A budget is a plan to show how much money a person or organization will earn and how much they will need or be able to spend (Cambridge University Press, 2020). In other words is a proposition on how to keep a trade-off between revenue and costs given the objectives a business wants to achieve.
In Umbrella the operating budget, costs and income generated from the day-to-day activities of each department, is prepared using incremental budget technic. With this approach the previous year’s budget is used as baseline with incremental amounts added for the new upcoming one. This system is easy and simple to understand, generates stable budgets where change is gradual and allows coordination between multiple departments’ budgets. It is based on the assumption methods and activities are constant from one period to following. Worth notice this approach does not encouragement the development of new ideas or a costs reduction. On the contrary incentives spending all allocated money so that a similar amount is maintained in the following period.
When it comes to preparing the budget for new or innovative ideas the approach used is different. In this case the budget is created using a bottom-up approach, in other words, starts at the department level and moves up to the top. At department level the cost of individual components is estimated. This activity is carried out in all departments involved in the same project. Once the management has all the required information, they can proceed evaluating the return of investment by doing a cost-benefit analysis and decide whether to approve or reject the initiative.
The incremental technique is used also to prepare the cash budget. As said earlier in this report, business’s income is almost completely based on betting revenue. For this reason, a forecast on the active customers KPI is used as a major adjustment factor. From 2005 to 2008, as we can see from the chart below, Umbrella’s active customers had had a strong positive trend so for the following year a cash budget with a favourable variance was prepared. In 2009 the European gambling market reached a point of saturation. The expected growth did not happen and sales did not reach expected targets. Number of active customers decreased, and the cash budget resulted inappropriate.