Intro to Master Budget AGEC Spring 2010

Some Conclusions…. Indicators of growth/survival:Indicators of growth/survival: –Increasing liquidity –Increasing solvency –Increasing debt repayment capacity –Increasing profitability Indicators of potential failure:Indicators of potential failure: –Declining liquidity –Declining solvency –Decreasing debt repayment capacity –Decreasing profitability

#3:Pro Forma Analysis Stress testingStress testing current expected cash flows by varying prices, unit costs and yields. future financial healthLook at implications of longer run price and unit cost trends on future financial health when making major decisions.

Pro Forma Analysis When going down the road, use the windshield as well as the rear view mirror!

Master Budget Preparation Annual operating budgetsAnnual operating budgets –Sales budget: number of units to besold –Production budget: expected output and inventory –Direct materials budget: planned material use –Direct labor budget: planned labor use –Other budgets: expected selling and administrative –Needed to prepare the cash budget Other annual budgets and statementsOther annual budgets and statements –Capital expenditure budget –Needed to prepare budgeted cash flow statement –Needed to prepare budgeted income statement –Needed to prepare budgeted year end balance sheet

Sales Budget Design of the Master Budget

Sales Budget Production Budget Design of the Master Budget

Sales Budget Production Budget Direct Materials Budget Direct Materials Budget Direct Labor Budget Direct Labor Budget Overhead Budget Overhead Budget Design of the Master Budget

Sales Budget Production Budget Direct Materials Budget Direct Materials Budget Direct Labor Budget Direct Labor Budget Overhead Budget Overhead Budget Selling and Administrative Expense Budget Selling and Administrative Expense Budget Design of the Master Budget

Sales Budget Production Budget Direct Materials Budget Direct Materials Budget Direct Labor Budget Direct Labor Budget Overhead Budget Overhead Budget Selling and Administrative Expense Budget Selling and Administrative Expense Budget Design of the Master Budget Cash Budget

Sales Budget Production Budget Direct Materials Budget Direct Materials Budget Direct Labor Budget Direct Labor Budget Overhead Budget Overhead Budget Selling and Administrative Expense Budget Selling and Administrative Expense Budget Budgeted Cash Flow Statement Pro Forma Financial Statements Cash Budget Capital expenditures Capital expenditures

Sales Budget Production Budget Direct Materials Budget Direct Materials Budget Direct Labor Budget Direct Labor Budget Overhead Budget Overhead Budget Selling and Administrative Expense Budget Selling and Administrative Expense Budget Budgeted Income Statement Budgeted Income Statement Budgeted Cash Flow Statement Pro Forma Financial Statements Cash Budget Capital expenditures Capital expenditures

Sales Budget Production Budget Direct Materials Budget Direct Materials Budget Direct Labor Budget Direct Labor Budget Overhead Budget Overhead Budget Selling and Administrative Expense Budget Selling and Administrative Expense Budget Budgeted Income Statement Budgeted Income Statement Budgeted Cash Flow Statement Budgeted Balance Sheet Budgeted Balance Sheet Pro Forma Financial Statements Capital expenditures Capital expenditures Cash Budget

Page 1 of the Master Budget

Page 2 of the Master Budget

Page 3 of the Master Budget

Page 4 of the Master Budget

This is the first of three financial statements we have discussed that is generated by the financial analysis we will be using later in the semester. This is the first of three financial statements we have discussed that is generated by the financial analysis we will be using later in the semester.

This is the second of three financial statements we have discussed that is generated by the financial analysis we will be using later in the semester. This is the second of three financial statements we have discussed that is generated by the financial analysis we will be using later in the semester.

This is the second of three financial statements we have discussed that is generated by the financial analysis we will be using later in the semester. This is the second of three financial statements we have discussed that is generated by the financial analysis we will be using later in the semester.

Sources of Uncertainty Global trends in production and consumption Energy prices and core inflation trends Interest rates and exchange rates Changes in industry subsidies

Accounting for Uncertainty Stress testing product prices Stress testing unit input prices like fuel costs Stress testing yields Stress test interest rates and exchange rates