2008/2009 Draft Budget2008/2009 Draft Budget

Financial Terms Explained

8 May 2008

Peter Cole, Director of Finance

What is a Budget?What is a Budget?

Budgeting is a formalised system of planning, controlling and evaluating the use of resources

A budget is a plan to achieve a given objective or objectives

Budgets are detailed quantified financial plans of action for a specific period in the future, both for individual departments within the organisation and the organisation as a whole

A budget is an expression of an organisation’s strategy in financial terms (if Investing in our People and campaigning are part of the Union’s vision and values, this should be reflected in the budget)

The Union’s sources of fundingThe Union’s sources of funding

The Union has the following sources of funding:

University of Kent grant funding (and from the University of Kent, University of Greenwich and Christchurch for the Universities at Medway Students’ Association - UMSA)

Retail, Licensed Trade and Catering Turnover

Job Shop and Nursery Income

Sundry income such as bank interest received and poster board income

The Union’s expenditureThe Union’s expenditure The Union incurs the following types of expenditure:

Direct costs of purchases of goods for sale and staffing costs to run the Union’s Retail, Licensed Trade and Catering outlets

Overhead costs to run the Union’s Retail, Licensed Trade and Catering Outlets

Rent

Depreciation

Equipment Maintenance

Other operating costs

Job Shop and Nursery Expenditure

Central costs (Human Resources, Finance, Administration) to support the Commercial and Membership Services operations

Membership Services Direct Expenditure

Sports and Societies

Advice

Representation & Campaigns

Volunteering

Student Media

Income StatementIncome Statement

A summary of an organisation’s financial results of its operations for a specified period of time, as is clearly noted in its title, e.g.:-

Income Statement for year ending 31 July 2008

It provides information about revenues generated and expenses incurred

The difference between total revenues and total expenses is identified as the net surplus or deficit

What are reserves and why are they vital?What are reserves and why are they vital?

Reserves are the value of an organisation’s accumulated annual surpluses (excess of income over expenditure) less deficits (excess of expenditure over income) over the years

Reserves are essential to an organisation’s financial health so that:

The organisation has a buffer available in case of one of more years of difficult trading conditions

Funds are available to commit to investment in capital assets to support the strategic growth of the organisation and achievement of its objectives

To be able to demonstrate a position of financial strength to stakeholders and interested parties to encourage their increased investment in the organsiation

What are Assets?What are Assets?

Assets are the economic resources of the organisation

Fixed Assets:-

Land and buildings

Equipment and fittings

Current Assets:-

Stock

Accounts receivable (debtors)

Cash

What are Liabilities?What are Liabilities?

Liabilities are amounts owed by the organisation to external parties

Bank loans

Bank overdraft

Suppliers

Government Creditors

VAT

PAYE (Payroll tax and National Insurance deductions)

Net Current Assets and LiabilitiesNet Current Assets and Liabilities

As we have seen current assets are stock, accounts receivable (debtors) and cash Current liabilities are all amounts owed to suppliers and other creditors within the near future

A financially sound organisation needs to have a surplus of current assets compared to its current liabilities, as it needs to have cash available to meets its liabilities when they fall due

Such an excess of current assets over current liabilities is known as having net current assets

However, if an organisation’s current liabilities exceed its current assets (known as net current liabilities), under normal circumstances this would not be a sustainable financial situation as the organisation would struggle to find the cash to pay its bills as they become due

Capital Expenditure and DepreciationCapital Expenditure and Depreciation

Capital expenditure is expenditure on assets which have a long-term (more than one year) useful economic life. Examples of such item would be

Structural and major refurbishment work to premises

Equipment such as fridges, freezers and chiller cabinets

Electronic tills

Computer hardware and software

The cost of capital expenditure is not charged to the Income Statement at the time of purchase, as these assets will support revenues and activities over a lengthy

period of time, so it would be wrong to charge all the cost of the capital asset against surplus upfront, but rather the cost should be matched against when the benefit of the revenues or activity is received

To achieve this, the cost of the capital asset is spread and charged equally against surplus over its useful economic life (e.g. electronic tills cost £12,000 and are expected to last for 4 years, so £3,000 (£12,000 divided by 4) is charged to the Income Statement as a cost for 4 years, as a depreciation charge

2008/2009 Draft Budget2008/2009 Draft Budget

8 May 2008

Peter Cole, Director of Finance

ContentsContents Financial background

Financial objectives 2008/2009

2008/2009 Budget Income

2008/2009 Budget Expenditure

2008/2009 Budget Surplus

Financial issues facing the Union

Capital Expenditure Budget 2008/2009

Financial BackgroundFinancial BackgroundSurplus / Deficit 1999 to 2008

-350

-300

-250

-200

-150

-100

-50

0

50

100

150

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

£000

The Union’s financial performance between 1999 and 2004 was poor, culminating in a £300k deficit in 2004

Financial BackgroundFinancial Background As a result of this by 31 July 2004, the Union’s reserves had fallen to a very low £65k

The four subsequent years up to and including 2007/2008 have been much more positive, each year producing as budgeted a surplus of between £50k and £70k,

building our projected reserves at 31 July 2008 up to £313k

Reserves 1997 to 2008

0

50

100

150

200

250

300

350

400

450

500

550

600

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

£000

Financial Objectives 2008/09Financial Objectives 2008/09

The Union faces a challenging time to make its budgeted surplus of £70k this financial year (2007/2008), but is confident it will do so

Given the need to build its reserves, the Union must make a significant (i.e. £90k) surplus again during 2008/2009

Reliance cannot be placed on the University increasing the Union’s Block Grant significantly (if at all) above inflation in future years

Financial Objectives 2008/09Financial Objectives 2008/09

Controlling costs and improving gross profit margins has been vital over the past few years to improve financial performance, but in order to continue to grow,

develop and to improve the services we provide, the Union has recognised that it must increase its revenue streams

Accordingly, during 2007/08, Rutherford Bar was opened and fully refurbished, the Oaks Nursery joined with Kent Union, and Woody’s Bar was completely refurbished

During 2008/09, the Union needs to drive contributions from Woody’s and Rutherford in order to maximise the benefit of the refurbishment programmes

It also needs to continue to expand its commercial activities on campus, diversifying and reducing its reliance on Licensed Trade revenues

Additional revenues generated can then be utilised to expand and further enhance our services to our members

2008/2009 Budget Income2008/2009 Budget Income Total Income

2006/2007 £6,436k 2007/2008 £7,310k (+ 13.6%) 2008/2009 £7,827k (+ 7.1%)

Block Grant 2006/2007 £1,081k 2007/2008 £1,258k (+ 16.4%) 2008/2009 £1,411k (+ 12.2%) (subject to negotiation with Universities)

Retail, Licensed Trade and Catering Turnover 2006/2007 £5,240k 2007/2008 £5,520k (+ 5.3%) 2008/2009 £5,803k (+ 5.1%)

Sports and Societies, Job Shop, Nursery and Sundry Income 2006/2007 £115k 2007/2008 £532k (Nursery became part of Kent Union in November 2007) 2008/2009 £613k

2008/2009 Budget Expenditure2008/2009 Budget Expenditure

Retail, Licensed Trade & Catering Direct Costs (Purchase of Goods for Sale and Staff Costs) 2007/2008 £ 4,071k 2008/2009 £ 4,246k

Retail, Licensed Trade & Catering Overheads 2007/2008 £ 1,240k 2008/2009 £ 1,324k

Job Shop and Nursery Expenditure 2007/2008 £ 395k 2008/2009 £ 471k

Central costs to support Commercial and Membership Services operations 2007/2008 £ 869k 2008/2009 £ 944k

Membership Services Direct Expenditure 2007/2008 £ 665k 2008/2009 £ 754k

2008/2009 Budget Surplus2008/2009 Budget Surplus Budget Surplus

2007/2008 £70k

2008/2009 £89k

Financial IssuesFinancial Issues The Union still had net current liabilities at 31st July 2007 of £112k (i.e. its amounts due in the near-term exceeded its current assets of cash, stock and debtors)

The situation is exacerbated by the high capital spend needed in the last 2 years to drive new and existing income streams, as this capital expenditure (fixed assets), has to be paid for from current assets (cash). Capex in 2007/2008 has been £393k against a depreciation charge of £170k which will increase net current liabilities to £265k at 31 July 2008 This is only a sustainable situation for the Union due to credit received from the University of

Kent on items initially funded by them and later recharged, principally payroll

Net Current Assets / Liabilites

-400

-350

-300

-250

-200

-150

-100

-50

0

50

100

150

2003 2004 2005 2006 2007 2008

Year

£000

Financial IssuesFinancial Issues

To build our financial credibility with the University of Kent that Kent Union is able to support itself financially and so that externally published financial statements show a position of strength to external stakeholders, suppliers and other interested parties, the Union has a policy to achieve net current assets by 31st July 2009

Our medium-term financial goal is to improve the Union’s financial stability by reaching £505k in reserves by July 2010

The intermediate steps planned to achieve this are: £310k by July 2008 (i.e. a £70K surplus in 2007/2008) £400k by July 2009 (i.e. a £90K surplus in 2008/2009) £505K by July 2010 (i.e. a £105K surplus in 2009/2010)

Capital Expenditure Budget 2008/2009Capital Expenditure Budget 2008/2009

The Union is budgeting for a capital expenditure spend of £174k in 2008/2009

The budgeted depreciation charge for the year is £188k

Principal items in the capital expenditure budget are:-

Refurbishment of The Lighthouse £ 40k Refurbishment of The Venue toilets £ 5k Freezers and chillers £ 16k Accessibility improvements to premises £ 20k Sports Federation equipment £ 10k

Plus numerous smaller value items across the Union’s outlets and services

2008/2009 Budget Expenditure2008/2009 Budget Expenditure

Membership Services Direct Expenditure

Student Advice £ 247k Representation & Campaigns £ 127k Sports & Societies £ 274k Volunteering £ 68k Student Media £ 38k

TOTAL £ 754k

This represents a 13.4% increase compared to membership services direct expenditure of £665k in the current year