M ARKETING M ANAGEMENT 3.04 Manage financial resources to ensure solvency

E SSENTIAL Q UESTION What are budgets in business and how are they used? Vocabulary: Budgets

W ARM - UP What is a financially based long term goal you would like to reach?

O BJECTIVE : E XPLAIN WHY BUDGETS ARE ABOUT MONEY Three M’s: Money Maps Management Money: Budgets use $ to define a company’s goals. Looks at the past to determine how money was spent and earned. Looks into the future in planning for goals that are specific and measurable. Two Categories: Income – money earned by selling goods/services, investments such as stocks/bonds. Expense – money spent by a business such as utilities, payroll, advertising, equipment, taxes, and loans.

T HINK - S HARE Why is it important to review how money was spent in the past? Is there a time when you saved up for a large purchase? Did you write up a plan? Why or Why not? Why would a business want to follow a budget? How is a budget useful to a business manager?

O BJECTIVE : D ESCRIBE HOW BUDGETS ARE FINANCIAL MAPS Company’s goal = Destination Company’s strategies = Directions Budget = Map The map or budget shows where the company is and where it headed. Provides a visual of the route to achieving the goal. Businesses are able to see where things are off course and then adjust to get back on track.

O BJECTIVE : I DENTIFY REASONS THAT BUDGETS ARE MANAGEMENT TOOLS Managers make informed decisions about the company’s strategies for reaching the goals. Managers communication with employees more precise.. Managers make better day to day decisions. Managers make plans for using the profit. Managers can make realistic, accurate and useful decisions with the information in an up to date budget.

O BJECTIVE : E XPLAIN THE IMPORTANCE OF BUDGETS TO BUSINESS SUCCESS To create physical records. A business is able to keep records that are accurate, accessible and meaningful. Serve as the framework for a company’s annual financial reports. To organize business activities. A good business plan includes a detailed budget to account for all financial activities. This decreases the potential for problems later. To guide operational decisions When to buy, what to buy, how much to pay, how much inventory, and how many employees These decisions impact the success or failure of a business.

O BJECTIVE : E XPLAIN THE IMPORTANCE OF BUDGETS TO BUSINESS SUCCESS To evaluate a business’ long and short term performance. Managers look at previous budgets to determine growth and/or performance. Provides benchmarks to measure changes. Variances are the difference between a budgeted amount and an actual amount. Show where they are on target and where they are not. To protect against financial crisis. Includes a plan for savings Just in case plan for paying for expenses due to unforeseen problems

T HINK -S HARE What might happen to a business that does not keep a physical record of money coming in and money spent? What would a business manager benefit from comparing budgeted and actual dollar amounts?

O BJECTIVE : I DENTIFY WAYS THAT BUSINESSES CAN CREATE BUDGETS Categories Income Sales Cash Credit Income from Investments Expenses Rent Insurance Utilities Supplies Wages Once the categories are decided, management allocates dollar amounts to each one.

O BJECTIVE : I DENTIFY WAYS THAT BUSINESSES CAN CREATE BUDGETS Allocation of Dollar Amounts Previous year’s budget make adjustments as needed due to changes Previous year’s budget with an across the board percentage increase Based on inflation or on projected growth Zero Based budgeting Each category begins with zero and is determined by need rather than previous figures.

O BJECTIVE : I DENTIFY WAYS THAT BUSINESSES CAN CREATE BUDGETS Time Period Fiscal year Quarters Months Rolling or continuous budgets – beginning with a 12 month budget, a new month is added as each month goes by. Advantages: Year long plan in place Major annual budgeting efforts are avoided More flexible Encourages managers to assess activities and adjust figures more frequently.

O BJECTIVE : D ISTINGUISH BETWEEN GENERAL AND SPECIALIZED BUDGETS Master budget – specialized budgets generated by individual departments comprising one large budget. Businesses that use this are retailers and manufacturers. Retailer – sales, purchases selling expense, general and administrative expense, and cash Manufacturer – raw materials, plant/equipment, transportation Specialized budgets are interrelated in that they depend on one another for estimates of future activity. The budgeting process begins with sales forecasts. Departments can estimate how much they have to spend to support the forecast.

T HINK -S HARE Why would it be helpful to compare current month figures with the same month’s figures of a previous year?

O BJECTIVE : D ESCRIBE CHARACTERISTICS OF A SUCCESSFUL BUDGET Well planned Integrate all the specialized budgets, so that they work together and are in agreement. Realistic Avoid making guess if at all possible. Use past records if available. Get information from trade associations, the local Chamber of Commerce, and the SBA. Flexible Budget figures may have to be adjusted due to economic trends, changes in competition, population shifts, and weather conditions. Clearly Communicated All employees need to see the budget to know his/her effect on company profits. Employees may become more cost-conscious. Evaluated Assess the company’s progress in achieving its goals.

T HINK -S HARE Why should budgets be flexible? What would happen in a business if employees were not aware of how they affect the budget?

A CTIVITIES Complete: Individual What Does Your Budget Do? LAP Handout More Music... More Money LAP Handout Groups In groups of 4, research the following websites reviewing the goods/service that each company provides. Select one business and develop 10 hypothetical expense categories, including ones that are unique to that particular kind of business Believe Your Budget Simulation

R ESOURCE Money Tracks Financial Analysis LAP 3 MBA Research2006