Angel Jake N.

Lobaton 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 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

There are several important reasons for the development of budgets:

 Budgets compel planning

Budgeting will move your department from a reactive style to a proactive

style of 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.
  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.