BUDGETING FOR PLANNING & CONTROL Introduction to Budgeting

After studying this topic, you should be able to: LEARNING OBJECTIVES After studying this topic, you should be able to:

LEARNING OBJECTIVES Discuss budgeting & its role in planning, control and decision making. Allocate budget resources Monitor financial activities against budget Identify and evaluate options for improved budget performance Complete financial/statistical reports Prepare budget information and prepare and finalise budget Monitor and review budget

QUESTIONS TO THINK ABOUT Do you budget? Explain why you do, or do not.

DO YOU BUDGET? Personal budget or family budget All sources of income are identified and expenses are planned with the intent of matching outflows to inflows Budget constraint = we are restricted to spend no more than its total resources

LEARNING OBJECTIVE 1) Discuss budgeting & its role in planning, control and decision making.

Looking ahead to see what actions should be taken to PLANNING: Definition Looking ahead to see what actions should be taken to realize particular goals.

CONTROL: Definition Looking backward, determining what actually happened & comparing it with previously planned outcomes.

Where do budgets fit into planning & control? Budgets are financial plans for the future, identifying objectives & the actions needed to achieve them.

PLANNING, CONTROL & BUDGET Strategic Plan Monitoring of Actual Activity Long Term Objectives Short Term Objectives Short Term Plan Comparison of Actual with Planned Budgets Feedback Investigation Corrective Action Budgets provide feedback for investigation on achieving the strategic plan

WHAT IS A BUDGET? French word ‘bougette’ = purse List of planned expenses and revenue Realistic forecast of revenues and expenditures in monetary (AUD) or quantitative terms (%, units) Financial plan for achieving future goals and objectives

WHAT IS A BUDGET? Target Route map for a business to reach its destination Control mechanism – enables actual financial operation of the business to be measured against the forecasted

WHAT IS A BUDGET? Budget provides estimates for: Revenue Expenses Staffing levels Equipment needs etc.

WHAT IS A BUDGET? 2 Key elements to a Budget: Income Expenditures Aim of the budget is to: Assist us in ensuring that our expenditure does not exceed our income

BUDGETING Process of planning resources Process of allocating resources and Identifying measurable outcomes

CHARACTERISTICS OF EFFECTIVE BUDGET Realistic – take into account all aspects that might influence the ability to achieve the goals and targets Measurable – written in a quantitative format in order to compare budgeted values with actual values Achievable – targets must be able to be reached Logical – they must make sense to users

BUDGETS AS PLANS Long term budget as a strategic plan Annual budget as an operational plan Quarterly budget Monthly budget as a performance plan

BUDGETS AS PLANS Long term budget as a strategic plan Range usually 3-5 years To remain realistic it should be reviewed and updated every year Reflection of the long-term goals of the organization

BUDGETS AS PLANS Annual budget as a operational plan Forecast for 1 year Is developed to align with the long term goals (set in long term budgets)

BUDGETS AS PLANS Monthly budget as a performance plan Forecast for 1 month Is developed to align with the short term goals Includes information such as monthly sales, profit and payroll targets

ADVANTAGES OF BUDGETING Why do we use budgets? Plan how much money is needed for the purchase of e.g. a house by calculating all costs Determine the most appropriate saving plan

ADVANTAGES OF BUDGETING Set standards (creation of targets) Compare actual to budgeted results Provide standards for performance evaluation Improved communication and coordination b/w management and staff

ADVANTAGES OF BUDGETING Creation of ‘what if’ scenarios Corrective action Summarize large amounts of information Improve decision making Allow monitoring, control and check

DISADVANTAGES OF BUDGETING They take time to be developed Padding = deliberate underestimating revenue, and overestimating expenses making it easier to achieve budget Conflicts = difficult to get consensus of all people involved They can be subjective = impact of internal or external factors might be difficult to determine

INFORMATION SOURCES FOR BUDGET PREPARATION Performance data from the previous periods Trends Management objectives Customer research Planned local events or issues Budget preparation guidelines of the company

TYPES OF BUDGETS Sales / Revenue budget Purchase budget Cost of goods sold budget Operating expense budget Budgeted profit and loss statement Cash budget Budgeted balance sheet

TYPES OF BUDGETS Sales / Revenue budget Anticipated levels of sales in units or revenue for the period E.g. sale of 1,000 coffees in the month or $27,000 revenue in the month

TYPES OF BUDGETS Purchase budget Estimates the amount of materials needed to created products that are anticipated to be sold E.g. to make 1,000 coffees in the month, we need 250 l of milk and 25 kg of coffee beans On a monthly basis within hospitality Always prepared after Sales budget as it estimates stock needed to be purchased to support sales

TYPES OF BUDGETS Cost of goods sold budget Calculations of the costs of the items that will have to be purchased E.g if we needed 25 kg of coffee beans, unit price $16, cost of coffee = $400 Prepared from information in the purchases budget

TYPES OF BUDGETS Operating expense budget Estimates expenses in selling, administrating and financing planned level of activity E.g. sales staff wages – labour expense budget, office expenses, advertising, bad debts, discount allowed Similarity to profit and loss statement

TYPES OF BUDGETS Budgeted profit and loss statement Estimates the total revenue and total expenses for a specific future period Calculated from sales, purchase, COGS, operating budgets

TYPES OF BUDGETS Cash budget Predicts the amount of cash business is likely to have at a point in time It shows predicted cash inflow and cash outflow It shows surplus / deficit of cash inflows over cash outflows

TYPES OF BUDGETS Budgeted balance sheet Estimates the assets, liabilities, and owner’s equity at a future point in future

END OF PRESENTATION ANY QUESTIONS?