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MBA 503 - Financial Analysis > Budgeting > Flashcards

Budgeting Flashcards

1
Q

Business Plan

A
  • The business plan is a key document for the internal management of the organization
  • Provides basis for evaluation/control
  • Helps with obtaining financing from external resources
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2
Q

9 steps in a business plan

A
  1. Owner’s visions: Decides to go into business
  2. Site Analysis: Choose site and do market research
  3. Layout design: Choose product/service
  4. Preliminary Budget: Forecast sales revenue
  5. Business Structure: Production, marketing, HR plan
  6. Financing Alternatives: Debt/Equity finance options
  7. Preliminary ProForma: 2-5 year forecast of all financial statements
  8. Discussion Package: Qualitative feasibility analysis
  9. Financing Plan
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3
Q

ProForma

A

A future looking set of financial statements based on estimates

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4
Q

Budget

A

A budget is a plan expressed in monetary terms that covers a future time period (typically a year)

Provides a plan expressed in quantitative terms

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5
Q

Master Budget

A

A MASTER BUDGET is a summary of all phases of a company’s plans/goals

It is a network consisting of many separate budgets that are interdependent.

Culminates into pro-forma statement of net income and cashflow statement

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6
Q

Reasons for budgeting

A

Budgets provide the ability to:

Compels management to think about the future

Clearly defines areas of responsibility

Provides a basis for performance appraisals through variance analysis

Improves allocation of scarce resources

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7
Q

Advantages of Budgeting

A

Provides managers a way to formalize their planning efforts

Provides definite goals and objectives that serve as benchmarks for evaluating subsequent performance (motivates mgrs. to achieve targets)

Uncovers potential bottlenecks before they occur

Coordinates the activities of the organization to ensure the plans and objectives are consistent with the broad goals of the entire organization

Allocates resources in line with strategic goals

Provides a means to control activities

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8
Q

Responsibility Centres

A

A responsibility center is defined as any functional unit headed by a manager who is responsible for the activities of that unit.

Revenue Center
Expense Center
Profit Center
Investment Center

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9
Q

Revenue Center

A

Outputs measured in $ terms but not directly compared to input costs

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10
Q

Expense Center

A

Units where inputs are measured in $ but outputs are not

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11
Q

Profit Center

A

Performance is measured by the difference between revenues and expenditures

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12
Q

Investment Center

A

Outputs compared with assets employed in producing them (ROI)

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13
Q

Eight steps in the budgeting process

A
  1. Business objectives: define and communicate the objectives for the year
  2. External analysis: Forecast economic and industry conditions, including competition
  3. Sales budget: Develop detailed sales budgets by market, geographic territories, major customers, and product groups
  4. Production budget: Prepare production budget (materials, labour, and overhead) by responsibility centre to satisfy the sales forecast and maintain agreed levels of inventory
  5. Non-production budget: Prepare by cost centre
  6. Capital expenditure budget: Prepare capital expenditure budget
  7. Cash budget: Prepare cash forecasts and identify financing requirements
  8. Master budget: Prepare master budget and budgeting statement of cash flows and obtain approval of profitability and financing targets
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14
Q

Sales Budget

A

A sales budget is a detailed schedule showing the expected sales for the coming periods.

Key to the entire budgeting process

All other parts of the master budget are dependent on the sales budget in some way

If the sales budget is inaccurate, the rest of the budgeting process will be a waste of time

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15
Q

Sales Forecasting

A

In order to develop a sales budget, consider the following in the forecast:

  • Past experience with sales volumes
  • Prospective pricing policy
  • Unfilled order backlogs
  • Market research studies
  • General economic and industry conditions
  • Consumer income, employment rate
  • Advertising and promotion techniques
  • 4 P’s
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16
Q

Production Budget

A

After the sales budget is prepared, the production requirements for the forthcoming budget period can be determined and organized in the form of production budget.

Sufficient goods must be available to meet sales projections and provide the desired ending inventory

Production needs = budgeted sales + desired EI – BI

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17
Q

What do you do if the production requirements exceed your capacity?

A

If the production requirements exceed capacity, consider the following options:

Subcontract the work
Plan for overtime
Introduce shift work
Purchase/lease additional machinery

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18
Q

Direct Materials Budget

A

Reports the values of direct materials that will be used during the year

19
Q

Direct Labour Budget

A

A forecast of the direct labour hours required to produce each unit

20
Q

Manufacturing Overhead Budget (MF OH)

A

Often based on previous year’s costs, adjusted for changes in cost rates.
Includes indirect labour, indirect materials and supplies, utility costs, plant maintenance, depreciation

21
Q

Capital Budget

A

The capital budget covers the acquisition of land, building, and items of capital equipment.

22
Q

How are Capital Expenses (CapEx) different from Operating Expenses (OpEx)

A

Purpose: CapEx are assets purchased with a useful life greater than a year; OpEx are costs to run a business

When Paid: CapEx are paid in one lump sum; OpEx are reoccuring expenses

When accounted for: CapEx are accounted for over a 3-10 year life span as the asset depreciates; OpEx are accounted for in the current month or year

Listed as: CapEx are property or equipment; OpEx are operating cost

Tax treatment: CapEx deducted overtime as the asset depreciates; OpEx are deducted in the current year

23
Q

Cash Budget

A 
The cash budget shows the impact of cash flow, under the following sections:
Receipts
Disbursements
Excess/Deficiency (balance)
Financing section
Ending cash balance
24
Q

Budgeting Challenges

A

Accuracy in predictions
Motivational problems
Limiting Nature of Budget
Negative Reputation of Budgeting

25
Q

Accuracy in predictions

A

Predicting volumes and sales are only estimates based on historical performance and future outcomes

26
Q

Motivational problems

A

When a budget is developed to control and monitor performance, managers may be inclined to develop budgets that are easy to achieve to avoid the risk of facing a poor performance review (agency problem)

27
Q

Limiting Nature of Budgets

A

Can constrain/limit innovation when encourage to keep costs at a specific level; may not take actions that could be beneficial for the company

Must have complete acceptance/support of management to be successful

28
Q

Negative Reputation of Budgeting

A

Often viewed by employees as a necessary evil and a restrictive tool.

29
Q

Methods of budgeting

A 
Top-down
Bottom up
Zero-based budgeting
Line-item
Program budgets
Performance budgets
Activity-based budgets
Incremental budgets
30
Q

Top-down

A

Budget prepared by mgmt. and imposed on lower levels of org.

31
Q

Bottom up

A

Supervisors/middle mgrs. prepare budgets and forward them up for review and approval.

32
Q

Zero-based budgeting

A

Each activity starts from a budget of zero and must build their budgets accordingly.

33
Q

Line-item

A

Each expenditure has a line included in the budget and a system to track it (does not show true costs of service programs or production)

34
Q

Program budgets

A

Delineates all the costs associated with doing a project/program (common for grant applications)

35
Q

Performance budgets

A

Similar to program budgets except they are tied to data that includes performance (i.e. customers served)

36
Q

Activity-based budgets

A

Allocates costs to products or services according to how much of the resources of the firm they consume

37
Q

Incremental budgets

A

Takes previous year’s budget as a base and adds/subtracts a percentage to determine new amount.

38
Q

Types of Budgetary Control

A 
Goal Setting
Planning
Planning using a Budget Manual
Planning by Budgeting Profit
Budget Monitoring/Variance Analysis
Auditing Expenditures and Results
39
Q

Goal Setting

A

Set goals for your budget
Recurring operational goals
Strategic goals
Goals communicate to managers what your business must achieve in the coming year.

40
Q

Planning

A

Control the level of spending using budgeting plans.
Short-term budgets
Long-term budgets

41
Q

Planning using a Budget Manual

A

All of your budget procedures and policies belong in one manual

Details who is responsible for various budget functions, such as approving expenditures, scheduling accounts receivable, collecting overdue bills, paying bills, making deposits and creating invoices

Shows how work flows through your budgeting department. For example, indicate how a department manager fills out an expenditure request, who it goes to in the budget center, all of the approvals needed and who sends it back to the department head.

42
Q

Planning by Budgeting Profit

A

Choose your budget method

Example: Choose zero-based budgeting

Income must match expenditures

If you do not include profit as an expenditure, you will have the tendency to spend all of your income on materials, supplies, overhead and payroll. By using zero-based budgeting with an expense built in for profits, you place an emphasis on success rather than mere survival.

43
Q

Budget Monitoring/Variance Analysis

A

Compare what the department actually spends with what the department budget called for.

Determine the reasons for budget overruns, and consider reducing the budget for departments that consistently spend less than their budgets indicated they would need.

44
Q

Auditing Expenditures and Results

A

It is not sufficient to determine if each program area spends according to its budgeted levels.

Audit the expenditures in different budget lines, such as supplies, and identify instances of waste

Study the results achieved based on how a manager spent his budget over the last year

Measure the performance against the overall budget policy

MBA 503 - Financial Analysis (6 decks)

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