Budget Period - The period of time during which the plan is expected to take place. The most
common budget periods are annual and monthly. Sometimes, you may budget for several
consecutive periods at once, for convenience or for finer-grained planning. For example, an
annual budget may include 12 monthly budget periods.

Creating a Budget

Even before you begin to make a budget, it’s important to have given some thought to your
account hierarchy. For example, if you want to budget a certain amount for your electric bill and a
certain amount for your water bill, you can’t have only an Expenses:Utilities account. Your accounts
must be at least as specific as your budget.

Choose Which Accounts To Budget For

The first step in creating a budget is to decide what it is you want to plan for. This decision
will affect which accounts you include in your budget. For example, if you are only interested in
tracking your expenses, you may create an expense budget by only entering amounts for expense
accounts. On the other hand, if you want to track all of your cash flow, you may create a cash flow
budget by entering amounts for asset, liability, income and expense accounts.

Before you begin to create your budget, you need to make two decisions: What accounts do
I want to budget for? and When do I want my budget to be for? You can always change your mind
later, after you’ve created a budget, but you need to start with something.

Tip !!!
As a rule of thumb, if you mostly care about what you spend your money on, you may want to make
an expense report. If you’re also concerned about having enough money in the right places at the
right times, you may want to use a cash-flow budget.
Choosing a Budget Period
Before creating a budget you must also decide what period of time you want to plan for. The
most common budget periods are monthly and annual. If you want your budget to plan for changes
in financial patterns over time, then you should include multiple budget periods in your budget. For
example, if you want to plan on having higher utility expenses in the winter than in the summer, then
you might break your annual budget into 4 quarters or even 12 months, and budget a higher value for
the winter periods than for the summer periods.

Getting Started
To create your first budget click on Actions → Budget → New Budget. You will immediately
see a new budget with the default settings and no entries. Then click on the Options button. The
most important options are the budget period and the number of periods. For the budget period,
choose the beginning date and the smallest period of time that you want to plan for. Then, for the
number of periods, choose how many periods you want to plan for.

The budget page now shows a list of accounts with a column for each budget period. The
date shown in the title of each column is the beginning of that budget period.

Entering Budget Values

Now, you must enter the budget values - the amounts that you expect the account balances
to change during the budget period. There are two ways to enter budget values. The first way is to
simply click on the cell and enter an amount.

Budget Reporting
You’ve already done the hardest part - creating your budget. But now you want to know how
your actual financial transactions compare to your plan. You need to run the Budget Report.

Two other types of budget reports are commonly used in the small business setting.

Types of Budget Report

Budgeted Income Statement Budgeted Balance Sheet.

 Budgeted Income Statement

The budgeted income statement is similar to the income statement. Both show the
revenues and expenses for a given period as well as the profit, which is the difference revenue -
expenses. The income statement is based on historical data, but the budgeted income statement
is based on the predictions made in the budget.

Budgeted Balance Sheet

The budgeted balance sheet is similar to the balance sheet. Both show the assets,
liabilities, and equity. The difference is that the balance sheet is based on historical data, and the
budgeted balance sheet is based on the predictions made in the budget.

During the Budget Period

The budget is completed and approved—so what now? More important than preparing the
budget is maintaining it over its life cycle. The budget must be monitored on a regular basis. This
entails the concept mentioned above: management by exception. Another term for this is variance
analysis. No budget cycle is perfect—anticipated revenues and expenses will rarely match their
actual counterparts exactly. The various accounts must be monitored for differences deemed
significant and proper action taken to correct any deviations, if possible. An important concept here
is that what is deemed as a significant amount for one budget may not be as important for another.
The amount of tolerance in account deviations can depend on several factors, as set by that budget’s
management team. These factors should be agreed to in advance of any discovered deviations
during the budget cycle.

An example of this process is a department’s fuel accounts. Let’s say that this department
operates on a biennual budget cycle, meaning that the budget is set for two years. During the
second year of this cycle, there are sharp increases noted in the amounts spent on fuel. This
particular account is at 110% of its budgeted amount based on comparative historical figures with
eight months left in the budget cycle. This deviation is obviously a cause for concern and needs
correction. But is it correctible?

In analyzing this deviation, the management team needs to determine if it is related to a

controllable factor or a non-controllable factor. This entails an analysis of the root of the problem—
has this occurred because the crews are responding to a higher than anticipated call volume,
producing more vehicle mileage; is the fleet maintenance program in need of modification to assist
in increases in vehicle operating efficiency; or, as is currently the case, have fuel costs increased due
to external economic factors beyond the control of management?
Planning for the Next Cycle

The above noted example provides the basis for forecast analysis of future expenditures as
part of upcoming budget cycles in the justification documentation. For instance, the mentioned fuel
costs were determined to be due to external economic factors beyond the direct control of the
management team. Thus, if economic reports project continued higher fuel costs, a forecast
indicating this should be included in the next budgetary cycle. Such forecasts should be prepared for
all aspects of operations and should detail specific reasons for requested funding increases. This
information should include both a detailed analysis of historical costs of operations in addition to any
related external economic analysis of related current and future business costs.

Summary
The process of budgeting can be the most important tool available to an EMS department
management team. The person(s) responsible for the oversight of the department should have a
working knowledge of both the budget numbers themselves and, more important, the process of
working through a budgetary cycle. This should include members of the management team who do
not have direct responsibility for preparation and presentation of the budget, as they will often be
the persons who assist the preparer in budgetary maintenance over its life cycle. A working
knowledge of basic financial concepts by all members of the management team is paramount to the
continued viability and success of any proactive EMS department.