Contemporary Security Management Chapter Six Budget Management

1. Chapter 6 - Budgeting

2. Contemporary Security Management Chapter Six Budget Management Chapter 6 - Budgeting

3. Operating Budgets • An operating budget is a necessity for any business, both for-profit and nonprofit. • Owners and managers use it to help track progress, plan for growth and adjust processes and procedures when things go awry. • Budgets can also be part of an investment package used to attract new dollars into the company. • Creating a realistic, useful budget does take time and work but is definitely worth the effort. Chapter 6 - Budgeting

4. Operating Budgets • An operating budget is a combination of known expenses, expected future costs, and forecasted income over the course of a year. • Operating budgets are completed in advance of the accounting period, which is why they require estimated expenses and revenues Chapter 6 - Budgeting

5. Operating Budgets • An operating budget lists the costs of running your business, including • salaries, equipment, services, interest payments, rent, utilities, loans, advertising, travel and training expenses. • Most businesses create an annual operating budget to predict recurring, regular expenditures, and some businesses go back and record actual expenditures in the operating budget to compare the predictions with actual costs. • An accurate operating budget can help your business manage funds in order to have capital to pay for expenses. Chapter 6 - Budgeting

6. Operating Budgets 83 • A budget helps a chief security officer make informed decisions on the management of people and assets in the security group. • The CSO prepares the budget on the basis of estimates to meet priorities for the next fiscal year. • The estimates reflect inflationary pressure and current year spending Chapter 6 - Budgeting

7. Operating Budgets 83 • Once the CSO makes the budget they then present it to their supervisor, who may modify the estimates and rearrange priorities. • If approved the CSO is free to enter into financial obligations at certain agreed dollar levels. • An independent body within the company will monitor security expenditures. Chapter 6 - Budgeting

8. Operating Budgets 83 • Three purposes of budgeting stand out: • Estimate the costs of planned activities. • Provide a warning mechanism when variances occur in actual costs. • Exercise uniformity in the matter of fiscal control. Chapter 6 - Budgeting

9. Budget Preparation 84 • Preparation usually begins 6 months in advance of the next fiscal year. • Security budget preparation begins with targets and ends with binding commitments. Outlays and spending authority are usually categorized by functions such as: • Labor, office supplies, travel, estimated costs of investigations, physical security inspections, and training. Chapter 6 - Budgeting

10. Budget Preparation 84 • Preparation includes obtaining buy-in from groups dependent on or affected by security group activities. • What is buy-in? • Buy-in is the commitment of interested or affected parties to a plan. Ideally, this commitment is demonstrated through action, rather than passive acceptance. • Buy-in can be difficult to recognize, but it generally takes the form of a concrete pledge to support the project and to help it succeed. In other words, getting people on board. Chapter 6 - Budgeting

11. Budget Preparation 84 • Why is buy-in important? • Staff Buy-in: Staff input is an important factor in ensuring that your activity will be adopted and properly implemented. • Any new activity or intervention will affect staff, so it’s important to consider who might be affected, either directly or indirectly. • Likewise, it’s essential to determine whose support and assistance you need to ensure the success of your program. Chapter 6 - Budgeting

12. Execution 85 • Execution of budget begins at the start of the next fiscal year. • The CSOs responsibility is to ensure effectiveand efficient performance of security group functions while at the same time keeping costs in line with the budget. • Amendments to budget may be necessary once the budget has been submitted. Chapter 6 - Budgeting

13. Authorization 84 • As noted before, authorization begins by obtaining supervisory approval. • Next step is to present the proposed budget to a budget review committee composed of specialists from the company’s finance group. • CSOs budget proposal is a detailed item-by-item detailing projected activities, purposes and benefits, and consequences if activities are not funded adequately. Chapter 6 - Budgeting

14. Audit 85 • The purpose of an internal audit is to: • Identify Improper Use of Funds • A budget evaluation can assist companies in the identification of resource misappropriation. • The identification provides an opportunity to correct the discrepancy and prevent it from occurring in the future. • Auditing inspects and analyzes budget transactions to ensure accuracy. • Auditors provide management with reports that highlight areas for concern regarding the appropriation of company funds and resources so that managers can use the information in the auditing reports to implement a corrective action. Chapter 6 - Budgeting

15. Audit • Obtain Information for Future Budgets • The information gathered in a budget audit and evaluation helps an organization plan future budgets. • For example, the company may discover during the evaluation that funds allocated to a department were excessive. • In future budgets the organization can reduce the amount allocated to that department and increase the amount provided for other projects and areas of the company. Chapter 6 - Budgeting

16. Audit • Collect Data for Budget Reports • An audit and evaluation of a business budget gathers the data necessary to create financial reports. • Management uses the financial reports to evaluate how well the organization executed the decisions and plans in the budget. • The financial data also helps the organization determine areas in the company that require improvement. Chapter 6 - Budgeting

17. Audit • Ensure Compliance • Government agencies and businesses conduct audits and evaluations to assure the public or investors that the organization is operating effectively and within the constraints of the law. • Annual evaluations and audits inspire confidence in the officials managing the agency or organization and add transparency to a company or government agency that also inspires compliance with the rules and laws regarding the allocation of funds. Chapter 6 - Budgeting

18. The Budget Director 86 • Responsible for bringing together all group budgets into a comprehensible whole called the master budget. • A budget is purpose-driven and function-conscious. • The budget director reports to the CFO. Chapter 6 - Budgeting

19. Zero-Based Budgeting 86 • Zero-based budgeting starts with an assumption that zero dollars are available. • Group leaders, including the CSO, make their case for funds by answering three questions: • What is the purpose of the activity? • What will it cost? • What is the added value? • See Figure 6-2 page 87-88 Chapter 6 - Budgeting

20. Traditional-based Budgeting • Traditional budgeting is historically based, while zero-based budgeting is need-based. • Perhaps the most significant difference between traditional and zero-based budgeting is the way you must gather and defend budget item data. • In traditional budgeting, you take information from the budget for the previous year or budget term. This information serves as your baseline, and items within the budget are assumed to represent the minimum cost of operations. • You justify only incremental changes or the increases in item costs. • In zero-based budgeting, you start from scratch every time and don't rely on any historical budget data. Your baseline thus is zero and you must justify everything, not just the incremental changes. Chapter 6 - Budgeting

21. Traditional-based Budgeting • Time Commitment • Traditional budgeting relies on information from the previous budget period. Thus, some of the budgeting work already is done when you start the budgeting process. • This, along with the fact you only have to justify incremental changes, means that you do not spend as much time completing the budget work. • Zero-based budgeting takes more time because these luxuries are not possible. • Some companies feel that the time commitment required of zero-based budgets make them impractical to do every budget period. Chapter 6 - Budgeting

22. Traditional-based Budgeting • Addition and Elimination of Items • Traditional budgets depend on previous data -- that is, they assume you will need the same items in the current budget period as you did in the last one. • However, this is not necessarily true. What you need can change depending on the market and your company's objectives. With traditional budgeting, it thus is harder to modify budget components. • With zero-based budgeting, you can add or eliminate items as necessary because zero-based budgets are not historically based. Chapter 6 - Budgeting

23. Traditional-based Budgeting • Complexity • Traditional budgets are relatively simple to read and prepare. Once you've established one, it's easy to continue the budget process in the future. • By comparison, zero-based budgeting is much more complex. The need to justify everything requires gathering more data, all of which must be analyzed by someone with extensive knowledge of each department and their subject areas. • Zero-based budgeting sometimes is so complex that it requires additional training in order to be executed properly. Chapter 6 - Budgeting

24. Traditional-based Budgeting • Trends • Traditional budgeting puts incremental changes at the forefront of the budget construction and approval process. • Because there is consistency in the baseline, looking at the incremental changes gives a company a way to track trends. • This is much harder in zero-based budgeting because you cannot guarantee that the same items will be in the budget from year to year. Chapter 6 - Budgeting

25. Cost/Benefit Ratio 89 • A major purchase not reflected in a budget is called an “exception to the budget.” • A preparatory step in considering a large expenditure is to determine the cost/benefit ratio, a figure computed by dividing costs by benefits. Chapter 6 - Budgeting

26. Cost/Benefit Ratio 89 • A major purchase not reflected in a budget is called an “exception to the budget.” • A preparatory step in considering a large expenditure is to determine the cost/benefit ratio, a figure computed by dividing costs by benefits. • When the ration is less than 1.0, it is favorable and unfavorable when it is higher than 1.0. • See page 89 Chapter 6 - Budgeting

27. Controlling Cost 90 • Cost control is inevitable. • Budget folder: • Invoices, statements, price quotes, purchase orders, sales receipts, notes and memos concerning expenditures, etc. • Accounting sends to CSO monthly reports: • Reflects spending for the previous month and year-to-date. • Compares those figures against the budet’s planned expenditures. • Highlights variances Chapter 6 - Budgeting

28. Steps • Step 1 • Pull together any previous budgets or reports of actual sales and expenses. • The more detailed the information, the better, especially if you are responsible for multiple departments, locations or sales groups. • Step 2 • Gather up fixed expenses that will need to be paid no matter how many sales you make. • Make a list that shows expenses such as rent, some salaries, liability insurance, fees and other known expenses that will occur on a regular basis. Chapter 6 - Budgeting

29. Steps • Step 3 • Estimate expenses that might vary depending upon external factors. • These include the cost of raw materials, which will increase as sales increase or the cost of advertisement, that can be increased or decreased as business needs permit. • Step 4 • Anticipate the unexpected. • Add in possible line items for unexpected items, as these will happen. Such expenses include legal fees, consultants or accountants for short-term projects, or repairs. Chapter 6 - Budgeting

30. Steps • Step 5 • Review the sales reports from past history. • Knowing what previous sales actuals were can help you determine what target to set for this year. Take into account changes such as adding a new sales location or reducing sales headcount before estimating this year. • Step 6 • Create a financial projection for sales in the upcoming year. • Use up-to-date market research to determine what kind of sales can be projected with a new product, a new line or new organization. Find free market research reports at buyusainfo.net or purchase them from companies such as Forrester and Hoovers. Chapter 6 - Budgeting

31. Steps • Step 7 • Put it all together. • The simplest budgets can be put together on spreadsheets, and of course you can use financial software packages geared to the needs of a small business. • List expenses and sales and compare the two. • It is always best if sales totals are larger than expense totals. Chapter 6 - Budgeting