1. 5.01 Budget Planning & Control

2. Budget Planning
Financial planning is one tool managers use to improve profitability. Planning the financial operations of the business is called budgeting. A written financial plan expressed in dollars is called a budget.

3. Budget Planning (continued)
A budget is a view into the future – a financial estimate of future business activities.
Identifying company goals is the first step in budget preparation. Company goals might be:
to increase sales
reduce cost of merchandise sold
increase net income

4. Budget Planning (continued)
Two budgets commonly prepared in businesses are:
Budgeted income statement – projection of a business’s sales, costs, expenses and net income for a fiscal period. Often called an operating budget.
Cash budget – projection of a business’s cash receipts and payments for a fiscal period. Used to manage estimated cash shortages and overages.

5. Budget Functions A budget serves three important functions:
Planning – managers make projections, plan actions to meet goals
Operational control – management compares actual amounts to budgeted amounts to determine how well a business is performing
Department coordination – all management personnel must help plan and use budget as a guide to manage sales, costs, and expenses

6. Budget Period
The length of time covered by a budget is usually one year.
Annual budget is used to compare current financial performance with budget plans.
Annual budget is normally prepared for a company’s fiscal year.

7. Sources of Budget Information
Budgets are not exact since they show only projected sales, costs, and expenses.
Companies use many sources to prepare budgets.
Company records – accounting and sales records from prior periods are used to determine trends
General economic information – changes in the national economy affect budget decisions
Company staff and managers – department managers project budget items for their areas of responsibility of the business
Good judgment – final budget decisions must be based on good judgment

8. Comparative Income Statement
Provides an analysis of previous years’ sales, cost, and expense amounts
Income statement containing sales, cost, and expense information for two or more years
Highlights items that may be increasing or decreasing at a higher rate than other items on the statement

9. Interpreting the Comparative Income Statement
First column shows actual sales, costs, and expenses for the current year
Second column shows actual amounts for the prior year
Third column shows the amount of increase or decrease from the prior year
Fourth column shows the percentage by which the current year amount increased or decreased from the prior year amount

10. Interpreting the Comparative Income Statement (continued)
The percentage change indicates whether the change is:
Favorable
Unfavorable
Normal

11. Favorable
Percentage increase in expenses or costs is less than percentage increase in sales
Percentage decrease in expenses or costs is more than percentage decrease in sales

12. Unfavorable
Percentage increase in expenses or costs is greater than percentage increase in sales
Percentage decrease in expenses or costs is less than percentage decrease in sales

13. Normal
Percentage increase in expenses or costs is equal to percentage increase in sales
Percentage decrease in expenses or costs is equal to percentage decrease in sales

14. Budgeted Income Statement
Businesses set goals, develop operational plans, and project sales, expenses, and costs
Operational plans provide general guidelines for achieving the company’s goals.
Operational plan is converted into a more precise plan expressed in dollars by preparing a budgeted income statement.

15. Budgeted Income Statement (continued)
Separate schedules are prepared to assist management in evaluating operations and goals.
Sales budget schedule
Purchases budget schedule
Selling expenses budget schedule
Administrative expenses budget schedule
Other revenue and expenses budget schedule
Budgeted Income Statement shows a company’s projected sales, costs, expenses, and net income.

16. Sales Budget Schedule
Prepared first because other budget schedules are affected by the projected net sales
Projected net sales are used to estimate the amount of merchandise to purchase and the amount that may be spent for salaries, advertising, and other selling and administrative expenses.

17. Purchases Budget Schedule
Shows the projected amount of purchases that will be required during a budget period
Factors considered when planning a purchases budget:
Projected unit sales
Quantity of merchandise on hand at the beginning of the budget period
Quantity of merchandise needed to fill projected sales orders without having excessive inventory
Price trends of merchandise to be purchased

18. Selling Expenses Budget Schedule
Shows projected expenditures directly related to selling operations
Some selling expenses are relatively stable and require little budget planning. Example: Depreciation Expense
Other selling expenses increase and decrease in relation to increases and decreases of sales.
Most selling expenses are linked closely to net sales.

19. Administrative Expenses Budget Schedule
Shows the projected expenses for all operating expenses not directly related to selling operations
Most administrative expenses are known and remain the same each period.
Sources used to prepare this budget schedule are:
Past records
Company plans
Sales and selling expenses budget schedules
Discussions with other managers

20. Other Revenue and Expenses Budget Schedule
Show projections for revenue and expenses from activities other than normal operations.
Typical items in this budget schedule are:
Interest income
Interest expense
Gains or losses on sale of plant assets

21. Budgeted Income Statement
Shows a company’s projected sales, costs, expenses, and net income
Prepared from the details of the five budget schedules
Allows for budgeting of federal income tax

22. Cash Budgets
Good cash management requires planning and controlling cash so that it will be available to meet obligations when they come due.
Cash budgets help analyze cash inflows and outflows.

23. Cash Budgets (continued)
Cash receipts budget schedule reports projected cash receipts for a budget period.
Projections are made from the following:
Cash sales
Collections on account from customers
Cash to be received from other sources

24. Cash Budgets (continued)
Cash payments budget schedule reports projected cash payments for a budget period.
Projections are made from the following:
Cash payments for accounts payable or notes payable to vendors
Cash payments for each expense item (requires an analysis of the selling expenses, administrative expenses, and other revenue and expenses budget schedules)
Cash payment for buying equipment and other assets
Cash payments for dividends
Cash payments for investments

25. Cash Budgets & Performance Reports
Analysis of actual cash balance is used to determine how actual cash compares to projected cash
If actual cash is less than projected cash, management must determine the reason and take action to correct.
Decrease could be caused by customers not paying
Decrease could be caused by expenses exceeding budget projections
If decrease continues, business may have to borrow money until receipts and expenses are brought into balance.

26. Performance Reports
Compares actual amounts with the budgeted income statement
Shows variations between actual and projected items
Management reviews performance reports to identify areas that need to be reviewed.

27. Performance Reports (continued)
First column shows amounts projected.
Second column shows actual sales, costs, and expenses.
Third column shows the difference between actual and projected.
Fourth column shows the percentage of the amount increased or decreased from the projected amount

28. Performance Reports (continued)
Management should determine what causes unfavorable results and how to correct those situations.
Management should also determine what causes favorable results and encourage continuation of those actions.