1 Block 3 Session 4 Budgeting: – Definition: “A quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows” – Budgets reflect plans for the future and expectations for the present; budget control reports comprise budget information about expected events compared with information reflecting actual events. – Budgets are meant to help people in managerial roles to manage by looking forward and by diagnosing how well or badly things are going. They also used to help higher-placed persons in managerial roles to control subordinates. – A budget provides a focus for the organization, aids the co-ordination of activities, and facilitates control. – Budgeting helps organizations to plan ahead in order to identify and reach objectives and targets, specified in financial and similar terms, then after approval, budgetary control process entails regular monitoring and measuring of transactions and events in financial and similar terms, and assessing progress towards theses objectives and targets.

2 Block 3 Session 4:- Uses of budgets:- (p.235 Text) 1.They tend to promote forward thinking and possible identification of short-term problems: we can identify potential problem and overcome it before it appears. 2.They can be used to help co-ordination between various sections of the business: Purchasing and production (run out of stock) if there is no linkage between activities. 3.They can motivate managers to better performance: Having a stated and clear task of objectives to reach can motivate a better performance. 4.They can provide a basis for a system of control: ensuring that events conform to plans. Financial performance statements: p.105 block –Different levels at the organization uses those statements for various reasons and responsibilities, some centre managers are only responsible for costs and others for revenues, while top management is concerned with the “bottom line”, the line of the statement sums up, this is the net profit or loss line. (micro and macro).

3 Block 3: Session 4:- Financial position statements: “Balance sheet” –It gives information about the organization’s financial position at a particular moment of time, ex: Dec 31 st 200x or June 30 th 200x –“ a still not a movie” –Components of a balance sheet: Assets: Items owned by the company –Fixed assets: are held with the intention of being used rather than resale, they can be seen as the tools of the business for a long time. »Ex: premises (buildings) »Land »Plan machinery »Motor vehicles (cars) –Current assets: are assets that are not held on a continuing basis, normally held as part of the day to day trading activities of the business, like: »Cash »Stocks »Trade debtors (accounts receivables, notes receivables). Liabilities: Amounts owed –Long-term liabilities: represents those amounts due to outside parties that are not liable for repayment within the next 12 months after the balance sheet date. Like: (long-term mortgage- long-term loans). –Current liabilities: represents those amounts due to outside parties within 12 months of the balance sheet date. Like: ( Accounts/notes payable, bank overdraft) Owner’s equity or shareholder’s equity –Is the difference between Assets and Liabilities. Balance sheet p.31 text. Balance sheet equation: A=L+OE Assets (current+ fixed) = Liabilities (long/short- term) + Owner’s equity

4 Block 3: Session 4:- Interpreting the balance sheet: p.41 text –The liquidity of the business: This is the ability of the business to meet its short-term obligations (current Liabilities) from its liquid (cash and near-cash) assets. Current assets are directly compared with current liabilities, liquidity is particularly important because business failures occur when the business cannot meet its maturing obligations. –The ‘mix’ of assets held by the business: The relationship between fixed assets and current assets is important, business with too much of their funds tied up in fixed assets could be vulnerable to financial failure, not easy to convert to cash. –The financial structure of the business: The relative proportion of the total finance contributed by the owners and outsiders can be calculated to see whether the business is heavily dependant on outside financing, heavy borrowing can bring with it a commitment to pay large interest charges. Using costs to make decisions:p.113 –An essential part of the effective management of an org. whether in the private business, not-for-profit, or public sectors of the economy, is to apply knowledge about costs and revenues in making decisions of any sort. –Costs represents the resources that have to be sacrificed to achieve a business objective.

5 Block 3: Session 4:- Fixed costs: costs that will occur and stay fixed even if the level of activity changes. –Ex: Rent, insurance and salaries. Variable costs: are costs that vary with the level of activity. –Ex: raw materials. Semi-fixed (semi-variable) costs. –Ex: electricity

6 Block 3: Session 4:- Break-even analysis: To calculate the quantity of activities of products, where costs=revenue, (no profit-no loss). –Example page 114. –Graph of total cost p.186 & 187 text. –Example 7.1 p.188. –Read activity 7.6 p.189 text. Direct and indirect costs: –Direct costs: Theses are costs that can be identified with specific cost units, the effect of the cost can be measured in respect of each particular unit of output, the main example of these are direct materials and direct labor. –Indirect costs (overhead costs) : These are all other costs, those that cannot be directly measured in respect of each unit of output. –Job costing: this term is used to describe the way in which we identify the full cost per unit output (job) where the units of output differ. To calculate the cost for the job, we need to ascribe the direct cost to the job then we charge each unit with a fair share of indirect costs. Activity 8.2 p.209 text. –Uses of full cost information: For pricing purpose: In some industries and circumstances, full costs are used as the basis of pricing. Cost plus= cost + margin, price taker& price maker. For income measurement purposes: To provide a valid means of measuring a business’s income it is necessary to match expenses with revenues.

7 Block 3: Session 4:- Measuring and reporting financial performance: –The profit and loss account (income statement): Businesses exist for the primary purpose of generating wealth, or profit, and it is the profit generated during a period that is the main concern of many users. The purpose of the profit and loss account or income statement, is to measure and report how much profit (wealth) the business has generated over a period. The main idea of the income statement is to calculate the difference between Revenues and Expenses, that is: –Profit or Loss = Revenues – Expenses Revenues: is simply a measure of the inflow of assets (such as cash, or amounts owed to a business by debtors) or the reduction of liabilities. Expenses: represents the outflows of assets (or increase in liabilities), such as: cost of buying goods (cost of sales or cost of good sold), salaries and wages, rent, insurance, heat and light, and telephones. –The relationship between the income statement and balance sheet = Assets = capital [ (+profit) Or (- loss) ]+ Liabilities. Assets = Capital+ (revenues-expenses)+ Liabilities.

8 Block 3: Session 4:- Income statement sheet:- –Sales: The amount in $ of sales of goods. (price per unit x no. of units) –Cost of Sales: the cost of goods that were sold. –Gross profit: sales – cost of sales. –Net profit (loss): gross profit – all other expenses –Depreciation: Fixed assets (except land) do not have a perpetual (everlasting) existence, they are eventually used up over time, so we need to calculate the cost of using that asset during the period of income statement, we consider 4 factors in calculating it: Cost of the asset. The useful life of the asset. The residual value of the asset. The depreciation method. Sales Less cost of sales 232, ,000 Gross profit 80,000 Less sales and wages Rent Heat and Light Telephone Insurance Loan interest Depreciation- fixtures and fittings Depreciation-car 24,500 14,200 7,500 1,200 1,000 2,000 1,000 1,600 53,000 Net profit 27,000