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Fantasy Meets Reality

Strategic Planning and Budgeting


Capital vs Expense
Presented by:

Jarmila Pencikova
Manager, Accounting
Osler, Hoskin & Harcourt LLP

Fantasy or Reality?

Budgeting
*
*
*
*
*
*

Analysis
Terminology
Operating Budget
Capital Budget
Budgeting for Projects
Reporting
Osler, Hoskin & Harcourt LLP

IT Spending Analysis
-

by type of expenditure (capital, operating)


by category (salaries, consulting, etc)
per partner
per lawyer
staff member
% to revenue
Osler, Hoskin & Harcourt LLP

Smith, Smith & Smith


Summary of Information Technology spending for period 1996 to 2002
Total

2002

2001

2000

1999

1998

1997

1996

in $'000

Actuals

Budget

Actuals

Actuals

Actuals

Actuals

Actuals

Actuals

Operating Expenditures:
Salaries and Related
Outside Consulting and Related
Telecom
Other Expenses
Software Depreciation, Licences & Maintenance
Hardware Depreciation, Leases & Maintenance
Outside Consulting Related to Capital Projects
TOTAL OPERATING EXPENDITURES

$
$
$
$
$
$
$
$

6,100
680
2,170
1,740
3,900
7,950
1,650
24,190

$
$
$
$
$
$
$
$

1,300
90
350
420
1,100
1,250
250
4,760

$
$
$
$
$
$
$
$

1,200
80
300
400
1,000
1,200
400
4,580

$
$
$
$
$
$
$
$

1,100
120
290
350
1,000
1,300
160
4,320

$ 1,100
$
270
$
350
$
320
$
650
$ 1,350
$
300
$ 4,340

$ 1,000
$
100
$
350
$
270
$
500
$ 1,400
$
380
$ 4,000

$
900
$
100
$
420
$
200
$
350
$ 1,500
$
360
$ 3,830

$
800
$
10
$
460
$
200
$
400
$ 1,200
$
50
$ 3,120

CAPITAL EXPENDITURES
Hardware
Software
TOTAL CAPITAL EXPENDITURES

$ 2,565
$ 1,170
$ 3,735

$
$
$

650
150
800

$
$
$

600
250
850

$
$
$

380
230
610

$
$
$

$
$
$

$
$
$

$
$
$

TOTAL EXPENDITURES

$ 27,925

5,560

5,430

4,930

Statistical Ratios
Expenditures per partner
Expenditures per lawyer
Expenditures per tim ekeeper
Expenditures per staff mem ber
Expenditures to Revenue

$
$
$
$

$
$
$
$

Num ber of partners


Num ber of lawyers
Num ber of timekeepers
Num ber of staff
Revenue

262
150
118
50
5.0%

106.7
186.7
236.7
555.0
$ 93,333

46
27
22
9
4.6%

120
205
255
625
$ 120,000

$
$
$
$

47
27
22
9
4.9%

115
200
250
600
$ 110,000

$
$
$
$

45
26
21
9
4.9%

110
190
240
575
$ 100,000

160
270
430

300
200
500

225
170
395

900
50
950

$ 4,770

$ 4,500

$ 4,225

$ 4,070

$
$
$
$

$
$
$
$

$
$
$
$

$
$
$
$

43
25
20
8
5.0%

110
190
240
575
$ 95,000

43
24
19
8
5.0%

105
185
235
550
$ 90,000

42
23
18
8
5.0%

100
180
230
530
$ 85,000

41
23
18
8
5.1%

100
175
225
500
$ 80,000

Capital vs Expense
Capital Expenditures/Assets
are the tangible or intangible properties that meet
certain criteria.
Tangible properties: land, building, equipment
Intangible properties: software
Osler, Hoskin & Harcourt LLP

Capital 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)
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Capital Expenditures/Assets
Categories
- Hardware
- Software
- Equipment
- Furniture
- Leaseholds Improvements
- etc.
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Prepaid 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 Maintenance
Software Maintenance& Licenses
Insurance
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Budget
Summary of the expected financial
consequences of the organization/units
short-term operating activities.
Focus on 2 types of Budgets:
- Operating
- Capital
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Operating 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.)
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Operating Budget
Find out what the Firms business plan is
(expansion, merger plans, office relocation)

impact on your operating expenses


(computer leases, number of IT people
required to support it, etc.)
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Operating Budget
* For known expenses (amount & timing),
budget the amount in appropriate month.
* For general expenses budget 1/12 of the
annual amount in each month.

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Operating Budget
You can prepare budget based on:
-

events (involves more than 1 account)


individual accounts

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Visit to another office


-

How many days?


How will I travel there?
Whats the purpose of the trip?

Types of expenses: * Accommodation


* Travel (incl. airfare, train,
mileage, parking & taxi)
* Meals
* Long Distance Calls
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Attending a Conference
Conference Attendance
- Registration
- Airfare/Train/Bus
- Meals
- Hotel
- Taxi
- Car Rental
- Other (parking, long distance calls, gas, etc.)
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Attending a Conference
Example: Conference @ end of August
Registration & Airfare
Meals, Hotel & other

May/June
Aug/Sept

Tip: Dont forget to convert foreign currency


amounts into your local currency!
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Maintenance Contracts
Equipment/Software Maintenance & Licenses
Annual Contract where cost < Prepaid Limit
- budget full amount in the appropriate
month
Annual Contract where cost > Prepaid Limit
- budget 1/12 of the annual cost for each
month of the year
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Equipment Maintenance
Example: 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 July
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Capital Budget
You can prepare budget based on:
-

Asset category
Project

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Budgeting by Asset Category


List individual categories and budget within
each category:
* Specific amounts for specific items
* General amount for unknown items
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Capital Project
* One or more capital expenditures with or
without related operating expenses.
* Budget is prepared for each Project.
* Each Project will have its own Capital
Project number.
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Budgeting 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.
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Budgeting for Capital Project


Each Project may have 2 types of expenditures:
* Capital

(Hardware, Software,
Equipment, Furniture)

* Operating

(Consultants fees, Travel,


Training cost, etc.)
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Budgeting for Capital Project


How and where do you enter the budget
numbers?
- in Excel
- in your accounting software
How do you report on your variances?
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Budgeting for Capital Project


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
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Reporting
* Listing of all Projects
* Statement per Project summarized by
expense category

Osler, Hoskin & Harcourt LLP

Smith, Smith & Smith


2002 Capital Projects Summary
For period ending July 31, 2002
Project
Number

Project
Name

100
101
102
103
104
105

HR Information System
Audio/Visual Equipment
Online Training
Document Management System
Microsoft Word XP Upgrade
Litigation Support Software

YTD
Actual

YTD
Budget

YTD
Variance

Unspent
Amount

Annual
Budget

$
$
$
$
$
$

180,000
75,000
1,000
395,000
325,000
118,000

$
$
$
$
$
$

200,000
65,000
20,000
400,000
300,000
120,000

$
-$
$
$
-$
$

20,000
10,000
19,000
5,000
25,000
2,000

$
$
$
$
$
$

70,000
25,000
49,000
5,000
175,000
32,000

$
$
$
$
$
$

250,000
100,000
50,000
400,000
500,000
150,000

Total for All 2002 Capital Projects

1,094,000

1,105,000

11,000

356,000

1,450,000

Summary of Project Expenditures


Capital Expenditures
Operating Expenditures

$
$

1,065,000
29,000

$
$

1,080,000
25,000

$
-$

15,000
4,000

$
$

235,000
121,000

$
$

1,300,000
150,000

Total 2002 Projects Expenditures

1,094,000

1,105,000

11,000

356,000

1,450,000

Smith, Smith & Smith


Summary for 2002 Project # 103 - Document Management System
For period ending July 31, 2002
Expenditure
Category

YTD
Actual

YTD
Budget

YTD
Variance

Unspent
Amount

Annual
Budget

Capital Expenditures
Hardware
Software
Equipment

$
$
$

91,000
205,000
18,000

$
$
$

100,000
200,000
20,000

$
-$
$

9,000
5,000
2,000

$
-$
$

9,000
5,000
2,000

$
$
$

100,000
200,000
20,000

Total Capital Expenditures

314,000

320,000

6,000

6,000

320,000

Operating Expenditures
Consultants
Training Cost
Travel Cost

$
$
$

60,000
15,000
6,000

$
$
$

50,000
20,000
10,000

-$
$
$

10,000
5,000
4,000

-$
$
$

10,000
5,000
4,000

$
$
$

50,000
20,000
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

Suggested Reading or Talking?


Speak to your CFO/Controller

Osler, Hoskin & Harcourt LLP

Contact Information
Jarmila Pencikova
Manager, Accounting
jpencikova@osler.com
416.862.5891
Osler, Hoskin & Harcourt LLP
First Canadian Place, P.O. Box 50
Toronto, Ontario M5X 1B8 Canada

Questions

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