1. EMBA Presentation October 15, 2016
Budgeting

2. Overview Budgets Within the Architecture of the Organization
Types of Budgets
Budget Preparation Theories
Example of Preparing Sales, Production and Raw Materials Budget
Example of Cash Flow Forecast

3. Budgeting and Organizational Architecture
Assigns Decision Rights – Gives Manager the Right to Spend or Use Organizational Resources
Measures Performance – Actual Results to Forecast
Rewards Performance – Basis to Incentive Compensation and Recognition for Accomplishing Goals

4. Types of Budgets
Strategic Plan
Long Term Budget
Operating Budget

5. Theory of Budget Preparation
Participation
Bottom-up, Top-down has been found to be a very successful approach
In a survey of 219 publicly traded firms, 79% indicated lower-level managers were significantly involved in the budget process
75% stated budgeting was a managerial, not accounting, function

6. Budget Preparation Theories
Budget Ratcheting
Uses past historical data for next year's budget
Usually raises targets from prior year
May cause for lower output this year to avoid higher targets next year
Line Item Budgets
Reduce agency problems
May restrict good management actions

7. Steps in Preparing the Operating Budget
Develop Sales Forecasts
Convert Sales Forecast to Production Budget
Prepare Raw Material Budget
Prepare Selling, General and Administrative Budgets
Convert to Cash Forecast
Prepare Pro-forma Balance Sheets

8. Preparation of the Sales Budget
The First Step to
Proper Planning of Production
Preparation of the Sales Budget

9. Getting to the Sales Numbers
Input from field sales personnel
Get the numbers right!!!!
Using the budget as a sales management tool

10. Example of Salesperson’s Input
Customer Proj. Sales Probability Adjusted Sales
A $1,000, $500,000
B $250, $250,000
C $500, $375,000
Misc $1,000, $800,000

11. Sales Projections for Production Budget
January 5,000 Units
February 6,000 Units
March 8,000 Units
April 7,000 Units
May 6,000 Units

12. Production Assumptions
Require 30% of next month’s sales on hand at beginning of month
Project to have 1,000 units on hand at beginning of January

13. Calculation of Production Required

14. Additional Assumptions
10% of next month’s raw materials must be on hand at beginning of month
Production process uses 5 units of raw product for each unit of finished product
Raw product costs $10.00 per unit
Direct labor cost is $15.00/hour and it takes one hour to make each finished product
Overhead is applied at $4.00 per DLH

15. Calculation of Raw Materials Budget

16. Cost of Goods Manufactured Schedule

17. Preparing the Cash Forecast
Must Be Done Prior to Preparation of Pro-forma Balance Sheets

19. Assumptions for Cash Flow Calculation
Company purchased $72,600 of inventory in May, $89,100 in June, and $93,720 in June
Cash balance was $10,000 on June 1
Salaries are paid on 7th and 22nd of each month
Salaries for May totaled $30,000

20. Additional Assumptions
Rent is paid on first day of the month
Utilities are paid on the 10th day of month following; May utilities totaled $3,000
All inventory is paid on the 10th day following month of purchase
Company has line of credit at Old Boise National Bank in amount of $100,000
Company always wants $10,000 in cash balance at end of each month

21. Cash Inflow Assumptions
April sales on account were $80,000
May sales on account were $90,000
Accounts Receivable are collected as follows:
10% in month of sale
75% in first month following
10% in second month following

23. Copyright by Frank Ilett, 2016