Financial planning and budgeting
Operating budgets
Major steps in preparing budgets
Key points to note about budgets
Cash flow budgeting
Operating budgets
Usually it is the Treasurer’s responsibility to coordinate the budgeting process in consultation with other management committee or board members. Budgeting is a key role in financial planning and management for most Clubs. It follows on from a review of the Club’s development or strategic plan and may well lead to a review of the Club’s future plans. There is usually a separation between operating and capital budgets.
Operating budgets are usually projected for one year at a time. Capital budgets involve less frequent but mostly substantial items and might be projected over a five-year period and subject to annual review.
Though not elaborated on in this module, in larger Clubs, operating budgets may be further subdivided into a number of cost-centre budgets such as marketing, administration, programs, facility operations, training and development, merchandising and so on.
The budget is a statement of the likely sources of income and anticipated expenses for operations and capital development. The budget shows all sources of income and expenses such as administration expenses, as well as program income and expenses. It is therefore essential that program sub-committees (e.g. coaching, facility development) have input to the budgeting process.
Click here for operating budgets template.
Major steps in preparing budgets
Step 1.
The management committee should decide whether the Club is going to use a conservative approach to budgeting and whether it is going to run a break-even (i.e. operating income to equal operating expenses), surplus or deficit budget. If there is to be a surplus or deficit budget, what amount is the management committee expecting or prepared to tolerate?
Step 2.
Identify and list all possible sources of income and all likely areas of expenditure, separating those items that belong in the operating budget and those items that belong in the capital budget. As a general principle, prudent budgeting ensures that total operating expenses are covered by total operating income for the year.
Step 3.
Obtain or make estimates for all budgeted items. Make a careful estimate about the amounts likely to be spent or received for each item. If the principle of conservatism is to be applied to the budgeting process, income items should be underestimated and expenditure items overestimated. Having end-of-year financial statements and budgets from previous years is particularly helpful in the budgeting process. This is an incremental approach to budgeting and assumes that the organisation does not need to implement major changes. It is important to consult with individuals and groups within the Club who are likely to be affected by budget decisions.
Step 4.
Adjustments for inflation and likely increases in expenses should be made. Figures are usually rounded off because they are estimates.
Step 5.
For some items it will be possible to calculate the amount which is likely to be paid or received. For large items, such as capital expenditure or hiring a staff member for the first time, it may be necessary to obtain quotes or estimates if the budget is to be accurate.
Step 6.
It may take several attempts to draw up a budget that is acceptable to the management committee or board. It is not unusual for a Club to review its operational and capital expenditure plans in light of budget estimates, particularly where deficits are likely to occur.
When a budget is being developed, particularly for the first time, it is important to make notes for the future. Projected and actual income and expenditure might vary markedly in the first few years of budgeting, but fine-tuning over a number of years will bring the projected and actual figures much closer together. Notes will help eliminate any 'fuzz' thinking from past budgets.
Where expenditure is expected to exceed income (deficit), this can be a problem if a Club does not have a pool of uncommitted accumulated funds from previous years. The Club must find ways of reducing expenditure or increasing income. If income can be increased realistically, looking at large expenditure items can provide options for saving money. As discussed earlier, the organisation may have to forgo some of its plans if it has insufficient funds.
A capital budget for a Rugby Club which owns a licensed Clubhouse facility might look something like the budget below. The yearly figures would need to be carried forward into the operating budget of the organisation to ensure that it did not run into problems with a deficit budget. Grant funds and other forms of income might be used to offset some items of capital expenditure.
Key points to note about budgets
- A budget is a key tool in financial planning and all Clubs should adopt an annual budget
- A budget is an expression, in monetary terms, of the means by which a Club plans to achieve its objectives. In other words how it intends to fund its activities for the year, its income and expenditure
- It is an estimate at a given point in time, and based on information known by the preparers at that time
- The various sub-committees of the Club should develop the budget and every effort should be made to ensure that all relevant persons have input
- It should be consistent with the Strategic Plan adopted by the Club
- Best practice in budgeting is for a balanced budget to be prepared and adopted by the committee (i.e. income equals expenditure). A small surplus may be a strategic ongoing plan
- Deficit budgets should rarely be approved and only after considerable discussion and a clear understanding of how the deficit is to be funded (e.g. from reserves)
- It should be adopted by the full committee at a formal meeting no later than the second meeting for the year
- Where your Club has an accounting software package the approved budget should be taken up to enable actual to reflect against budget
- A budget is a tool of management and should be used and reported against on a monthly basis and form part of the monthly financial report. It should be reviewed quarterly
- A budget does not put your Club in a strait jacket; the committee can amend it by resolution
Cash flow budgeting
If a Club is to continue to operate, it must have enough cash to pay its bills when they become due. Many Clubs are vulnerable to cash flow problems because they operate on small cash reserves, and they fail to see the implications of cash flow problems until it's too late.
The timing and size of cash receipts and payments are the two most important factors in cash flow budgeting. After projecting annual operating and capital budgets, the Treasurer and the management committee should try to project on a month-to-month basis its cash position to plan for months where the Club is likely to have a shortage or a surplus of cash on hand. Months where income is projected to be low and expenditure is expected to be high tend to cause cash management problems.
Astute Treasurers are able to anticipate the months in which cash flow problems are likely to occur and plan accordingly. Bringing forward income and putting back large items of expenditure (e.g. capital works) are the two most widely used strategies for dealing with cash flow problems.
Click here for a cash flow template.
Acknowledgements
Reproduced with permission from the Australian Sports Commission.
