Budgeting and Financial Planning

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Budgeting and Financial Planning

• Chapter 15

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Why budgets?

• Planning
• Controlling
• Coordination
• Allocation of resources
• Evaluation

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Master budget

• Series of individual budgets and schedules
  representing the plan for the organization
• Begins with sales forecast
• Ends with pro forma financial statements

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Sales budget

• Revenue and unit forecast
• Based on various pieces of info
• Past sales, trends, pricing policy, competitors
  actions, etc.

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Operational budgets

• For various operational areas
• Tailored to the type of organization
• Revenue-producing resource needs
• Production or acquisition
• Selling and administrative
• Cash receipts and disbursements
• Capital budget

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Production budget

• Based on sales forecast, desired inventory levels
• Sales end. invty. beg. Invty.

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Materials budget

• Based on production needs, desired material
  inventory levels

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Labor budget

• Based on production needs

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Overhead budget

• Based on production needs
• Not all costs will be proportional to units
  produced
• Batch-level
• Product-level
• Facility-level

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SGA budget

• May be unit-, batch-, product-, customer- or
  facility-level
• Selling expenses based on units sold
• Not units produced

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Cash budget

• All cash inflows and outflows
• Possible timing differences between revenues and
  expenses and the resulting cash flows
• Credit sales
• Schedule of cash receipts
• Credit purchases
• Schedule of cash disbursements

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Budgeted cost of goods manufactured

• Determines the absorption cost per unit
  manufactured

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Pro forma financial statements

• Income statement
• Revenue from sales budget
• Cost of goods sold from unit cost calculation
• SGA expenses from SGA budget
• Other expenses from cash budget
• Interest expense
• Income tax expense

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Pro forma financial statements

• Balance sheet
• Some items direct from budgets
• Cash
• Accounts receivable
• Materials inventory
• Finished goods inventory
• Accounts payable
• Some are rolled forward from previous year
  balances

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Pro forma financial statements

• Statement of retained earnings
• Previous year balance
• Add pro forma income
• Subtract dividends (cash budget)
• Cash flow statement
• Direct from cash budget

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Budget considerations

• Different budgets for different uses
• Planning
• Master budget
• Static budget
• Controlling
• Flexible budget
• Includes different levels of activity as
  benchmarks
• Evaluating
• Flexible budget
• Budget at actual level achieved

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Budget considerations

• Behavioral and ethical issues
• Based on estimates
• May be intentionally misstated to make actual
  results look better than planned
• Misallocation of resources
• Breakdown of coordination
• Participative or imposed?
• Who knows best?