Budgeting Flashcards
Budgeting
The process of preparing reports that estimate the financial consequences of financial transactions
- Assists planning by predicting what is likely to occur
How does budgeting aid decision making?
- Comparing actual results vs budgeted
- Identifying and explain reasons for significant differences
- Improving how to run the business
Budgeted cash flow statement
An accounting report that attempts to predict all future cash inflows and outflows and the estimated bank balance at the end of the budget period
Uses of budgeted cash flow statement
Planning > is business expecting surplus or deficit?
Surplus…
- What level of drawings are realistic w/o compromising liquidity of business?
- When’s the best time to purchase an NCA?
- Increase loan repayments to reduce interest expense
- Increase advertising
Deficit…
- Organise/increase overdraft facility
- Defer purchase of a NCA
- Capital contribution
- Defer loan repayments
Operating activity cash flows…
- Increase sales, offer discounts to accounts receivable
- Avoid prepaying expenses, defer some expenses (advertising)
Budgeted income statement
Accounting report that attempts to predict future revenues and expenses to determine expected net profit/loss for the budget period
Using budgeted income statement to plan
Based on expected sales levels, need to plan for…
- Staffing levels
- Mark-up to achieve goals
- Levels of inventory management for gains/losses
- Staff performance
Using budgeted income statement to make decisions
Compare actual performance to budgeted to identify problems and take corrective action
- Is % mark-up helping achieve goals?
- Did ads reach intended customers?
- Should advertising be increased?
Budgeted balance sheet
An accounting report that attempts to predict future assets, liabilities and owner’s equity at a particular point in the future
Using budgeted balance sheet to plan
- Analyse changing carrying value (CV) of NCA’s, plan for replacement
- Loan requirements
- Drawings levels
Using budgeted balance sheet to make decisions
- Setting benchmarks for liquidity and stability levels
- Working capital ratio
- Debt ratio (fund assets)
Different between budgeted and actual reports
Budgeted
- Uses future predicted values
- Estimates uncertain, no source docs
- Estimates drawn from variety of sources (knowledge of business, expected market conditions)
Actual
- Based on actual transactions (past events)
- Use source docs to record
- Info extracted to reports from transactions recorded in journals and ledger accounts
Budgeting process cycle
> Budgeted reports prepared
Actual reports prepared
Variance reports prepared
Decisions made to improve business performance
Variance reports
A report that compares actual and budgeted results highlighting differences so problems can be identified and corrective action taken
Interpreting graphs of financial reports
- Describe variance (unfavourable, favourable) and by how much
- Describe potential reasons for the variance
Strategies to improve cash inflows from operating activities
- Word of mouth or social media advertising to increase sales
- Increase paid advertising if expected to bring greater cash inflows from sales
- Identify fast moving vs slow moving inventory, adjust inventory mix
