1. Budgeting/Financial Planning
Chapter 8
Budgeting/Financial Planning

2. Budgeting: General Concepts
Purposes and uses
Budgets and sub-budgets
Relationships among budgets
Budget techniques
Behavioral implications

3. Budget Purposes and Uses
Planning
Communication
Coordinating
Resource allocation
Managing
Evaluating performance
Providing incentives

4. Budgets and sub-budgets
Any budget can have component budgets
Might have for some, but not other items in higher level budgets
Amount of detail depends on entity’s needs

5. Relationships among budgets
Budgets and sub-budgets are interrelated
Must be prepared in a sequential process
Must understand the starting point, and the relationships among the components

6. Typical Budgeting Sequence
Sales Budget first
Production (or purchasing for retailer)
Production inputs (DM, DL & o/h)
SG & A (from sales)
R&D, Marketing, Customer service
All of these into cash budget
Budgeted financial statements

7. Budget techniques
In preparing budgets, must understand connections between
Different component budgets
Inventory (FG) needs and sales
Inventory (RM & WIP) needs and production
Timing differences in cash payments (expenses) and collections (revenues)

8. Inventory Budgets Depend on Sales Need inventory before it can be sold
(purchase or production)
For manufacturer, need to
Have FG prior to sale
Make it before needed in finished goods
Buy RM before needed in production

9. Inventory Budgets: Model
Look to end of period for total needs, then come back to see where it comes from.
By end of period, how much is needed?
What did we have to start?
Difference is current period purchase or production needs

10. Inventory Budget Model
Current period needs
+ Desired ending inventory
= Total needed by end of period
- Beginning inventory (expected)
= Amt to be purchased or built
(This is the basic BI + Pur – EI + COGS relationship arranged differently)

11. Desired Ending Inventory
Company will have a policy for desired inventory levels
Likely different for different inventory types
Use in budget
Factors to determine this level?

12. Cash Budget Meshing of receipts and cash payments
Physical Budgets  Cash budgets
Must factor in timing differences of payments and of collections
E.g. cash collections relative to sales
Once finished, can prepare budgeted financial statements

13. Behavioral Implications
Budget padding
Participation in the budget process
Budget ethical issues
Zero base budgeting