PREPARATION OF BUDGETS

1. A Budget is a detailed plan of action for a future period - expressed in quantitative and monetary terms Budgets are essentially short-term plans which help to achieve the longer term aims of the business PREPARATION OF BUDGETS

2. BUDGETS • Budgets reflect management policy relating to all aspects of the business eg • new and existing markets • products • stockholdings • increased use of technology • workforce • expected price rises etc

3. BUDGETS • A Budget shows what the results are likely to be if the plan is put into action, and so: • reveals problems that might arise and • enables management to prepare in advance to offset these problems

4. Functions of Budgets • Planning • Co-ordination • Control and performance evaluation • Participation/Motivation

5. Planning • Forward planning forces managers to consider alternative future courses of action, evaluate them properly and decide on the best alternative • It also encourages managers to anticipate problems before they arise giving them time to consider alternative ways of overcoming them when they do arrive.

6. Co-ordination • Department managers may make decisions about the future which are incompatible or even in conflict with other departments eg • Sales may be planning to extend the credit period in order to stimulate sales to a point beyond the bank overdraft arrangements • Budgeting helps to avoid such conflicts by encouraging managers to consider how their plans affect other departments and how the plans of other departments affect them • This also leads to better communication between departments

7. Control and performance evaluation • While budget preparation aids planning, the way budgets are used helps in control and performance evaluation • The system of calculating deviations from budget ie variances, after the event fosters cost-consciousness amongst workers and managers and highlights areas of over and under achievement.

8. Participation/Motivation • By actively involving managers at all stages of the hierarchy, the process of budgeting brings the different levels closer together • The junior members feel that they have a say in the running of the organisation • This leads to increased job satisfaction and consequently productivity.

9. Stages in the Preparation of Budgets • The long-term objectives of the organisation, and management policies for meeting these, should be established • Preparation of the budget is the responsibility of the Cost Accountant or a Budget Committee • A Budget Officer may be appointed, responsible for all the day-to-day work involved in the preparation of the subsidiarybudgets and for the preparation of the Master Budget

10. TYPES OF BUDGETS • Sales Budget • Production Budget • Cash Budget

11. Sales Budget • This allows an analysis of expected sales by quantities and revenues (units and £s) from the entire range of products • Management uses this budget as the basis for other subsidiary budgets ie production, selling cost, capital acquisition, stockholding etc • This budget helps in early decision making relating to sales policies in different sectors of the market

12. Sales Budget • It can also be used to compare actual results with the budget to identify areas for improvement eg checking sales staff performance • The Sales Budget provides targets for motivating staff.

13. Production Budget • The Production Budget is based on the Sales Budget • It shows the production of each product required to meet the Sales Budget and • provides a basis for assessing production needs in terms of labour, machine utilisation and materials.

14. Cash Budget • This should show opening cash/bank balance and all expected cash/bank inflows including 'spot cash sales', receipts from debtors, other receipts, dividends and sales of fixed assets • It should also show expected cash/bank outflows including payments to creditors, purchases of fixed assets and payment of dividends.

15. Cash Budget • This budget is used by management to highlight surpluses or shortfalls of cash/bank and when they are likely to occur • It allows planning for the use of surpluses or the arranging of cover for shortfalls eg overdraft facilities, long term loans or a share issue • As a result of the Cash Budget, other budgets may require to be revised if cash shortages forecast in this budget cannot be resolved

16. CASH BUDGETS • It is no use budgeting for production and for sales if sometime during the budget period the firm runs out of cash funds • Cash is therefore also budgeted for, so that any shortage of cash can be known in advance and action taken to obtain permission for a loan or a bank overdraft to be available (or for long term needs funds may be made available by an issue of shares or debentures) • A Cash Budget will reveal what funds will be needed, how much is needed and when it will be needed

17. Timing of Cash Receipts and Payments • When completing the Cash Budget, therefore, we are interested in when the money is received and when it is paid out, not when the goods are sold or purchased • For example, raw materials might be bought in March, incorporated in the goods being produced in April, and paid for in May • These raw materials will be shown in the Cash Budget under May ie when the goods are paid for.