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Budgeting and Financial Planning

Budgeting and Financial Planning. Chapter 15. Why budgets?. Planning Controlling Coordination Allocation of resources Evaluation. Master budget. Series of individual budgets and schedules representing the plan for the organization Begins with sales forecast

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Budgeting and Financial Planning

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  1. Budgeting and Financial Planning Chapter 15

  2. Why budgets? • Planning • Controlling • Coordination • Allocation of resources • Evaluation

  3. Master budget • Series of individual budgets and schedules representing the plan for the organization • Begins with sales forecast • Ends with pro forma financial statements

  4. Sales budget • Revenue and “unit” forecast • Based on various pieces of info • Past sales, trends, pricing policy, competitors’ actions, etc.

  5. Operational budgets • For various operational areas • Tailored to the type of organization • Revenue-producing resource needs • Production or acquisition • Selling and administrative • Cash receipts and disbursements • Capital budget

  6. Production budget • Based on sales forecast, desired inventory levels • Sales + end. invty. – beg. Invty.

  7. Materials budget • Based on production needs, desired material inventory levels

  8. Labor budget • Based on production needs

  9. Overhead budget • Based on production needs • Not all costs will be proportional to units produced • Batch-level • Product-level • Facility-level

  10. SG&A budget • May be unit-, batch-, product-, customer- or facility-level • Selling expenses based on units sold • Not units produced

  11. Cash budget • All cash inflows and outflows • Possible timing differences between revenues and expenses and the resulting cash flows • Credit sales • Schedule of cash receipts • Credit purchases • Schedule of cash disbursements

  12. Budgeted cost of goods manufactured • Determines the absorption cost per unit manufactured

  13. Pro forma financial statements • Income statement • Revenue from sales budget • Cost of goods sold from unit cost calculation • SG&A expenses from SG&A budget • Other expenses from cash budget • Interest expense • Income tax expense

  14. Pro forma financial statements • Balance sheet • Some items direct from budgets • Cash • Accounts receivable • Materials inventory • Finished goods inventory • Accounts payable • Some are “rolled forward” from previous year balances

  15. Pro forma financial statements • Statement of retained earnings • Previous year balance • Add pro forma income • Subtract dividends (cash budget) • Cash flow statement • Direct from cash budget

  16. Budget considerations • Different budgets for different uses • Planning • Master budget • Static budget • Controlling • Flexible budget • Includes different levels of activity as benchmarks • Evaluating • Flexible budget • Budget at actual level achieved

  17. Budget considerations • Behavioral and ethical issues • Based on estimates • May be intentionally misstated to make actual results look better than planned • Misallocation of resources • Breakdown of coordination • Participative or imposed? • Who knows best?

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