Budgets and Analysis

Understanding your financial Understanding your financial performanceperformance

Mark DeBlois, Partner

KPMG Lethbridge

(403) 380 – 5702

Thursday, February 26, 2004

The Budget

Planning for SuccessPlanning for Success

How many accountants does it take to change a light bulb?

Two. One to change the bulb and one Two. One to change the bulb and one to check it was done within budget.to check it was done within budget.

The Budget – Your Financial Road Map

A budget is the translation of strategic plans A budget is the translation of strategic plans into measurable quantities that express the into measurable quantities that express the expected resources required and the expected resources required and the anticipated returns over a period of time.anticipated returns over a period of time.

A detailed estimate of future transactions, A detailed estimate of future transactions, designed to provide a plan for and control designed to provide a plan for and control over future operations and activities.over future operations and activities.

Budget Scope

Budgets are normally developed for a Budgets are normally developed for a specific program of activitiesspecific program of activities

Budgets are prepared for:Budgets are prepared for: OperationsOperations Capital expendituresCapital expenditures Cash FlowCash Flow

Budgets - The 4 Basic Functions

PlanningPlanning Coordinating and communicatingCoordinating and communicating Monitoring progressMonitoring progress Evaluating performanceEvaluating performance

Planning

Involves a process to ensure the Involves a process to ensure the organization will have the necessary organization will have the necessary resources to achieve its goals.resources to achieve its goals.

It involves building assumptions to It involves building assumptions to facilitate economic modelingfacilitate economic modeling

Strength of the budget is dependent Strength of the budget is dependent upon thorough planningupon thorough planning

Coordinating & Communicating

Coordination involves pulling the pieces Coordination involves pulling the pieces together to achieve the Master Budget.together to achieve the Master Budget.

Expresses the organization’s overall Expresses the organization’s overall financial objectives and strategic goals.financial objectives and strategic goals.

To achieve success, communication is To achieve success, communication is essential.essential.

Monitoring Progress

Timely and periodic monitoring allows Timely and periodic monitoring allows management to track progress by management to track progress by comparing actual results to expected or comparing actual results to expected or planned results.planned results.

Through the monitoring process we are able Through the monitoring process we are able to identify variance. We can then take to identify variance. We can then take action to ensure we stay the course.action to ensure we stay the course.

Tracking your budget

To track your budget:To track your budget: Assess monthly revenue performance Assess monthly revenue performance

versus budgetversus budget Assess monthly expense performance Assess monthly expense performance

versus budgetversus budget Determine the effect variances will have on Determine the effect variances will have on

your overall bottom lineyour overall bottom line

Evaluating Performance Managers are held accountable for the Managers are held accountable for the

performance of their department and their performance of their department and their contribution to the goals of the organization contribution to the goals of the organization as a whole.as a whole.

Performance is often evaluated against the Performance is often evaluated against the budget or plan.budget or plan.

Tips for Effective Budgeting

Stay goal-orientedStay goal-oriented Be realistic, achievable but with stretchBe realistic, achievable but with stretch Don’t try to do it aloneDon’t try to do it alone A budget is not a substitute for regular A budget is not a substitute for regular

communicationcommunication Don’t use the budget to deny requestsDon’t use the budget to deny requests

Where do we start?

Analyze the organizational strategyAnalyze the organizational strategy Understand the targetsUnderstand the targets Document your assumptionsDocument your assumptions Quantify your assumptionsQuantify your assumptions Take a step backTake a step back

To some degree, preparing a budget involves To some degree, preparing a budget involves crunching numbers – a process being left crunching numbers – a process being left more and more to financial models, more and more to financial models, computers and technology.computers and technology.

Behind the budget are people - like you - who Behind the budget are people - like you - who develop the assumptions, people who know develop the assumptions, people who know the operations and consider the strategic the operations and consider the strategic goals.goals.

Analyzing Financial Performance

Accounting will prove anything. Even the truth!

Analyzing and Interpreting Financial Statements Financial Statements provide a wealth of Financial Statements provide a wealth of

informationinformation Analyzing and interpreting this information Analyzing and interpreting this information

is key to making informed decisions and is key to making informed decisions and developing successful strategiesdeveloping successful strategies

Analysis and Interpretation

What do the numbers tell us?What do the numbers tell us? How can we use the financial statements in How can we use the financial statements in

financial forecasting?financial forecasting? Value of informed decision making.Value of informed decision making.

Tips for Analyzing

Consider the contextConsider the context Compare your department to your peersCompare your department to your peers Watch for trendsWatch for trends

Financial Statement Analysis

Comparison to budgetComparison to budget Comparison to prior yearsComparison to prior years Common-size statementsCommon-size statements Trend analysisTrend analysis Peer group comparisonPeer group comparison

Ratio Analysis

Provides a means of digging deeper into the Provides a means of digging deeper into the information contained in the financial information contained in the financial statements.statements.

A financial Ratio is a means of expressing key A financial Ratio is a means of expressing key components in relation to other componentscomponents in relation to other components

Value added when compared to peersValue added when compared to peers

Ratio Analysis

Profitability RatiosProfitability Ratios Liquidity RatiosLiquidity Ratios Operating RatiosOperating Ratios Leverage RatiosLeverage Ratios

Profitability Ratios

Return on assets (ROA)Return on assets (ROA) Return on equity (ROE)Return on equity (ROE) Return on revenue (ROR)Return on revenue (ROR)

Liquidity Ratios

Current ratioCurrent ratio Current assets / current liabilitiesCurrent assets / current liabilities

Quick ratioQuick ratio (Cash +short-term investments+A/R) / (Cash +short-term investments+A/R) /

Current liabilitiesCurrent liabilities

Operating Ratios

Asset turnoverAsset turnover Days in receivablesDays in receivables Days in payablesDays in payables

Leverage Ratios

Interest coverageInterest coverage Debt to equityDebt to equity

Questions?Questions?

What is the definition of an What is the definition of an accountant?accountant?

Someone who solves a problem Someone who solves a problem you did not know you had in a way you did not know you had in a way you don't understand.you don't understand.