EMBA Presentation October 15, 2016 Budgeting

Overview Budgets Within the Architecture of the Organization Types of Budgets Budget Preparation Theories Example of Preparing Sales, Production and Raw Materials Budget Example of Cash Flow Forecast

Budgeting and Organizational Architecture Assigns Decision Rights – Gives Manager the Right to Spend or Use Organizational Resources Measures Performance – Actual Results to Forecast Rewards Performance – Basis to Incentive Compensation and Recognition for Accomplishing Goals

Types of Budgets Strategic Plan Long Term Budget Operating Budget

Theory of Budget Preparation Participation Bottom-up, Top-down has been found to be a very successful approach In a survey of 219 publicly traded firms, 79% indicated lower-level managers were significantly involved in the budget process 75% stated budgeting was a managerial, not accounting, function

Budget Preparation Theories Budget Ratcheting Uses past historical data for next year's budget Usually raises targets from prior year May cause for lower output this year to avoid higher targets next year Line Item Budgets Reduce agency problems May restrict good management actions

Steps in Preparing the Operating Budget Develop Sales Forecasts Convert Sales Forecast to Production Budget Prepare Raw Material Budget Prepare Selling, General and Administrative Budgets Convert to Cash Forecast Prepare Pro-forma Balance Sheets

Preparation of the Sales Budget The First Step to Proper Planning of Production Preparation of the Sales Budget

Getting to the Sales Numbers Input from field sales personnel Get the numbers right!!!! Using the budget as a sales management tool

Example of Salesperson’s Input Customer Proj. Sales Probability Adjusted Sales A $1,000,000 .50 $500,000 B $250,000 1.00 $250,000 C $500,000 .75 $375,000 Misc $1,000,000 .80 $800,000

Sales Projections for Production Budget January 5,000 Units February 6,000 Units March 8,000 Units April 7,000 Units May 6,000 Units

Production Assumptions Require 30% of next month’s sales on hand at beginning of month Project to have 1,000 units on hand at beginning of January

Calculation of Production Required

Additional Assumptions 10% of next month’s raw materials must be on hand at beginning of month Production process uses 5 units of raw product for each unit of finished product Raw product costs $10.00 per unit Direct labor cost is $15.00/hour and it takes one hour to make each finished product Overhead is applied at $4.00 per DLH

Calculation of Raw Materials Budget

Cost of Goods Manufactured Schedule

Preparing the Cash Forecast Must Be Done Prior to Preparation of Pro-forma Balance Sheets

Assumptions for Cash Flow Calculation Company purchased $72,600 of inventory in May, $89,100 in June, and $93,720 in June Cash balance was $10,000 on June 1 Salaries are paid on 7th and 22nd of each month Salaries for May totaled $30,000

Additional Assumptions Rent is paid on first day of the month Utilities are paid on the 10th day of month following; May utilities totaled $3,000 All inventory is paid on the 10th day following month of purchase Company has line of credit at Old Boise National Bank in amount of $100,000 Company always wants $10,000 in cash balance at end of each month

Cash Inflow Assumptions April sales on account were $80,000 May sales on account were $90,000 Accounts Receivable are collected as follows: 10% in month of sale 75% in first month following 10% in second month following

Copyright by Frank Ilett, 2016