Week 7 - Business Planning - Operating and Financial Budgets Flashcards
What is a budget
o A budget is a comprehensive, formal plan expressed in financial terms, covers a future time period and is based on a defined level of activity (fancy word for a financial plan!)
What are benefits of budgeting?
o Use information to evaluate progress
o Ensures a company/business remains on track
o Creates an early warning system for potential problems
o Results in greater management awareness of the overall operations of the business
What makes for a good/effective budget?
o Depends upon a sound organisation structure where responsibility and authority for all phases of operations are clearly defined
o Require realistic goals to be effective
o Acceptance levels of management
Explain the concept of budgetary control?
o Develop budget, analyse differences between actual and budget (did we achieve), take corrective action and then modify future plans.
o Budgetary control compares actual results to planned objectives and thus allowing analysis of results to happen and action to take place if necessary.
What are some problems with budgeting?
o Time consuming and expensive
o Too ridged
o Focus on sales targets rather than customer satisfaction
What is a sales budget?
o Estimated sales in units and dollars from the organisation’s products
Explain a purchases budget
o Provides information regarding how many products need to be purchased and how much this will cost.
What is a cost of sales budget?
o Cost of sales is related to the units sold, not purchased
o It is an expense budget and will affect the profit/loss statement
What is a cash budget?
o Movements through the business’s bank account, identifies cash inflows and cash outflows
o Supports cash flow planning and identifies cash balance at the end of each budgeted period
What does a cash budget show?
o Shows expected cash receipts, cash payments, and therefore identifies impact on the business cash balance
What are the components of a cash budget?
o Add cash inflows = cash available
o Minus cash payments = cash balance at end
Schedule of Cash Collections
o A schedule of cash collection lays out when each dollar of sales revenue will be “collected.”
Explain a schedule of payments for purchases
o When a business does not pay the supplier in cash but rather on credit, there is then a mismatch between the timing of purchases of goods and services and cash outflow.
