Capital vs Expense Budgeting

Fantasy Meets RealityFantasy Meets Reality

Strategic Planning and Budgeting

Capital vs Expense

Presented by: Jarmila PencikovaManager, AccountingOsler, Hoskin & Harcourt LLP

Fantasy or Reality?Fantasy or Reality?

BudgetingBudgeting

* Analysis* Terminology* Operating Budget* Capital Budget* Budgeting for Projects* Reporting

Osler, Hoskin & Harcourt LLP

IT Spending AnalysisIT Spending Analysis

- by type of expenditure (capital, operating)- by category (salaries, consulting, etc)- per partner- per lawyer- staff member- % to revenue


Total 2002 2001 2000 1999 1998 1997 1996in $'000 Actuals Budget Actuals Actuals Actuals Actuals Actuals Actuals

Operating Expenditures:Salaries and Related 6,100$ 1,300$ 1,200$ 1,100$ 1,100$ 1,000$ 900$ 800$ Outside Consulting and Related 680$ 90$ 80$ 120$ 270$ 100$ 100$ 10$ Telecom 2,170$ 350$ 300$ 290$ 350$ 350$ 420$ 460$ Other Expenses 1,740$ 420$ 400$ 350$ 320$ 270$ 200$ 200$ Software Depreciation, Licences & Maintenance 3,900$ 1,100$ 1,000$ 1,000$ 650$ 500$ 350$ 400$ Hardware Depreciation, Leases & Maintenance 7,950$ 1,250$ 1,200$ 1,300$ 1,350$ 1,400$ 1,500$ 1,200$ Outside Consulting Related to Capital Projects 1,650$ 250$ 400$ 160$ 300$ 380$ 360$ 50$ TOTAL OPERATING EXPENDITURES 24,190$ 4,760$ 4,580$ 4,320$ 4,340$ 4,000$ 3,830$ 3,120$

CAPITAL EXPENDITURESHardware 2,565$ 650$ 600$ 380$ 160$ 300$ 225$ 900$ Software 1,170$ 150$ 250$ 230$ 270$ 200$ 170$ 50$ TOTAL CAPITAL EXPENDITURES 3,735$ 800$ 850$ 610$ 430$ 500$ 395$ 950$

TOTAL EXPENDITURES 27,925$ 5,560$ 5,430$ 4,930$ 4,770$ 4,500$ 4,225$ 4,070$

Statistical RatiosExpenditures per partner 262$ 46$ 47$ 45$ 43$ 43$ 42$ 41$ Expenditures per lawyer 150$ 27$ 27$ 26$ 25$ 24$ 23$ 23$ Expenditures per timekeeper 118$ 22$ 22$ 21$ 20$ 19$ 18$ 18$ Expenditures per staff member 50$ 9$ 9$ 9$ 8$ 8$ 8$ 8$ Expenditures to Revenue 5.0% 4.6% 4.9% 4.9% 5.0% 5.0% 5.0% 5.1%

Number of partners 106.7 120 115 110 110 105 100 100 Number of lawyers 186.7 205 200 190 190 185 180 175 Number of timekeepers 236.7 255 250 240 240 235 230 225 Number of staff 555.0 625 600 575 575 550 530 500 Revenue 93,333$ 120,000$ 110,000$ 100,000$ 95,000$ 90,000$ 85,000$ 80,000$

Smith, Smith & Smith

Summary of Information Technology spending for period 1996 to 2002

Capital vs ExpenseCapital vs Expense

Capital Expenditures/Assets

are the tangible or intangible properties that meet certain criteria.

Tangible properties: land, building, equipmentIntangible properties: software


Capital Expenditures/AssetsCapital Expenditures/Assets

Criteria- held for use in the provision of services, for

admin purposes, etc.- acquired to be used on a continuing basis- not intended for sale in the ordinary course

of operations- have a value and useful life (normally more

than 1 year)Osler, Hoskin & Harcourt LLP

Capital Expenditures/AssetsCapital Expenditures/Assets

Categories- Hardware- Software- Equipment- Furniture- Leaseholds Improvements- etc.


Prepaid ExpensesPrepaid Expenses

Expenses over a certain limit (set by the Firm) that cover period of more than 1 month are usually expensed over the period they cover.

Examples: Equipment MaintenanceSoftware Maintenance& LicensesInsurance


BudgetBudget

Summary of the expected financial consequences of the organization/unit’s short-term operating activities.

Focus on 2 types of Budgets:- Operating- Capital


Operating BudgetOperating Budget

Find out how many people will be hired in the new year throughout the Firm

impact on your operating expenses (computer leases, number of IT people

required to support it, etc.)Osler, Hoskin & Harcourt LLP


Find out what the Firm’s business plan is(expansion, merger plans, office relocation)

impact on your operating expenses (computer leases, number of IT people

required to support it, etc.)Osler, Hoskin & Harcourt LLP


* For known expenses (amount & timing),

budget the amount in appropriate month.

* For general expenses budget 1/12 of the annual amount in each month.



You can prepare budget based on:

- events (involves more than 1 account)- individual accounts


Visit to another officeVisit to another office- How many days?- How will I travel there?- What’s the purpose of the trip?

Types of expenses: * Accommodation * Travel (incl. airfare, train, mileage, parking & taxi) * Meals * Long Distance Calls


Attending a ConferenceAttending a ConferenceConference Attendance

- Registration- Airfare/Train/Bus- Meals- Hotel- Taxi- Car Rental- Other (parking, long distance calls, gas, etc.)


Attending a ConferenceAttending a Conference

Example: Conference @ end of August

Registration & Airfare May/JuneMeals, Hotel & other Aug/Sept

Tip: Don’t forget to convert foreign currency amounts into your local currency!


Maintenance ContractsMaintenance Contracts

Equipment/Software Maintenance & Licenses

Annual Contract where cost < Prepaid Limit- budget full amount in the appropriate

monthAnnual Contract where cost > Prepaid Limit

- budget 1/12 of the annual cost for each month of the year


Equipment MaintenanceEquipment MaintenanceExample: Existing contract @ $60,000/year

for period July 2002 to June 2003. This cost will go up to $90,000/year for period July 2003 to June 2004.

Budget for 2003:$30,000 for Jan to June 2003 ($5,000/month)$45,000 for July to Dec 2003 ($7,500/month)$75,000 total for 2003

Payment in 2003 - $90,000 in JulyOsler, Hoskin & Harcourt LLP

Capital BudgetCapital Budget

You can prepare budget based on:

- Asset category- Project


Budgeting by Asset CategoryBudgeting by Asset Category

List individual categories and budget within each category:

* Specific amounts for specific items* General amount for unknown items


Capital ProjectCapital Project

* One or more capital expenditures with or without related operating expenses.

* Budget is prepared for each Project.

* Each Project will have it’s own Capital Project number.


Budgeting for Capital ProjectsBudgeting for Capital Projects

* Show the cost for the entire life of the Project (if more than 1 year) broken down by each fiscal year.

* Budget by Asset Category within each Capital Project.


Budgeting for Capital ProjectBudgeting for Capital Project

Each Project may have 2 types of expenditures:

* Capital (Hardware, Software, Equipment, Furniture)

* Operating (Consultants fees, Travel, Training cost, etc.)



How and where do you enter the budget numbers?

- in Excel- in your accounting software

How do you report on your variances?



Set up each Project as a “department” in your accounting software and record every expenditure (capital or operating) under this “department”.

Advantages:- easy to record- easy to keep track of- easy to report on


ReportingReporting

* Listing of all Projects

* Statement per Project summarized by expense category


Project Project YTD YTD YTD Unspent AnnualNumber Name Actual Budget Variance Amount Budget

100 HR Information System 180,000$ 200,000$ 20,000$ 70,000$ 250,000$ 101 Audio/Visual Equipment 75,000$ 65,000$ 10,000-$ 25,000$ 100,000$ 102 Online Training 1,000$ 20,000$ 19,000$ 49,000$ 50,000$ 103 Document Management System 395,000$ 400,000$ 5,000$ 5,000$ 400,000$ 104 Microsoft Word XP Upgrade 325,000$ 300,000$ 25,000-$ 175,000$ 500,000$ 105 Litigation Support Software 118,000$ 120,000$ 2,000$ 32,000$ 150,000$

Total for All 2002 Capital Projects 1,094,000$ 1,105,000$ 11,000$ 356,000$ 1,450,000$

Summary of Project ExpendituresCapital Expenditures 1,065,000$ 1,080,000$ 15,000$ 235,000$ 1,300,000$ Operating Expenditures 29,000$ 25,000$ 4,000-$ 121,000$ 150,000$

Total 2002 Projects Expenditures 1,094,000$ 1,105,000$ 11,000$ 356,000$ 1,450,000$

Smith, Smith & Smith2002 Capital Projects Summary

For period ending July 31, 2002

Expenditure YTD YTD YTD Unspent AnnualCategory Actual Budget Variance Amount Budget

Capital ExpendituresHardware 91,000$ 100,000$ 9,000$ 9,000$ 100,000$ Software 205,000$ 200,000$ 5,000-$ 5,000-$ 200,000$ Equipment 18,000$ 20,000$ 2,000$ 2,000$ 20,000$

Total Capital Expenditures 314,000$ 320,000$ 6,000$ 6,000$ 320,000$

Operating ExpendituresConsultants 60,000$ 50,000$ 10,000-$ 10,000-$ 50,000$ Training Cost 15,000$ 20,000$ 5,000$ 5,000$ 20,000$ Travel Cost 6,000$ 10,000$ 4,000$ 4,000$ 10,000$

Total Operating Expenditures 81,000$ 80,000$ 1,000-$ 1,000-$ 80,000$

Total for the Project 395,000$ 400,000$ 5,000$ 5,000$ 400,000$

Smith, Smith & SmithSummary for 2002 Project # 103 - Document Management System

For period ending July 31, 2002

Suggested Reading or Talking?Suggested Reading or Talking?


Speak to your CFO/Controller

Contact InformationContact Information

Jarmila PencikovaManager, Accounting

[email protected]

Osler, Hoskin & Harcourt LLPFirst Canadian Place, P.O. Box 50

Toronto, Ontario M5X 1B8 Canada

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Capital vs Expense Budgeting

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