1. Chapter 1
Budgeting Basics

2. What is Budgeting?
Budgeting Defined A budget is a plan or forecast of the anticipated results of a business for a specified period.

3. What is Budgeting?
A budget should be seen as a tool for planning, coordinating and controlling the effective and efficient use of resources so that the organisation’s daily operations are directed towards its long term goals.

4. What is Budgeting?
Forecasts are required frequently in all aspects of business operations: Marketing Production Finance Human resources Top management

5. The Uses of Budgets
Tool for Planning Tool for Control Tool for Organising Tool for Motivation

6. The Uses of Budgets

7. Benefits of Budgeting
• Encourages thinking in a regular and systematic manner. • Requires teamwork. • It coordinates the segments of a business. • Management and staff decision making is more clearly focused.

8. Benefits of Budgeting
Defines responsibility, establishes communication and identifies problems.
• It sets a performance benchmark.
• It allows continuous improvement by pinpointing strengths, weaknesses, opportunities and threats.
• It forces a regular review of actual results.

9. Limitations of Budgeting
• Budget preparation is costly. • Time-consuming. • Budgets are only estimates, not statements of fact. • They may create anxiety.. • Preparation of a budget does not guarantee success.

10. Forecasting
In most cases, the future direction of the firm is based on the analysis of historical events. Forecasting deals with the analysis of the past and utilises this historical information to enable the development of expectations about the future.

11. Forecasting
Correctly forecasting a sales budget will depend upon: • Actions of competitors. • Economic trends. • Government policies. • Past sales and trends.

12. Classification of Budgets
Static Budgets Static Budgets are budgets prepared to identify performance at one level of activity. Flexible Budgets Flexible Budgets are “comparison style” budgets prepared to identify performance at more than one level of activity.

13. Classification of Budgets
Fixed Costs Fixed Costs — these are costs, which in total, remain the same for a period of time regardless of the level of sales activity. Relevant range of activity Fixed costs are “fixed” only within a certain range of activity or over a certain period of time.

14. Variable Costs
Variable costs are dependent upon the level of activity for their incurrence. Variable costs increase as activity increases and vice versa. Characteristics of variable costs are: • They change in total in proportion to changes in the level of activity (activity being production or sales) • The cost per unit remains constant over the relevant range. The relevant range is between zero and normal capacity. Outside this range the cost relationship may alter.

15. Variable/Fixed

16. Semi-variable Costs
Those costs contain a fixed component and a variable component. The fixed component represents the minimum cost of supplying a service. The variable component is that portion that is influenced by changes in the level of activity.

17. Semi-variable Costs
Semi-variable costs are determined using the following formula: Total Cost = Fixed Cost + (Variable Cost Per Unit x Units of Activity)

18. Zero-based Budgets
With zero-based budgeting, each year the process starts afresh. Past information is not considered relevant for future decisions.

19. Continuous Budgets
Continuous budgets (rolling budgets) are continually updated by periodically adding a new incremental time period and dropping the period just completed.

20. Period Budgets
Short-term Budgets Intermediate-term Budgets Long-term Budgets Qualitative Forecasting Methods Quantitative Forecasting Methods

21. Financial Risks and Strategies
Risk arises for businesses because of uncertainty. For example, sales in the next period can never be predicted with 100% accuracy. Businesses must be aware of the financial risks they face and have procedures and protection strategies in place to guard against these risks.

22. Cash flow risk
Cash flow risk is the risk of a business not being able to pay its bills when they are due. Cash flow risk can be reduced by: • Sufficient access to credit. • Budgeting and forecasting. • Performing scenario analysis.

23. Risk of changes in tastes/technology
Consumers have changing tastes, products go into and out of fashion and technology is always improving. For example, CD sales have dropped significantly since music became available to download over the internet. Businesses must continually consider the future and try to pre-empt a change in their market.

24. Financial Risks and Strategies
Other Risks include:
Economic Risk
Hazard Risk
Interest rate risk
Competition Risk

25. Preparation of Budgets
Managers must decide the answers to three important questions before developing their business budgets.
What is the business’ present situation?
Where does the business need to go from here?
How should the business get there?

26. Stakeholders
• Employees. • Managers. • Clients. • Financial Institutions. • Suppliers. • Directors.

27. Budget Committee
A master (comprehensive) budget is an overall budget of an organization which includes and incorporates the budgets of all sub-units of the business.

28. Research
Before submission to the committee, budget proposals must be carefully researched.

29. Research
Sources of Data • Managers, supervisors and senior staff • Previous budgets • Previous activities • The accounts department • The purchasing department

30. Sources of Data
• The personnel department • External suppliers • Equipment and stationery catalogues • Business, trade magazines or articles • Government departments such as the Australian Bureau of Statistics (ABS) or the Australian Taxation Office (ATO)

31. Primary Data
Primary data is collected by the organisation which intends to use it. Methods of data collection include:
Personal Interview
Mailed Questionnaire
Telephone Survey

32. Secondary Data
This is data, which has already been collected and collated. Much data including demographic statistics can be provided by the Australian Census(conducted by Australian Bureau of Statistics - ABS) which surveys the total population.

33. Planning and Organising
Planning involves the determination of goals and the means by which they are expected to be achieved.
Control is the action taken to implement plans together with subsequent performance evaluations.
Control over ongoing activities within organisations is closely linked to the management accounting system.
The budget (or profit plan) is a quantification of management’s plans for the organisation.

34. Planning and Organising
There are a number of issues to consider in planning and budgeting: • Systematic Planning • Co-ordination of Business Activities • Responsibility Centres • Exception Reports • Flexible Budgeting

35. Budgeting Procedures
The development of a forecast will require the following steps: • Determine the objective of the forecast. • Determine the variables to be forecasted. • Determine the time horizon of the forecast. • Decide upon a forecasting method. • Collect the required data — past records. • Make the forecast. • Implement the results and review the forecasting process through an effective feedback system.

36. Secular Trend Movement
It is the long term direction of the data, usually described by the “line of best fit”.

37. Cyclical Movement
The cyclical component of a time series represents a pattern that is repeated over periods of different time lengths and reflects the movement in the level of business activity associated with economic events such as recession, prosperity, recovery etc.

38. Seasonal Movement
Seasonal movements represent fluctuations that repeat themselves within a fixed time period of less than one year, and may be of even lesser time periods be it quarter year, monthly, weekly, etc.

39. Irregular Movements
These patterns refer to uncontrollable, random variations that impact greatly on the level of business activity.

40. Master Budgets
The Master Budget is usually prepared for a one year period, subdivided into months. It is made up of two major parts.

41. Components of a Master Budget — Operating Budget

42. Components of a Master Budget — Financial Budget

43. Preparation of Budgets
Budgets take into account those things that are expected to impact future operations. These include: • Price rises or falls. • Economic factors. • An increase or decrease in competition. • Identifiable trends. • Impact of government legislation.