Budget — Example
Category: Strategy Implementation
Presentation of the table
This is, as an example, the budget of the Moscow branch of a Russian bank. We are in March 2000, and the March 2000 figures have just been calculated. The last three columns, on the right, show the year-to-date (January to March) actual figures for last year (1999), this year (2000) and show also the year-to-date figures such as expected in the budget.
The first three columns give the monthly actual figures since the beginning of the year 2000.
The lines detail first the main items of the revenues, before showing the details of the expenses, with a split between direct and indirect costs.
The budget compared with last year results
As determined by the branch, the revenue budgeted for the first three months of the year are of 11,250 (in thousands of RUR), compared to 8,000 the year before, which is a significant increase. The branch intends to push savings accounts, credit cards and unit trusts, with only a slight increase of the loan activities.
With a quite high level of costs, 1999 revenues did just cover the direct expenses. By increasing its revenues and slowly decreasing its direct costs, the branch should show in 2000, according to the budget, a much higher level of earnings before indirect costs (charges for the head-office functions) and taxes.
The purpose of the branch, within the direct costs, is to encourage a salary scheme giving more incentives linked to the activity, and to reduce the fixed staff costs. Communications, travel and entertainment costs should decrease as well, according to the budget. The branch is ready, nevertheless, to spend more in equipment.
As a whole, the branch thinks that it could generate earnings, before indirect costs and taxes, big enough to be profitable ( +1,950) after all expenses, compared to a net loss over the same period of 1999 (-1,150).
Realisation 2000 compared to the budget
In terms of revenues, the first three months of this year show a lower level than expected, with the branch missing its targets on pretty much all the products. It is however too early to judge if the budget will not be reached at all in 2000. The month of March has been better than February, and February was better than January. Therefore, the branch manager can still think that it is not the time yet to take a very strong corrective action.
Such as realised, the first three months figures show that the direct costs have decreased more than expected in the budget, mainly because the variable staff costs are less that forecast (revenues being also lower than forecasted). As a whole, the direct costs seem to be well under control.
Example. Samplebank year 2000 budget — Moscow branch
| 000 RUR | actual figures | year-to-date | |||||
| janv-00 | févr-00 | mars-00 | 2000 | budget | 1999 | ||
| Revenues | |||||||
| Savings accounts | 100 | 100 | 110 | 310 | 750 | 350 | |
| credit cards | 300 | 400 | 500 | 1 200 | 1 500 | 500 | |
| unit trusts | 200 | 350 | 275 | 825 | 1 250 | 150 | |
| Mortgages | 400 | 350 | 350 | 1 100 | 1 000 | 1 250 | |
| loans (retail) | 1 000 | 950 | 1 100 | 3 050 | 3 250 | 2 750 | |
| loans (corp.) | 750 | 900 | 1 200 | 2 850 | 3 500 | 3 000 | |
| Total | 2 750 | 3 050 | 3 535 | 9 335 | 11 250 | 8 000 | |
| Direct costs | |||||||
| staff: fixed | 1 200 | 1 200 | 1 100 | 3 500 | 3 500 | 4 200 | |
| Variable | 200 | 250 | 325 | 775 | 1 000 | 500 | |
| rent, utilities | 405 | 405 | 415 | 1 225 | 1 225 | 1 200 | |
| Equipment | 100 | 150 | 200 | 450 | 500 | 350 | |
| Communications | 110 | 100 | 90 | 300 | 250 | 425 | |
| Travel | 35 | 30 | 32 | 97 | 100 | 125 | |
| Entertainment | 75 | 65 | 70 | 210 | 175 | 325 | |
| Others | 75 | 50 | 55 | 180 | 250 | 450 | |
| Total | 2 200 | 2 250 | 2 287 | 6 737 | 7 000 | 7 575 | |
| Earnings before | 550 | 800 | 1 248 | 2 598 | 4 250 | 425 | |
| H/O and taxes | |||||||
| Indirect costs | |||||||
| (charged by H-O) | |||||||
| Systems | 350 | 300 | 300 | 950 | 900 | 800 | |
| Other services | 150 | 150 | 150 | 450 | 450 | 650 | |
| Total | 500 | 450 | 450 | 1 400 | 1 350 | 1 450 | |
| Taxes | 250 | 250 | 350 | 850 | 950 | 125 | |
| Net earnings | -200 | 100 | 448 | 348 | 1 950 | -1 150 | |
Key ratios
One important for the branch is linked to the direct expenses. Their relative level, compared to the revenues, is to be monitored. In year-to-date 1999, the ratio was 94% (7,575 / 8,000). In the budget, the target was a ratio of 62%, more in line with the average benchmark in the banking area. The realised 2000 figure generated a ratio of 72%.
Within the expenses, the staff costs are usually the most important cost. In 1999, the total staff costs (fixed and variable) accounted for 62% of the direct costs (41% of the revenues). They were forecasted at 64% in the budget, and the realised ratio in 2000 was 63%. The interest of the new strategy of the branch is to increase the share of the variable staff costs, actually linked to activity generated by the staff, and to have less fixed costs. Therefore, there would be an increase in the variable staff costs only if the turnover has been higher.
What to do?
The actual trend shows that the actual figures are in line with the budget on the expense side. The management should follow the impact of its new salary policy, and also ensure that the communication costs will not continue to increase.
On the revenue side, the targets are not yet reached. It is probably the time to meet with the commercial managers to see if a stronger stimulus could be given to the action of the salespeople. It is only in two to three months that a significant corrective action, or a change in the budget, would have to be considered if the year-to-date revenues are still under their budget.