2 Flashcards
What is a budget
Quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.
Various activities within a company should be coordinated by preparation of plans of actions for future periods. These detailed plans are usually referred to as budgets
What is the strategic planning, budgeting and control process
Specify objectives and strategies
Creation of long-term plan
Preparation of annual budget
Monitor actual results
Respond to deviations from plan 
What are the functions of budgeting
Coordination
Communication
Motivation
Planning
Evaluation
Control
What are the stages in the preparation of budgets
Communicate policy and guidelines to those responsible
Determine the factor that restricts output (usually sales demand)
Prepare sales budget
Prepare supporting budgets and master budgets
Negotiate budgets with line managers
Coordination and review of budgets
Final acceptance of budgets
Ongoing review of budgets
What are the different types of budgets process
Top down (imposed)
Bottom up (participative)
Parallel (negotiated)
What does the sales budget determine
Trade receivables budget (how much credit business allows customers)
Once business knows how much credit to allow, inflow to cash budget can be determined
What does the labour budget feed into
Cash budget (businesses usually pay labour in same week or month that they work)
Once business knows production quantities, it can determine labour budget
Sales budget also determines production budget
What can be determined once trade payables budget is determined
Outflow from cash budget
Once business knows how much credit is allowed, trade payables budget can be determined

Once production budget is known, business can determine raw materials purchases budget
What requirements will sales, production and labour all have
Overhead requirements that will be paid at sometime and there will be outflows from cash budget
What type of requirements for investments will all aspects of the business have
Capital requirements. There will be outflows from cash budget.
Business may have financing needs and may issue shares for cash or take out loans. There will be inflows to cash budget
What are cash budgets
Shows budgeted cash flows in and out of business for budgeted period
Why is cash flow different to profit
Some cash outflows aren’t expenses – purchase of non-current assets and loan repayments
Some cash inflows are not income – issue of shares and loans received
Some expenses are not cash outflows – depreciation
There are timing differences between cash budget and income statement
Using cash budgets for control, what would you do to manage situation when prediction is short-term cash deficit and what are the consequences of your actions
Take more credit from suppliers – could affect goodwill and costs
Allow customers less credit – could harm goodwill and damage sales
Apply for bank overdraft – interest costs
Buy less inventory – could affect capacity and costs
Delay buying non-current assets – could affect capacity or other costs
Cancel or delay dividends or other payments to owners – may rely on income
Using cash budgets for control, what would you do to manage situation when prediction is long term cash deficit and what are the consequences of your actions
Apply for long term loan – interest costs
Buy non current assets on long-term finance – interest costs
Sell and lease back existing non current assets – interest costs
Cut costs – shrink business
Issue shares for cash – need to pay dividends in future
Using cash budgets for control, what would you do to manage situation when prediction is short-term cash surplus and what are the consequences of your actions
Buy more inventory and increase production – take advantage of bulk discounts
Pay suppliers earlier – generates goodwill and may result in prompt payment discounts
Invest in short-term deposits – interest income
Allow customers longer to pay – generates goodwill and may boost sales
