1. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning

2. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning A budget is a plan expressed in financial and/or more general quantitative terms, which extends forward for a period into the future

3. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Budgeting forms part of a broader planning process Having established strategic objectives, management assesses alternative actions and then formulates detailed plans, taking into account any constraints

4. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Example: Arbus Arbuthnot plc - manufacturer of skincare products and cosmetics 1. Sales budget 2. Production budget 3. Communication of budget guidelines 4. Submission of departmental budgets 5. Approval of budgets 6. Agreement and implementation

5. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Planning and co-ordination of operations and activities Providing motivation Control of operations and activities Basis for performance evaluation

6. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Demotivational budgets Setting unrealistic targets Budgetary slack Incremental approach Use it or lose it Name, blame and shame

7. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning

8. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Durka is a sole trader, selling tyre pressure gauges to car spares suppliers. Planned sales in units for the next three months are: January 1800 February2000 March2100

9. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Durka: opening balance sheet at 1 January Fixed assets10 000 Stock 3 000 Debtors 4 000 Cash 2 100 9 100 Creditors: stock ( 3 000) Creditors: expenses( 200) Net current assets 5 900 Total net assets 15 900 Capital 15 900

10. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning 1. Debtors at each month end = 50% of sales for that month 2. Stock and creditors for stock at end March = 50% of cost of sales for March 3. Payments for purchases of stock: January £6 300, February £7 000, March £7 350 4. Creditors for expenses at each month end = £200 5. Selling price per unit = £5 6. Cost price per unit = £3.50 7. Expenses = £1500 per month, including £100 of depreciation

11. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Calculate: 1. Budget profit and loss account for each of January, February and March 2. Budget cash flow for each of January, February and March 3. Budget balance sheet at 31 March

12. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Durka: budget profit and loss account Jan Feb March Sales (1800 x £5)9 000 (2000 x £5) 10 000 (2100 x £5) 10 500 Cost of sales (£3.50) (6 300) (7 000) (7 350) Gross profit2 700 3 000 3 150 Expenses (1 500) (1 500) (1 500) Net profit1 200 1 500 1 650

13. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Budget cash receipts £ January receipts = opening debtors 4 000 + 50% x January sales of £9 000 = 4 500 8 500 February receipts = 50% x January sales 4 500 + 50% x February sales of £10 000 5 000 9 500 March receipts = 50% x February sales 5 000 + 50% x March sales of £10 500 5 250 10 250

14. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Creditors and stock At 31 March, creditors and stock = 50% of March cost of sales: 50% x £7 350 = £3 675 Debtors At 31 March, debtors = 50% of March sales: 50% x £10 500 = £5 250

15. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Budget cash payments for expenses Expenses are the same each month (£1500) and the month end creditor is the same (£200) Excluding depreciation of £100 per month, cash payments each month for expenses = £1 400

16. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Durka: budget cash flow Jan FebMarch Cash receipts 8 500 9 500 10 250 Cash payments stock (6 300) (7 000) (7 350) Cash payments expenses (1 400) (1 400) (1 400) Net cash inflow 800 1 100 1 500 Opening cash balance 2 100 2 900 4 000 Closing cash balance 2 900 4 000 5 500

17. Use with Business Accounting and Finance Second Edition by Catherine Gowthorpe ISBN 1-84480-200-0 © 2005 Thomson Learning Durka: budget balance sheet at 31 March: Fixed assets(10 000 - 300) 9 700 Stock 3 675 Debtors 5 250 Cash 5 500 14 425 Creditors: stock ( 3 675) Creditors: expenses ( 200) Net current assets 10 550 Total net assets 20 250 Capital (£15 900 + 1 200 + 1 500 + 1 650) 20 250