Week 9 - Profit & loss and cash budgets

Question 1

Define what a budget is

Answer 1

Is a plan that’s prepared and approved prior to a defined period of time, showing planned income, expenditure and capital employed

Question 2

Define budgetary control

Answer 2

Is the establishment of budgets, relating to the responsibilities of executives to the requirements of a policy, and the continued comparison of actual with budgeted results, to secure by individual action the objective of that policy

Question 3

Typical budgeting cycle

Answer 3

Question 4

What is the Performance hierarchy?

Answer 4

Question 5

Define strategic planning

Answer 5

Is long term looking at the whole organisation and defines resources requirements e.g to develop new products in response to changing customer needs

Question 6

Define tactical planning

Answer 6

• Is a medium term which looks at the department/divisional level and specifies how to use resources
• e.g train staff dealing with challenges that this new product presents

Question 7

Define operational planning

Answer 7

• Is short term which is very detailed and is mainly concerned with control
• E.g A budget is set for the new product to include advertising expenditure, sales forecasts, labour and material expenditure etc

Question 8

Two types of approaches to budgeting

Answer 8

• Incremental
• Zero based

Question 9

Incremental approach to budgeting (2)

Answer 9

• The budget for each period is determined with reference to what was spent last period plus an allowance for anticipated inflation
• This suits a business where similar costs and revenues occur each year

Question 10

Zero based approach to budgeting (2)

Answer 10

• This budget requires each cost element to be specifically justified as if the activity were being undertaken for the first time
• This would suit a new business venture or a rapidly changing/competitive environment

Question 11

What is top down budgeting?

Answer 11

Is based on market driven targets allocated to operational teams and is imposed by senior management

Question 12

What is bottom up budgeting?

Answer 12

Is where operational teams have full participation in preparation which is consolidated into a master budget

Question 13

Budgets as a motivational tool (Hopwood, A; accruing and human behaviour, 1978) (3)

Answer 13

• Any target budget set should be between the aspirational and expected lie
• If its below expected then it’s too easy therefore low motivational as workers don’t see the need to do more
• It is too high then motivation will be impacted as it will be too hard to achieve

Question 14

What are the benefits of budgeting? (7)

Answer 14

• Co-ordination of activities
• Responsibility allocations
• Utilisation of scarce resources
• Motivation of individuals
• Planning of business
• Evaluation of divisions and individuals
• Telling (A communication tool)

Question 15

What is the traditional budgeting dynamic?

Answer 15

Volume > Resource implication > Cost

Question 16

What is the purpose of a P&L budget?

Answer 16

To understand the fundamental viability of the organisation I.e can we make a profit

Question 17

What is the purpose of cash budgets?

Answer 17

To identify liquidity issues and required funding and/or investment opportunities for the year

Question 18

Why is cash important? (4)

Answer 18

• Cash flow is key to financial success and value creation
• Cash helps to:
• pay bills and cover tax
• Capital expenditure and acquisitions
• To service finance and to predict surpluses and deficits