strategic planning
long-term planning (3-5 years)
- typically carried out by senior management
- concerns broader issues –> business takeovers, expansion plans, etc.
budgeting
- focuses on short term (typically looking forward to 1 year)
- sets the financial framework of the time period
- how an entity is going to achieve its goals
budget
QUANTITATIVE expression of an entity’s plans
how can budgeting assist decision making?
- putting into operation longer term plans
- Assessing the feasibility of strategic plans
- setting targets for managers
- identifying resource constraints in budget period
- identifying periods of expected cash shortages and excess cash holdings (working capital management)
- assisting with short-term planning decisions, such as capacity utilisation
master budget
a SET of interrelated budgets (individual operating budgets) for a future period which provides a framework for viewing relevant budgets of an entity
in order for the master budget to be used as a control tool, it needs to…
mirror the entity’s chart of accounts
sales budget shows…
- Sales revenue per period—the amount of inventory (retail and manufacturing) or employee time (service) to be sold each period, converted into dollars
- Cash collections from sales (and when)
total revenue
BP(BQ)
purchase budget shows…
purchases (in units and dollars) required each period to forecast how many units of inventory to purchase
2 purposes for purchase budget
- meet “expected” sales target (formulated by sales budget)
2. keep inventory at desired levels.
selling expenses + associated cash payments budget examples
- delivery costs
- advertisements
general and administrative expenses and associated cash payments budget example
- salaries
- general overheads
cash budget
statement of expected future cash receipts and payments
- data comes from PREVIOUSLY PREPARED budgets (such as sales budget)
how does the cash budget assist in decision making?
- documenting timing of all cash receipts and payments
- helping to identify periods of expected cash shortages and surpluses
- identifying suitable times for purchase of non-current assets
- assisting with planning and use of borrowed funds
- providing a framework for ‘what if’ analysis
projected income statement
summarises a business’ expected revenues and expenses for the budget period
3 ways to calculate COGS
- Cost of Opening Inventory + Cost of Purchase – Cost of Closing Inventory
- Purchase price per unit * Total sales units
- percentage of sales rev ex: COGS = 55% of sales rev
net cash flow (cash budget)
cash receipts - total payments
suggestions for improving cash flow
- selling excess non-current assets
- reducing unnecessary stock levels
- seeking ways to improve sales or fees
ways cash outflow can be reduced
- keeping inventory levels to only what is required
- cutting expenses by identifying areas of waste, duplication or inefficiency
- reducing carbon footprint
the style of budgeting processes is…
the extent of participation by managers in the annual budget process
behavioural aspect of budgeting explores 2 key areas:
- the “style” of budgeting process
2. the impact of budget targets on manager’s motivation, behaviour & decision making
authoritarian style of budgeting
- top-down approach
- senior management are the ones that set the target/budget for unit managers
- ^ unit managers have no say
participative style of budgeting
- bottom-up approach
- targets and budgets are arrived at by a process of discussion and negotiation between senior management and unit managers
- share information (lower level management has more info + contact on customers)
limitation of bottom-up approach
- budgetary slack (setting targets too low –> meaningless)
