Budgeting/Financial Planning Chapter 8 Budgeting/Financial Planning

Budgeting: General Concepts Purposes and uses Budgets and sub-budgets Relationships among budgets Budget techniques Behavioral implications

Budget Purposes and Uses Planning Communication Coordinating Resource allocation Managing Evaluating performance Providing incentives

Budgets and sub-budgets Any budget can have component budgets Might have for some, but not other items in higher level budgets Amount of detail depends on entity’s needs

Relationships among budgets Budgets and sub-budgets are interrelated Must be prepared in a sequential process Must understand the starting point, and the relationships among the components

Typical Budgeting Sequence Sales Budget first Production (or purchasing for retailer) Production inputs (DM, DL & o/h) SG & A (from sales) R&D, Marketing, Customer service All of these into cash budget Budgeted financial statements

Budget techniques In preparing budgets, must understand connections between Different component budgets Inventory (FG) needs and sales Inventory (RM & WIP) needs and production Timing differences in cash payments (expenses) and collections (revenues)

Inventory Budgets Depend on Sales Need inventory before it can be sold (purchase or production) For manufacturer, need to Have FG prior to sale Make it before needed in finished goods Buy RM before needed in production

Inventory Budgets: Model Look to end of period for total needs, then come back to see where it comes from. By end of period, how much is needed? What did we have to start? Difference is current period purchase or production needs

Inventory Budget Model Current period needs + Desired ending inventory = Total needed by end of period - Beginning inventory (expected) = Amt to be purchased or built (This is the basic BI + Pur – EI + COGS relationship arranged differently)

Desired Ending Inventory Company will have a policy for desired inventory levels Likely different for different inventory types Use in budget Factors to determine this level?

Cash Budget Meshing of receipts and cash payments Physical Budgets  Cash budgets Must factor in timing differences of payments and of collections E.g. cash collections relative to sales Once finished, can prepare budgeted financial statements

Behavioral Implications Budget padding Participation in the budget process Budget ethical issues Zero base budgeting