Scarcity leads to Innovation

BUDGETING & Forecasting

The Basic Framework of Budgeting A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period. 1.The act of preparing a budget is called budgeting. 2.The use of budgets to control an organization’s activity is known as budgetary control.

Planning and Control Planning – involves developing objectives and preparing various budgets to achieve these objectives. Control – involves the steps taken by management that attempt to ensure the objectives are attained.

Advantages of Budgets Goals and Objectives Budgets

Compels managers to think ahead Aids managers in coordinating their efforts Provides definite expectations that are the best framework to evaluate performance Advantages of Budgets

Advantages of Budgeting Advantages Define goal and objectives Uncover potential bottlenecks Coordinateactivities Communicateplans Think about and plan for the future Means of allocating resources

BMB Bhaag Milkha Bhag Case Bhaag Milkha Bhag Case 31/2 years in Making. 31/2 years in Making. Innovations to enhance the audience base which led to increase in revenues and reduction in costs. Innovations to enhance the audience base which led to increase in revenues and reduction in costs.

Human Factors in Budgeting The success of budgeting depends upon three important factors: 1. Top management must be enthusiastic and committed to the budget process. 2. Top management must not use the budget to pressure employees or blame them when something goes wrong. 3. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets. The success of budgeting depends upon three important factors: 1. Top management must be enthusiastic and committed to the budget process. 2. Top management must not use the budget to pressure employees or blame them when something goes wrong. 3. Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.

Budgeting Example  Royal Company is preparing budgets for the quarter ending June 30.  Budgeted sales for the next five months are: April 20,000 units April 20,000 units May 50,000 units May 50,000 units June 30,000 units June 30,000 units July 25,000 units July 25,000 units August 15,000 units. August 15,000 units.  The selling price is $10 per unit.  Royal Company is preparing budgets for the quarter ending June 30.  Budgeted sales for the next five months are: April 20,000 units April 20,000 units May 50,000 units May 50,000 units June 30,000 units June 30,000 units July 25,000 units July 25,000 units August 15,000 units. August 15,000 units.  The selling price is $10 per unit.

The Sales Budget The individual months of April, May, and June are summed to obtain the total projected sales in units and dollars for the quarter ended June 30 th

Sales Forecasting Step 1: Create the ROLL Out Plan Planning the Number of Doors/outlets Step 2: Find the Sales for each outlet A. On the basis of SPF for (EBO/LFRS): SPF= Sales /Area in square ft. 1) Find out the benchmark SPF ( Find for atleast two competitors and calculate average SPF) 2) Forecast Organization’s SPF in different scenarios.

Sales Forecasting Different scenarios can be: Pessimistic Scenario: 10% to 30% of Benchmark SPF Pessimistic Scenario: 10% to 30% of Benchmark SPF Normal Scenario: 40% to 70% of Benchmark SPF Normal Scenario: 40% to 70% of Benchmark SPF Optimistic Scenario: 80% to 100% of Benchmark SPF Optimistic Scenario: 80% to 100% of Benchmark SPF

Sales Forecasting 3) Forecast Sales= SPF * Area Step 3: Cumulate the Sales of all the Outlets.

Sales Forecasting B. On the basis of Quantities for (MBOs) 1) Find out the benchmark Quantity sold per month ( Find for atleast two competitors and calculate average quantities sold) 2) Forecast Organization’s Quantity sold in different scenarios.

Sales Forecasting Different scenarios can be: Pessimistic Scenario: 10% to 30% of Quantity sold Pessimistic Scenario: 10% to 30% of Quantity sold Normal Scenario: 40% to 70% of Quantity sold Normal Scenario: 40% to 70% of Quantity sold Optimistic Scenario: 80% to 100% of Quantity sold. Optimistic Scenario: 80% to 100% of Quantity sold.

Sales Forecasting 3) Forecast Sales= ASP * Quantity Sold. Step 3: Cumulate the Sales of all the Outlets.

Computation of ASP Step 1 Step 1 Identify key product categories Step 2 Step 2 Decide the pricing of each category ( Competitive Benchmarking) Step 3 Step 3 Indentify the Weightage of each category Indentify the Weightage of each category

Computation of ASP

Purchases Budget Budgeted purchases = Desired ending inventory +Sales– Beginning inventory