Financial Analysis LAP 3

Objectives Explain the importance of budgets. Describe the characteristics of an effective budget.

Objective A Explain the importance of budgets.

What are your financial goals? A budget can help you get there.

What is a budget? An estimate of income and expense for a specific time period IncomeExpense Fiscal year

Budgets are... about money. There are two broad categories: income and expense.There are two broad categories: income and expense. Income Expense

like maps. They show a route to success.They show a route to success. Budgets are...

management tools. They help managers make informed decisions.They help managers make informed decisions. Budgets are...

Why Budgets Are Important 1.They create physical records. Written records that are accurate, accessible, and meaningfulWritten records that are accurate, accessible, and meaningful Framework for annual financial reportsFramework for annual financial reports

Why Budgets Are Important 2.They organize business activities. Manager must put dreams into reality with everyday details that support the business’s goals.Manager must put dreams into reality with everyday details that support the business’s goals. Salaries and wages Raw materials Transportation Plant Insurance Utilities Manufacturing Budget

Why Budgets Are Important 3.They guide operational decisions. Managers have more information to make routine decisions.Managers have more information to make routine decisions. What to buy? How much to pay? How much inventory? How many employees?

Why Budgets Are Important 4.They help evaluate long- and short-term performance. Past budgets provide benchmarks. Comparing budgeted and actual amounts reveals variances. Short term Long term

Why Budgets Are Important 5.They help protect against financial crisis. Saving for emergencies is encouraged.

Objective B Describe the characteristics of an effective budget.

Budgets as Trees EXPE EEXXPPEENSENSEEEXXPPEENSENSE Phone Cellular Local Long distance

Take a Bite’s owner wants to earn a profit. What Budgets Look Like Here’s how:

Budgets are organized by categories. Income Expense Cash sales Credit sales Wages Rent Insurance Utilities Interest Supplies

How to Allocate $$$ Adjust previous year’s budget based on changesAdjust previous year’s budget based on changes Adjust previous year’s budget with across-the-board increaseAdjust previous year’s budget with across-the-board increase Use zero-based budgetingUse zero-based budgeting

Fiscal year, with quarters and months Budget Timing Rolling, or continuous, budgets Jan. Year 1 Feb. Year 1 March Year 1 April Year 1 May Year 1 June Year 1 July Year 1 Aug. Year 1 Sept. Year 1 Oct. Year 1 Nov. Year 1 Dec. Year 1 Jan. Year 2 Feb. Year 2 March Year 2

Made up of information from specialized budgetsMade up of information from specialized budgets The Master Budget Master Budget Specialized Budgets Specialized budgets are interrelated.Specialized budgets are interrelated. Purchases Sales Selling Expense Cash General and Administrative Expense

Change to meet the manager’s needs Budget Formats Example:

Those responsible for managing people and money Who prepares budgets?

Well plannedWell planned Characteristics of an Effective Budget RealisticRealistic FlexibleFlexible Clearly communicatedClearly communicated EvaluatedEvaluated Compare

Imagine the budget for a public swimming pool. What income and expense categories are there? $ $ $ $ $ $ IncomeExpense 1.Daily sales 2._________ 3._________ 4._________ 1.Towels 2._________ 3._________ 4._________

Georgia has underspent on this year’s travel budget. Should she spend unnecessarily now in order to keep money in next year’s budget?

MarkED Acknowledgments Original Developers Christopher C. Burke, MarkED Jane Wright, MarkED Version 1.0 Copyright © 2006 MarkED Resource Center

Digital-based photography sources: DIGITAL VISION LTD. Teenagers Today Obj. B: # Photos copyright Digital Vision Ltd., all rights reserved. 833 Fourth Ave. SW, Suite 800 Calgary, AB, Canada T2P 3T5 EYEWIRE IMAGES Money & Finance Obj. A: #MFI_068 Photos copyright Eyewire Inc. 833 Fourth Ave. SW, Suite 800 Calgary, AB, Canada PHOTODISC, INC. Business and Transportation Vol 14 Obj. A: #225 Photos copyright PhotoDisc, Inc Fourth Ave., Seattle, WA 98121

Copyright: All photographic digital images on this CD are owned by the aforementioned photographic resources or their licensors and are protected by the United States copyright laws, international treaty provisions, and applicable laws. No title to or intellectual property rights to the images on this CD are transferred to you. These sources retain all rights and are not to be used, digitally copied, transferred, or manipulated in any way. To do so is a violation of federal copyright laws.