BUDGETING

• Business must be managed effectively and efficiently
• How to achieve objectives?
• Minimize use of resources
• Management?
• Coordinate and control efforts of the firm
• How best to achieve objectives?
• Forecast in advance it’s future actions
• Systematic approach = planning and budgeting

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• Planning = critical to success
• Management by objective vs management by crisis
• Proactive vs reactive

WHAT IS BUDGETING?

• Framework by which management can achieve short term goals
• Sets out targets
• Provides detailed planning for allocation of resources

HOW TO BUDGET?

• Management considers the broad objectives
• Sets out how to achieve
• Known as detailed plans
• These plans = budgets
• Budget = coordinated plan expressed in financial terms for activities and resources of a business, for a specific time period

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• Normally, prepared in advance for a period of time,usually for 1 year or could be monthly or quarterly basis also

BENEFITS OF BUDGETING - 5 Cs

• Coordination
• Communication
• Control
• Compassion
• Concentration

PREPARING BUDGETS

• Sales budget
• Production budget
• Purchases budget
• Labour budget
• Trade receivables budget
• Trade payables budget
• Cash budget
• Master budget

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• Budgets prepared for each function and all budgets coordinated to contribute to the final summary budget known as MASTER BUDGET (BUDGETED STATEMENT OF PROFIT OR LOSS AND BUDGETED SOFP)

CASH BUDGET

• Detailed statement of expected receipts and payments of cash during the following year
• Sometimes, annual cash budget is divided into shorter time period
• Most important budget- close attention
• Vital that there is always sufficient cash to buy materials, pay expenses etc
• Shows expected cash position of business
• Shows whether need for loan etc

LABOUR BUDGET

• Prepared to determine business need for planned labour
• Prepared to show:
• Number of labour hours required
• Number of workers required
• Cost of hiring the workers

TRADE RECEIVABLES BUDGET

• Forecasts the amount that credit customers will owe to a business
• Shows expected credit customers at end of each month
• Closely linked to production budget, sales budget, and cash budget
• Very important :
• Take into account credit period allowed on balances outstanding

TRADE PAYABLES BUDGET

• Forecasts amount that will be owed to trade payables at end of each month
• For manufacturing businesses, it will refer to suppliers of raw materials
• For retail businesses, the budget will refer to suppliers of goods for resale
• Linked to purchases budget and cash budget

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