Budgets and Budgetary control

Budgets and Budgetary Control

.a. An itemized summary of estimated or intended expenditures for a given period along with proposals for financing them: submitted the annual budget to Congress. b. A systematic plan for the expenditure of a usually fixed resource, such as money or time, during a given period: A new car will not be part of our budget this year. c. The total sum of money allocated for a particular purpose or period of time: a project with an annual budget of five million dollars. d. To plan in advance the expenditure of: needed help budgeting our income; budgeted my time wisely. e. To enter or account for in a budget: forgot to budget the car payments. To make or use a budget. e. Of or relating to a budget: budget items approved by Congress. f. Appropriate for a restricted budget; inexpensive: a budget car; budget meals.

Budget : Definition
CIMA has defined budget as A financial and /or quantitative statement , prepared and approved prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective .It may include income,expenditure and the employement of capital. An Analysis of the above definition reveals the following features of a Budget. 1. 2. 3. 4. Budget is a financial and /or quantitative statement, Prepared and approved prior to a defined period of time, Of the policy to be pursued during that period , For the purpose of attaining a given objectives.

Budget is thus a target fixed in terms of rupees or quantities or both .This target must be fixed in advance . The budget must clearly state the policies to be pursued for achieving the targets.

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Purpose
Budget helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging managers to consider problems before they arise. It also helps co-ordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments. Other essentials of budget include:

To control resources To communicate plans to various responsibility center managers. To motivate managers to strive to achieve budget goals. To evaluate the performance of managers To provide visibility into the company's performance For accountability

In summary, the purpose of budgeting is tools: 1. tools provide a forecast of revenues and expenditures, that is, construct a model of how a business might perform financially if certain strategies, events and plans are carried out. 2. Tools enable the actual financial operation of the business to be measured against the forecast. 3. Lastly,tools establish the cost constraint for a project, program, or operation.

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Types of Budget
INTRODUCTION
Depending upon the purpose that a budget is expected to serve and the requirements of the organisation , budgets are classified into several types on the basis of coverage , capacity and conditions. The followings chart sums up the different types of Budgets.

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1. Coverage budget
Functional budget The cost and income plan created for a particular process or department operating within a business. For example, a functional budget for the manufacture of a product line might include estimated costs of production, marketing, sales, labor, equipment and materials, as well as projected sales income. Master budget A master budget refers to a summary of company's plans that set targets for production, expenses, sales, financing activities and distribution. It helps a company in setting the spending limits and tracking the expenses.

2. Capacity budget
Fixed budget A fixed budget is a financial plan that does not change through the budget period, irrespective of any changes from the plan in actual activity levels experienced
A fixed budget is one that is drafted on the basis of specific criteria without any provision for any changes at any point during the period of time covered by the budget. The budget lets those involved know how much they have to spend during a given time frame, regardless of any eventualities such as a slump in sales or increased profits.

Flexible budget A flexible budget is a budget where there is room for change. In these budgets, money from one line can be moved to another if one expense ends up being more than expected.

3. Conditions
Basic CIMA had defined basic budget as A budget which is established of use unaltered over a long period of time. Thus it is an idea budget under the most favourable business conditions . such budget may be useful to the top management for long term strategic planning , but it is not useful as a tool of cost control in the short run. Current budget CIMA has defined current budget as A budget which is established for use over a short period of time and is related to current conditions . this is based on current business conditions and hence its targets are practical .such budget can act as a powerful incentive for the executives to make efforts to achieve the targets.

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Basic concepts relating to budgetAccording to ICAI

Budget: It is statement of an estimated performance to be achieved in given time, expressed in currency value or quantity or both Budget centre: A section of an Organization for which separate budget can be prepared and control exercised. Budgetary control:Guiding and regulation activities with a view to attaining predetermined objectives ,effectively and efficiently. Budget manual :the budget manual is a schedule , document or booklet which shows in written forms the budgeting organisation and procedures. Budget period :the period of time for which a budget is prepared and it may be a year, quarter or a month. Components of budgetary control system : Physical budget Those budgets which contain information in terms of physical units about sales, production etc.for example quantity of sales, quantity of production ,inventory , and manpower budgets are physical budgets. Cost budgets Budgets which provide cost information in respect of manufacturing , selling,administration etc .for example manufacturing costs , selling costs, administration cost , and research and development cost budgets are cost budgets. Profit budget A budget which enables in the ascertainment of profits for examples sales budget , profit and loss budget etc. Financial budgets A budget which facilitates in ascertaining the financial position of a concern for examples cash budget , capital expenditure budget ,budgeted balance sheet etc.

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Objectives of budgeting are Planning, Directing and Controlling.

Functional budgets budgets which relate to the individual functions in an organisation are known as functional budgets . for example , purchase budget, sales budget, budget, plant utilisation budget and cash budget. Master budget it a consolidated summary of the various functional budgets .it serves as the basis upon which budgeted P&L A/c and forecasted balance sheet are built up.

Long term budgets the which are prepared for periods longer than a year are called long term budgets .such budgets are helpful in business forecasting and forward planning .capital expenditure budget and research and development budget are examples of long term budgets. Short term budgets Budgets which are prepared for period less than a year are known as short term budgets . Cash budget is an example of short term budget .such types of budgets are prepared in cases where a specific action has to be immediately taken to be bring any variation under control, as in cash budgets.

Basic budget A budget which remains unaltered over a long period of time is called basic budget. Current budgets A budget which is established for use over a short period of time and is related to the current conditions is called current budget.

Fixed budget-According to chartered Institute of management Accounts of England , a fixed budget is a budget designed to remain unchanged irrespective of the level of activity actuall attained Flexible budget- According to chartered Institute of management Accounts of England , a flexible budget is defined as a budget which by recognizing the difference between fixed , semi variable and variable costs is designed to change in relation to the level of activity of activity attained.

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The Importance of Budgeting

Helps individual to save to purchase for items needed, thus reducing the use of credit Enable an individual to live within his income One way to overcome financial tense in family due to financial matters Helps to keep records for items that are taxable for the purpose of income tax Enable the individual to control and record expenses Enable specific financial goals to be achieved Helps individual to be prepared for financial emergencies Assist the individual in directing the income to important expenses

Objectives of Budgeting
To implement a proper & disciplined spending individuals must follow the amount allocated To reduce amount of money wasted through unnecessary spending by Reducing interest for credit Buying items that involved large sum of money at different period of time (eg. Different months) Discussing with family members the items that should be bought at certain time 1. 2. There are 3 steps in budgeting 1. Planning the spending plan Estimating available income Defining major expense categories & setting budget levels 2. Implementing the spending plan 3. Evaluating the spending plan Steps in Budgeting Planning the spending plan i. Estimating available income Income are identified, make a list or table of income that might be received the following year Income may be based to the past income with a little adjustment Income include: Salary (later minus the income-tax) Dividend from investment Bonus from investment or salary.
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Budgets and Budgetary control

Borrowed money Money from working children Rental from tenant Debt repayment by others to you

At the beginning of the course, we have emphasized the need for managers to be forward-looking. For you, therefore, reviewing the past information alone is not enough since your job involves not only predicting but also shaping the future of your enterprises. This requires proper planning about all activities of the business. Finance being the life blood of a business, financial planning is of utmost significance to a businessman. A budget is an important tool for financial planning and control.

However, before we come to the intricacies of budgeting, it will be useful for you to understand the meaning and implications of financial planning.

FINANCIAL PLANNING

Financial planning is concerned with raising of funds and their effective utilisation with a view to maximise the wealth of the company. It includes the determination of:

the amount of funds needed for implementing various business plans the pattern of financing i.e. the form and proportion of various corporate securities , such as shares, debentures, bonds, bank loans to be issued or raised the timing of floatation of various corporate securities

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In spite of a good financial plan, the desired results may not be achieved if there is no effective control to ensure its implementation. The budget represents a set of yardsticks or guidelines for use in controlling internal operations of an organisation. The management, through budget, can evaluate the performance of every level of the organisation. The discrepancy between plan performance and actual performance is highlighted through budgets. The organisation may have to change the course of its operations in a particular area or revise its plans keeping in view the changing conditions.

It will, therefore, be useful for you to understand the complete budgeting process. In this unit, we shall explain what budget is and what budgetary control means. Besides the importance of budgeting as a management tool, the techniques of preparing various types of budgets will also be discussed.

WHAT IS A BUDGET?

A budget is a plan expressed in quantitative, usually monetary terms, covering a specific period of time, usually one year. In other words, a budget is a systematic plan for the utilisation of manpower and material resources. In a business organisation a budget represents an estimate of future costs and revenues. Budgets may be divided into two basic classes : Capital Budgets and Operating Budgets. Capital budgets are directed towards proposed expenditure for new projects and often require special financing (this topic is discussed in the next unit). The operating budgets are directed towards achieving short term operational goals of the organisation, for instance, production or profit goals in a business firm. Operating budgets may be sub-divided into various departmental or functional budgets. The
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main characteristics of a budget are:

a) It is prepared in advance and is derived from the long term strategy of the organisation b) It relates to future period for which objectives or goals have already been laid down c) It is expressed in quantitative from, physical or monetary units, or both.

Different types of budgets are prepared for different purposes e.g. Sales Budget. Production Budget, Administrative Expense Budgets, Raw-material Budget, etc. All these sectional budgets are afterwards integrated into a master budget which represents an overall plan of the organisation. A budget helps its in the following ways:

It brings about efficiency and improvement in the working of the organisation. It is a way of communicating the plans to various units of the organisation. By establishing the divisional, departmental, sectional budgets, exact responsibilities are assigned. It thus minimizes the possibilities of buck-passing if the budget figures are not met. It is a way of motivating managers to achieve the goals set for the units. It serves as a benchmark for controlling on-going operations. It helps in developing a team spirit where participation in budgeting is encouraged. It helps in reducing wastage's and losses by revealing them in time for corrective action. It serves as a basis for evaluating the performance of managers.
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It serves as a means of educating the managers.

BUDGETARY CONTROL

No system of planning can be successful without having an effective and efficient system of control. Budgeting is closely connected with control. The exercise of control in the organisation with the help of budgets is known as budgetary control. The process of budgetary control includes

(i) preparation of various budgets

continuous comparison of actual performance with budgetary performance and revision of budgets in the light of changed circumstances.

A system of budgetary control should not become rigid. There should be enough scope for flexibility to provide for individual initiative and drive. Budgetary control is an important device for making the organisation more efficient on all fronts. It is an important tool for controlling costs and achieving the overall objectives.

Installing A Budgetary Control System

Having understood the meaning and significance of budgetary control in an organisation, it will be useful for you to know how a budgetary control system can be installed in the organisation. This requires first of all, finding answers to the
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following questions in the context of an organisation:

What is likely to happen? What can be made to happen? What are the objectives to be achieved? What are the constraints and to what extent their effects can be minimised?

Having found answers to the above questions, the following steps may be taken for installing an effective system of budgetary control in an organisation.

Organisation for Budgeting

The setting up of a definite plan of organisation is the first step towards installing budgetary control system in an organisation. A, Budget Manual should be prepared giving details of the powers, duties, responsibilities and areas of operation of each executive in the organisation.

Responsibility for Budgeting

The responsibility for preparation and implementation of the budgets may be fixed as under:

Budget Controller

Although the Chief Executive is finally responsible for the budget programme, it is
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better if a large part of the supervisory responsibility is delegated to an official designated as Budget Controller or Budget Director. Such a person should have knowledge of the technical details of the business and should report directly to the President of the Chief Executive of the organisation.

Budget Committee

The Budget Controller is assisted in his work by the Budget Committee. The Committee may consist of Heads of various departments, viz., Production, Sales Finance, Personnel, Purchase, etc. with the Budget Controller as its Chairman. It is generally the responsibility of the Budget Committee to submit, discuss and finally approve the budget figures. Each head of the department should have his own Subcommittee with executives working under him as its members.

Fixation of the Budget Period

`Budget period' means the period for which a budget is prepared and employed. the budget period depends upon the nature of the business and the control techniques. For example, a seasonal industry will budget for each season, while an industry requiring long periods to complete work will budget for four, five or even larger number of years. However, it is necessary for control purposes to prepare budgets both for long as well as short periods.

Budget Procedures

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Having established the budget organisation and fixed the budget period, the actual work or budgetary control can be taken upon the following pattern: Sales Budget generally forms the fundamental basis on which all other budgets are built. The budget is based on projected sales to be achieved in a budget period . The Sales Manager is directly responsible for the preparation and execution of this budget. He usually takes into consideration the following organisational and environmental factors while preparing the sales budget:

Sales Budget Some organisations follow the practice of preparing a rolling or progressive budget. In such organisations, a budget for a year in advance will always be there immediately after a month, or a quarter, passes, as the case may be, a new budget is prepared for twelve months. The figures for the month/quarter, which has rolled down, are dropped and the figures for the next month/quarter are added.

Rolling Budget A rolling budget calls for considerably more management attention than is the case when a company produces a one-year static budget, since some budgeting activities must now be repeated every month. In addition, if a company uses participative budgeting to create its budgets on a rolling basis, then the total employee time used over the course of a year is substantial. Consequently, it is best to adopt a leaner approach to a rolling budget, with fewer people involved in the process.
Advantages and Disadvantages of the Rolling Budget

This approach has the advantage of having someone constantly attend to the budget model and revise budget assumptions for the last incremental period of the budget. The downside of this approach is that it may not yield a budget that is more achievable than the traditional static budget, since the budget periods prior to the incremental month just added are not revised.
Example of a Rolling Budget

ABC Company has adopted a 12-month planning horizon, and its initial budget is from January to December. After a month passes, the January period is complete, so it now added a budget for the
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following January, so that it still has a 12-month planning horizon that now extends from February of the current year to January of the next year.
Similar Terms

A rolling budget is also described as continuous budgeting.

Production budget may be expressed in physical or financial terms or both in relation to production. The production budgets attempt to answer questions like: (i) What is . to be produced? (ii) When it is to be produced? (iii) How it is to be produced? (iv) Where it is to be produced? The production budget envisages the production programme for achieving the sales target. It serves as a basis for preparation of related cost budgets, e.g., materials cost budget, labour cost budget, etc. It also facilitates the preparation of a cash budget. The production budget is prepared after taking into consideration several factors like: (I) Inventory policies, (ii) Sales requirements, (iii) Production stability, (iv) Plant capacity, (v) Availability of materials and labour, (iv) Time taken in production process, etc.

This budget provides an estimate of the total volume of production distributed product-wise with the scheduling of operations by days, weeks and months, and a forecast of the inventory of finished products. Generally, the production budget is based on the sales budget. The responsibility for the overall production budget lies with Works Manager and that of departmental production budgets with departmental works managers.

The direct materials' budget has two components, (i) materials requirement, bud-get, and (ii) materials procurement or purchase budget. The former deals with the total
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quantity of materials required during the budget period, while the later deals with the materials to be acquired from the Market during the budget period. Materials to be acquired are estimated after taking into account the losing rind the opening inventories and the materials for which orders have already been placed.

Basically, there are three elements of cods, namely direct material direct labour and overheads. Separate budgets for each of these elements have to be prepared. Selling and Distribution Overheads Budget: This budget includes all expenses relating to selling advertising delivery of goods to customers, etc. It is better if such costs are analysed according to products, types of customers, territories and the sales departments. The responsibility for the preparation of this budget rests with the executives of the sales department. There must be a relationship of selling expenses with the volume of sales expected and an effort should be made to control the costs of distribution. The preparation of the budget would depend on analysis of the market situation by the management, advertising policies, research programmes, and the fixed and variable elements.

Administrative Overheads Budget: This budget covers the administrative expenses including the salaries of administrative and managerial staff. A careful analysis of the needs of all administrative departments of the enterprise is necessary. The minimum requirements for the efficient operation of each department can be estimated on the basis of costs for the previous years, and after a study of the plans and responsibilities of each administrative department for the budget period. The budget for the entire administrative function is obtained by integrating the separate budgets of all administrative departments. Budget Format
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The Master Budget may have the following format: or sales) actually attained does not conform to the one assumed for budgeting purposes. The management will not be in a position to assess the performance of different heads on the basis of budgets prepared by them, because they can serve as yardsticks only when the actual level of activity corresponds to the budgeted level of activity. On account of the limitations of fixed budgeting and its inability to provide for automatic adjustments when the volume changes. Firms whose sales and production, cannot be accurately estimated have given up the practice of fixed budgeting

Budgeting Events help us personally connect with the community. There are several significant elements to consider when planning an event, as mentioned in the Company Meeting on Event Production last week. One crucial element to planning a successful event is planning to take care of the financials hence the need for a budget. Events Budgeting - Site Track site rental costs. As you plan the event itself and as you meet with your venue sales manager, track all projected rental fees for the event and function space, housekeeping, baggage handling, and related expenses. Estimate catering costs. This includes all food and beverage charges, including tips and gratuities -which can account for up to 30%. Add decor expenses. Most events include expenses for decor, such as centerpieces, flowers, tent rentals, etc. This is where you list those costs. Events Budget Program Document entertainment & equipment fees. Common expenses in this category include the A/V equipment, but it's also a good spot to list honorariums to speakers or if you are hiring entertainers. Document transportation charges. This includes shuttles, coaches, event transfers, and any related expenses. Identify activities expenses. If your event includes activities such as golfing, tennis, spa, rafting, biking, or other activities, you will want to note the cost of these fees separately. I suggest summarizing the total cost in your spreadsheet and attaching a breakdown.
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Events Budgeting Publicity

Summarize printing charges. Several small item charges actually combine to make a larger expense line item. These include invitations, name badges, program booklets, event signage and banners. Set and summarize budget for online marketing. This includes advertisements on Facebook, Google, and local newspapers, blogs and magazines. Events Budgeting Miscellaneous Line item for gifts. One of my event rules is to never allow a guest to leave empty handed. So, whatever gift or gifts you provide, track the cost for them separately; you'd be amazed at how much these items can cost. Post other expenses. If an expense doesn't fall into any of the above categories, I tend to list them as a miscellaneous expense item here. Give yourself a contingency fund category. Depending on the size or complexity of an event, you may want to give yourself as much as up to 20% of the event budget here. Despite the best planning, charges are going to exceed projected plans with expenses that you never consider. This will keep you from going over budget every time. Events Budgeting Process Summarize projected expenses. As you build your event program, you will have a good projection of the total expenses. This is the information that I will share with my event client to make sure they are aware of the event budget so that there aren't any surprises later on. Summarize actual expenses. This happens after the event has concluded. I will subtotal the invoices into the above 10 categories and document the actual budget. If extremely favorable, I will identify savings in actual budget vs. the projected budget, demonstrating the value-add of my role.

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Advantages And Disadvantages Of Budget Control

Like other control methods, budgets have the potential to help organizations and their members reach their goals. Budget controloffers several advantages to managers. Some of these are: The major strength of budgeting is that it coordinates activities across departments. Budgets translate strategic plans into action. They specify the resources, revenues, and activities required to carry out the strategic plan for the coming year. Budgets provide an excellent record of organizational activities. Budgets improve communication with employees. Budgets improve resources allocation, because all requests are clarified and justified. Budgets provide a tool for corrective action through reallocations.

However, budgets control can also create problems. The disadvantages of budgets are: The major problem occurs when budgets are applied mechanically and rigidly. Budgets can demotivate employees because of lack of participation. If the budgets are arbitrarily imposed top down, employees will not understand the reason for budgeted expenditures, and will not be committed to them. Budgets can cause perceptions of unfairness. Budgets can create competition for resources and politics. A rigid budget structure reduces initiative and innovation at lower levels, making it impossible to obtain money for new ideas. These dysfunctional aspects of budgets systems may interfere with the attainment of theorganization's goals. One generally accepted guideline for effective budgeting is to establish goals that are difficult but attainable. Therefore, skilled managers who understand budgets and how to use them have a powerful control tool with which to attain departmental and organizational goals.

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Project Budgeting
Cost Plans and Budgets

Depending on the policies of your company, you may be involved with developing the cost plan and maintaining the events budget. Often the client has been given a quote before the show, which typically includes expenses such as pre-planning, travel, sub- rentals, and other variable costs. Its the responsibility of the AV technician to monitor the budget during the event. There are a variety of budgets, all created to track and categorize every dollar. As an AV technician, you will have the greatest impact on two types of budgets: Event budgets or event cost plans Company budgets It is easy to get these two types of budgets confused. Due to their close relationship, they share several standard accounting characteristics. Examples of a rental companys finances (Figure A) and the budget breakdown of an event (Figure B) are on the next page. These are great examples of the blocks of financial data that are organized and analyzed by the accounting department to forecast the financial standing of the company. Notice that both tables track similar data such as income, revenue, and expenses; except an events budget is focused on financial details of a single event rather than the impact of many events. When it comes to individual shows, the cost structure changes in comparison to the companys overall picture. An event that uses minimal outside resources will appear to be more profitable. Look in the example below at the events finances and compare it to the company finances. This is an example of an event where the events expenses (Figure B) exactly match the percentages for the whole rental company (Figure A). An example of a companys finances:

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Rental Company Income Statement Revenue (less Expenses) = Gross Profit Revenue Breakdown Equipment Rental Labor Supplies/Materials = Total Revenue Expenses Breakdown Business Overhead Labor - internal Labor - external Cost of Supplies Cost of Sale Items Sub-Rentals = Total Expenses 60% 30% 10% 100% 40% 15% 15% 5% 5% 10% 90% 100% 90% 10%

(Figure A) An example of an events finances:

An Events Budget Budget Breakdown Revenue (less Expenses) = Gross Profit Revenue Breakdown Equipment 7,500 $10,000 9,000 $1,000

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(less 20% discount) Estimated Labor Materials Sold = Total Revenue Expenses Breakdown Average Share of Business Overhead Cost of Staff used on event Cost of outside labor Cost of supplies sold Cost of supplies used Cost of sub-rentals = Total Expenses (1,500) 3,000 1,000 10,000

4,000 1,500 1,500 500 500 1,000 9,000

(Figure B) Notice the similarities between the data that is tracked for the company and event. Income Many businesses divide their accounting into two groups: cost centers and profit centers. Profit centers are sources of revenue. Cost centers are the departments that are not responsible for generating revenue, such as the accounting department. Any events an AV tech works on are typically categorized as profit centers. The event is intended to make a profit. If the event is successful, it will increase the amount of dollars in that profit center- if it is not successful, it will decrease the amount of dollars in that profit center, showing a loss of income for that event. When an event shows profit, it brings the company income. Whether the even makes a profit or not, it is still considered a profit center. A companys revenue is sometimes called income, and can be acquired from different sources. A rental or staging companys income sources may include: 1. Equipment Rental 2. 3. Labor Materials

To make a profit, the company needs to charge the client more for the service or materials than it is costing them to acquire, and maintain it. The pricing structure must be set so that it brings in income: Total Costs + Profit = Price. However, the price must be competitive when compared to what other companies are charging for the same service or product. This often results in more of a profit on some items and less on others, making some items more profitable than others. In the rental industry, on average, the majority of income will not come from the mark-up on labor or materials; but from the rental of equipment.

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Budgets and Budgetary control Expenses

Expenses come in many different forms. They are categorized by how often they occur and if they are expected to reoccur. Categorizing these expenses can be difficult, but so can calculating them. There are straight forward calculations such as costs of salaries and purchasing equipment. Other expenses, which are more difficult to assess are: deprecation of equipment, mileage on vehicles, and the cost of replacing lost or stolen equipment. The companys ability to track and prepare their finances for these expenses is essential to the companys degree of success.
Two Types of Expenses

Operating overhead is a large expense for a company in the live events industry. Operating overhead, also known as fixed expense, is not directly altered by the amount of business at any given time. The allocation of operating overhead will affect the entire company. An example of this is the amount a company will pay in salaries. Calculating total operating overhead will help the company set prices that will allow them to make a profit. Examples of operating overhead: Equipment depreciation Insurance, utilities Rent Salaries (for cost center labor) , accounting, marketing, and management Variable expenses can fluctuate in proportion to the sales revenue (income). Theoretically, they are controllable based on the level of sales. The classic example of a variable expense is a sales commission, which varies based on the amount of sales revenue. All the other variable expenses will change based on units sold. Accurately calculating these expenses will help the accounting department analyze the performance compared to prior years and adjust the prices accordingly. Examples of variable expenses are: Sub-rental equipment you must pay to use Materials items sold to the client Supplies items that are used in the course of doing business, but are not paid for by the client Direct Labor (profit center staff) positions
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directly associated with revenue.

To calculate profit, the accounting department may follow a simple formula: unit margin (the price you pay for a unit and your costs for purchasing and maintaining it) unit sales volume = total margin fixed expenses = operating profit. Changes in sales volume and prices per unit will affect the entire profit structure.
Understanding Variable Expenses

Sometimes it is difficult to appreciate the impact variable expenses have on a companys profit margin. Variable expenses are the most easily adjusted, and therefore, the most easily controlled. Once you understand the large impact these expenses can have on your companys profits, you can appreciate the role you can play in managing your companys variable expenses. Costs of Sub-Rentals One of the largest variable expenses for rental companies is sub- rental. This is the equipment rented from other companies to supplement or replace existing inventory. Minimizing unnecessary sub-rentals is one of the most important things a rental company can do to control expenses. For example, if a company can reduce sub-rentals by $20,000 per year by purchasing a $50,000 item that will last for three years, then it can realize a 20% return on its investment over three years ($20,000 x 3= $60,000. $60,000 $50,000= $10,000 or, 20% of the $50,000 purchase). What are some ways that you can reduce the amount of sub- rentals your company uses? Costs of Lost or Stolen Equipment A lost piece of gear has three costs associated with it: 1. Purchase cost The purchase price of equipment depreciates overtime, which translates into a monthly cost. For example, a $1,000 item depreciated over three years costs the company $27.78 a month regardless of the number of uses. 2. Sub-rental cost The cost of renting a replacement for lost or stolen equipment. If the $1,000 item rents to
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a client for $100 a week and the replacement sub-rental costs $90 a week, that leaves only $10 to pay for the $27.78 depreciation instead of the $100 normally received from a non sub-rental.

3. Replacement cost If the company buys a new $1,000 item, the total depreciation increases to $55.56. This increase accounts for the deprecation of the stolen equipment. 4. Hidden cost Employee time spent tracking lost inventory, reporting stolen gear to authorities, purchasing new gear, arranging for sub-rentals, and transporting sub-rentals. What are some ways you can reduce the cost of lost or stole gear? Secure all the equipment at all times. Keep doors shut and locked. Record what gear is removed from the warehouse and when it is returned to the warehouse. Keep records of where the equipment is at all times. Avoid keeping equipment in the trucks if you can. If equipment must be stored in the trucks, park the trucks in secure areas or in highly visible areas.

Expense Tracking

Here is an example of a live event budget form that tracks the costs of an event:
LIVE EVENTS FORM Event Title: Event Date: Length: Event Personnel: Onsite Project Manager Lead AV Technician Assistant AV Technician Pre-Production Post-Production Camera Director Camera Operator Audio Engineer
Number Days Rate Indirect Costs Direct Costs Total

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Sound Board Operator Gaffer Heavy Lifting Rigger Personnel Subtotal Equipment: Scaffolding Package Projection Package Camera Package Equipment: (contd) Sound Package Lighting Package Dolly Rental Sub-Rentals Strike of Equipment Equipment Subtotal Supplies: Gaffers Tape Projection Bulbs Batteries VHS SVHS DVI DVD CD-RW Supplies Subtotal Travel: Lodging Air Fare Parking Meals Per Diem Travel Subtotal Office Telephone Computer Photocopying Postage Supplies Office Sub-total Miscellaneous Event Insurance
Number Days Rate Indirect Costs Direct Costs Total Number Days Rate Indirect Costs Direct Costs Total Number Days Rate Indirect Costs Direct Costs Total Number Days Rate Indirect Costs Direct Costs Total Number Days Rate Indirect Costs Direct Costs Total

Number

Days

Rate

Indirect Costs

Direct Costs

Total

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Location Permits and Fees Catering Parking Fee Docking Fee Vehicle Mileage Vehicle Rental Miscellaneous Subtotal

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Key Financial Factors During an Event Making good decisions during crisis situations can be a daunting task. You must use your knowledge of the shows budget, the clients temperament, and your companys resources to come up with viable solutions. One resource that you can use to make informed decisions is the employee time log. This will help you know the status of each employee. Before you make a decision look at the key factors to consider during a crisis: Fixed labor Unreimbursed (you cannot charge your client) overtime Unreimbursed (you cannot charge your client) supplies Unnecessary sub-rentals Fixed labor Fixed labor costs are the labor costs guaranteed to the client not to increase and are typically estimated prior to the event as a package price. If a lead AV technician manages time and resources well, tit is possible to finish the event using less labor hours than estimated. Completing events early can help make a profit for the company. Unfortunately, when a crisis situation occurs, additional labor and material is often required. If the crisis is not caused by the client, the client will not have to pay any extra costs, and your company will have to absorb the cost, causing a loss of revenue. Unreimbursed overtime Depending on the contract and situation, un-reimbursed overtime can take several forms. Unreimbursed overtime occurs when you cannot charge the client for overtime. This is often caused by mistakes in time management or in allocation of resources. A example of this would when the equipment being delivered arrives late due to traffic problems, which can causes the labor crew to get paid for just waiting to work. The next example of unreimbursed overtime is hidden overtime. This type of overtime occurs when the crew is working two consecutive events. If circumstances dictate that the first event has the crew work a longer than planned, it causes them to roll into overtime during the second event. Unreimbursed supplies These are supplies that are consumed during the course of one or many events. Examples of unreimbursed supplies include projector lamps, gaffers tape, and 28 | P a g e M.L.Dahanukar College of commerce

Budgets and Budgetary control batteries. Sub-Rental This is equipment that the company does not own and must pay to use. If managed properly, sub-rentals can help the company when its own inventory is temporarily short, or the equipment needed for a job is out of the normal scope of services the company usually provides. Unnecessary sub-rentals, however, can be a result of mistakes, such as poor logistical planning, lack of proper maintenance leading to equipment failure, and improperly diagnosed equipment problems. Extra labor, sub-rentals, and supplies can quietly destroy an events profit and, over time, a companys business. Manage your resources wisely and use prudent control over expenditures when ever possible. Be resourceful and explore all of your options before incurring expenses. Take the time to realign your revenue and expenses on a regular basis by looking at your financial paperwork. Keeping Accurate Time Logs Keeping accurate logs is vital to the success of the event, especially when faced with a crisis. Crisis situations may cause you to

abandon all thought and react on instinct. STOP! Hasty decisions can increase the probability of lost profit margins. You need to keep a cool head and use resources such as time logs to make intelligent decisions. To stay within budget, you need to inspect your time logs. Figure out ways to maximize efficiency. When you can, utilize an employee who: is not being paid overtime has taken their break is completing their assigned task ahead of schedule is capable of solving the problem Below is an example of a timesheet that tracks the task that the employee is working on and the time spent on that task. The hours this person worked on the event can be recorded on a master sheet so that you know the current status of each employee. This will allow you to make informed decisions and save money. It is a best practice to standardize your companys timesheets. Each sheet should include the employees name, the event ID (if working on multiple events), the the employee began and ended working, , the total hours worked per day, and hours worked per event.
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It is difficult to motivate employees to keep an accurate account of the hours. One way to help remove common obstacles is by creating a standard time log. This log should be clear, concise, and easy to complete, use, and reference.
Time Sheet Name: Date: Event: Total Hours Per Task Regular Time

Assigned Task

Start Time

Stop Time

Total Hours Per Task Overtime

Total:

Allocating Resources During an Event

There are many decisions to make during an event. When you are new to managing events, it is often difficult to know what decisions to make. Unfortunately, there is no list of right and wrong answers, when it comes to these decisions. You must learn about the common mistakes made during the event and do your best to avoid making similar mistakes. Each company has a different process for approving changes to the budget or schedule. These processes can often require an AV technician to contact several people before making a change. It is a best practice for a company to provide its technicians with contact information for everyone who must approve a change, and the procedure involved with making that change.
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Analyze a possible situation where you may need to allocate resources during an event and analyze some possible solutions. You are a lead AV technician for an event. During the course of this event, a video projector fails. Your company doesnt have any spare projectors, so a sub-rental has to be secured. Once you secure a sub-rental, you must decide how to proceed with transportation and installation. As a project manager or lead AV technician, you have the ability to minimize certain costs with good decision-making. Lead technician A decides to use outside labor to locate, transport, and install the sub-rental projector. Due to the meticulous time logs, the lead technician knows that the outside labor is still on straight time while the inside labor would be on overtime.
RENTAL EVENT Budget Breakdown Revenue (less Expenses) = Gross Profit $10,000 9,000 $1,000

Revenue Breakdown Equipment (less 20% discount) Estimated Labor Materials Sold = Total Revenue 7,500 (1,500) 3,000 1,000 10,000

Expenses Breakdown - Average Share of Business Overhead Cost of Staff used on event Cost of outside labor Cost of supplies sold Cost of supplies used Cost of sub-rentals = Total Expenses

4,000 1,500 1,500 500 500 1,000 9,000

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RENTAL EVENT Budget Breakdown Revenue (less Expenses) = Gross Profit Revenue Breakdown Equipment (less 20% discount) Estimated Labor Materials Sold = Total Revenue Expenses Breakdown - Average Share of Business Overhead Cost of Staff used on event Cost of outside labor Cost of supplies sold Cost of supplies used Cost of sub-rentals = Total Expenses 7,500 (1,500) 3,000 1,000 10,000 $10,000 9,350 $450

4,000 1,750 1,000 950 250 1,000 9,350

Making informed decisions about labor can mean the difference between a profitable event and a costly event. Having up-to-date logs will help you make informed decisions faster. The sooner a problem is resolved the less chance your client will notice the problem, the greater chance you have of fixing it in time, and the more time your crew will have to complete their tasks on schedule without incurring overtime.
Facility Contracts and Insurance

Every event will need insurance and contracts to operate legally. The types of contracts and insurance required will vary depending on regional codes and laws. The event site or your company will know what type of contracts and insurance are required for you to legally operate. As an AV technician, you must know where the legal documentations are so that you can produce it if asked. If the legal documentation is not available at the show site, you must know who to contact to confirm the documentation. AV technicians usually dont sign contracts with clients. Normally, an AV technician needs to know that the contracts exist and who is responsible for enforcing their terms.
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Smaller AV organizations require an AV technician to read and interpret contracts with venues, insurance agencies, or sub-rental agencies. If your company requires you to work with contracts, they should provide guidelines for you to follow.
Here are some examples of contract features that should cause concern when you see them: The terms of the contract infringe on rights or create dangerous situations. The terms of the contract can be interpreted in multiple ways. The terms of the contract violate anyones rights which are guaranteed them under the law. The penalties outlined in the contract seem unreasonable. In these cases, bring the issue to the attention of your supervisor. In many cases, the contract will need to be rewritten, or the changes will be written into the original contract and initialed by both parties. Liability The most prevalent legal issue in the live events industry is safety. Insurance companies exist to make sure their client is the last one found liable in the event of an accident. Insurance companies hire people to make sure large corporations and hotels are never found liable. As an AV company, vendor, or sub-contractor, you need to be protected by liability insurance. As an AV technician, you must follow proper procedures and be aware of your actions at all times to prevent an accident. To prevent accidents, monitor the area before, during, and after the event and look for: Improperly secured cables Improperly taped cables Dangerous overhead rigging and hanging equipment Damage to the facility Unsafe operation of equipment Damaged hardware Damaged cables Here is an example of what can happen: A company was doing a show in an atrium lobby. Lights were mounted on pipe and base hung out over the edge of the balcony, held in place only by sandbags. After the show had ended, a stage hand removed all the sandbags from the bases, the lights and pipe fell down four stories and killed a woman. It was a horrible tragedy that was caused by an employee who had not been properly trained. This company was extremely negligent, suffered lawsuits, and almost went out of business as result. You have to be very 33 | P a g e M.L.Dahanukar College of commerce

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aware of what you are doing and understand what could happen. The reason AV professionals tape cables around doorways is because they know what could happen. There are a lot of what could happens and there is no end to the number of things to consider. In the event of an accident, always take care of the people first. Make sure they get proper medical attention, then ask for the persons information, documentation, and then notify your supervisor so that the proper forms can be filled out. When working in the clients venue (hotel, convention center, or building), there may be other authorities that need to be notified. In a hotel or convention center, its often the security office, or they may even have a safety officer who needs to be notified. Make sure you go through the proper channels and be accommodating. Your company may be liable, so dont do anything thats going to make it worse by being uncooperative. Take care of people first. Accidents dont happen very often but when they do it can be very devastating to a company and the people involved. Do everything you can to prevent accidents from happening.

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EVENT BUDGET
EVENT: College Event

ORGANISER: Students

TELEPHONE NUMBER:916000000

PREDICTED ATTENDANCE: 500

TICKET UNIT PRICE:400

VENUE: College campus

EVENT DATE:28/2/2013

INCOME Projected ticket sales total Sponsorship Collected transport fares Food sales Beverages sales Other (specify) TOTAL INCOME 200000 100000 50000 150000 75000 50000 625000

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BUDGETARY CONTROL EXPENDITURE Venue Security Licensing Insurance Tickets Advertising DJ Band PA / sound system Lighting Other entertainment Beverages stock Food Contingency (Min. 50) Other (specify) Other (specify) TOTAL EXPENDITURE --------5000 20000 50000 15000 20000 35000 25000 10000 15000 25000 5000 60000 BUDGET APPROVED 20000 5000 10000 320000 DATE PASSED VP Student Activities

SURPLUS

305000

Notes:

1. All costs should be shown inclusive of VAT you must always check with a supplier whether a quoted price includes VAT. They often won't say unless you ask. 2. Non-budgeted expenditure is the personal responsibility of the organiser and will not be paid. 3. The organiser named at the top of this budget will be the authorised signatory for expenditure relating to this event unless there is another budget holder (e.g. Rag Officer or the Ents Officer 36 | P a g e

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EXPENDITURE
FIXED COST
Venue Security Licensing Insurance Tickets Advertising DJ Band PA / sound system Lighting Other entertainment --------5000 20000 50000 15000 20000 35000 25000 10000 15000 25000 BUDGET APPROVED

VARIABLE COST
Beverages EXPENSES Food Other (specify) Other (specify) TOTAL EXPENDITURE 5000 60000 5000 10000 300000 VP Student Activities DATE PASSED

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BIBLOGRAPHY

Books Referred
MANAGEMENT ACCOUNTING
STANDARD COSTING, VARIANCE ANALYSIS AND DECISION - MAKING By Bhattacharyya Debarshi

By Alexander Berger

Website Visited
www.caclubindia.com www.futureaccountant.com www.accountingtools.com www.globusz.com www.accountingcoach.com

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