Lecture 9: Budgeting Flashcards
Budgeting
Allows a business to predict their future financial positition or performance and their future goals - able to use a budget to make targets and guide performance so that they can meet the budget
Strategic planing
Planning focusing on the broad, overall direction of the business, considering large issues such as expansion, resturcturing or new product development.
Budgeting process
- Planning - considering decisions such as the duration, realism, adjustability, approach and timing of the budget
- Control - implementation of the budget, evaluating out performance throughout the period and reviewing our end performance
Master budget
Interrelated budgets covering all aspects of the business including the operational and financial budgets
Operational budgets
- Sales budget - prepared for each product/service line (expected volume of sales x intensed slling price)
- Purchases budget - determines the colume of production/purchases needed to meet the sales budget
- Operating expense budget - includes seperate budgets for each cost centre beween gross profit and EBIT
Financial budgets
- Budgeted profit and loss statement - combines the individual operating budgets
- Capital expenditure budget - related to planned expenditure on net capital accumulation
- Cash budget - prediced cash receipts and patments relating to operating and investing activites - will determine the levels of financing activities needed to meet the other cash obligations - prepared on a month-by-month basis
- Budgeted balance sheet - the result of the previous balance sheet data with the budgeted income statment, cash budget and capital expenditure budget imposed upon it
Critical evaluation of common budgeting process approaches
- Budgetary slack - may occur because of a participitative approach to ensure that the target is easily achieved
- Discretionary spending - unnecessary spending to rais expenses to ensure that future busgets are not cut
- Deferring incurring expenses in the period - to make sure the expense targerts are not exceeded
- Lack of motivation except towards the target - once the target is met performance slows down
- Difficulty of authoritarian set target - demotivates managers who feel it is unreachable
- Figure may already be known
Incremental v. zero-based budgeting
Incremental is where the previous years figures are used as a base and increases/decreases are justified with these figures
Zero-based is where each figure is developed from scratch with a cost-benefit analysis
Variance reports
Created at the end of the period to determine the differences between actual and budgeted forecasts - once these are identified management will determine which are significant and then analyse why these occured and then take corrective action.