Chapter 4: Preparing budgets (functional budgets, cash budgets)

Question 1

Functional budgets

Answer 1

Each function in the business will need to create a budget for what they expect to happen in the next period

including a budget for sales, material purchases, labour requirements as well as every other important area

Question 2

Hierarchy of functional budgets

Answer 2

preparation of functional budgets will asset in the production of the overall master budget (pulls together all the budgets for sales, costs, assets and cashflows to give a budgeted profit and loss, balance sheet and cashflow)

Functional budgets should relate to one another
example can’t expect to sell 100,000 units while producing 50,000 units

Question 3

Preparing the functional budget (template)

Answer 3

Step 1: Sales budget (usually the limiting factor, principle budget factor)

Step 2: Production budget

Step 3: Raw Materials budget, labour budget, production overheads budget

Step 4: Cost of sales budget

Step 5: Admin and general cost budget, selling and distribution cost budget to create a master budget

Question 4

Principle budget factor

Answer 4

Usually sales volume

what is the limiting factor which limits the growth in sales that an organisation can achieve

complete the principle budget factor budget first

Question 5

Preparing functional budgets - additional factors to consider

Answer 5

Principle budget factor first

need to consider:
-Opening and closing inventory of finished goods
-defective units of output
-opening and closing inventory of raw materials
-wastage or raw materials
-idle labour time

Question 6

defective units - mark up or margin

Answer 6

margin

Question 7

Cash budget

what to do if you identify a potential deficit

Answer 7

-organise an overdraft facility with the bank
-offer customers a settlement discount to pay early
-delay payment to suppliers
-delay capex
-raise finance such as loans or share issue

Question 8

Cash budget

what to do if you identify a potential surplus

Answer 8

-offer more generous terms to customers
-arrange to pay off existing finance
-invest the surplus where it will generate a good return

Question 9

Preparing a cash budget

Answer 9

Step 1: Enter one-off payments and receipts such as purchases of non-current assets or receipts from share issue

Step 2: Enter Wages and salaries which are usually paid in the same month

Step3: Deal with receipts from sales (cash sales and credit sales)

Step4: Deal with payment for purchases (cash and credit purchases)

Step 5: calculate net cash flow

Step6: Calculate closing balance

Question 10

Calculating cash flow figures from the financial statements

cash received from customers
cash paid to suppliers

Answer 10

Cash received from customers: calculated from P&L and balance sheet info, trade receivables

Opening trade receivables, add credit sales in period, less closing trade receivables = cash received

Cash paid to suppliers:
Opening trade payables + credit purchases in period - closing trade payables

Question 11

Capital budgets

Answer 11

for purchase of capital items such as new buildings or machinery

Significant impact on the cash flow

benefits realised over a period of many years

may need to work out utilisation

Question 12

machine utilisation formula

Answer 12

(machine hours required/machine hours available)x100