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Manage Budgets & Financial Plans

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Imran Goss

on 3 November 2014

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Transcript of Manage Budgets & Financial Plans

Manage Budgets & Financial Plans
TLIP 5035A

Is a statement about future demand.

The future demand is usually reported on the following basis,

Monthly or
(every 3 months)

What is a Forecast?
Every department within a company needs an estimate of what the future will look like.

Why Forecast?
What is a Budget?
A Budget is an estimate of income and expenditure for a set period of time.

Another way of thinking is a budget is like a plan, a guideline that the business needs to follow.
"When you're clear on your strategic goals and have a process that integrates strategic planning with resource allocation and performance management,

can actually work
, Baxter says. It becomes a mechanism for ensuring not only that funds flow first to the strongest opportunities, but also that those opportunities actually deliver on their promise."
Harvard Business School

Research and Ideas
Loren, G. 2013, "Why Budgeting kills your company," Harvard Business School

11th August 2003,
source: http://hbswk.hbs.edu/item/3623.html
Budget Preparation
Budgets are also plans expressed in financial terms.

Important factors must be considered such as......
Past sales levels & trends
Economic trends
Likely action of competitors
Market research studies
Possible government actions (policies and laws)
Budget Preparation

Manage Budgets and Financial Plans

Transport & Logistics
Imran Goss

Version 2.0 October 2014
The planning cycle of a budget....
Comparison of actual results
to budget
Budget Preparation
Salaries 231, 000
Stationery 10, 000
Telephone 10, 800
Electricity 11, 320
Rate 5, 555
Depreciation 9,000
Brisbane Branch: Linfox Australia
Estimated changes for the next financial year
Salaries are expected to increase by 5%
Stationery is expected to decrease by 10%
Electricity will increase by 6%
Rates will increase by 8%
Telephone & depreciation will remain the same
The new budget
Brisbane Branch: Linfox Australia

Salaries 242,550
Stationery 9,000
Telephone 10,800
Electricity 12,000
Rates 6,000
Depreciation 9,000


Benefits of budgeting
It compels management to plan ahead
Anticipates the future in a systematic way
Provides the business at all levels with a realistic performance target
It outlines the divisions of a business and creates awareness amongst staff
It serves as an effective communication tool
Limitations of budgeting
Budgets cannot ensure that the future has been accurately predicted
Budgets are only
Budgets are not substitutes for sound management practices
Budgets must be
adjusted / changed
to reflect the economic climate
Success comes from the efforts of
staff and management
not the budget.
Classifications of budgets
A static budget is prepared for one level of activity.
A particular level of production
A level of sales
Classifications of budgets
A flexible budget is several budgets covering a range of activity within the organisation.
A sales budget based on sale levels at,
$190,000 &
What are Fixed Costs?
These are costs that in total will tend to remain the same for a period of time.

They also stay the same over a particular range of activity.

Examples of Fixed Costs
Such costs will not be affected by the changes in the level of activity.
What are Variable Costs?
Variable costs will fluctuate up and down with the level of activity.
Water consumpltion
What are total costs?
Total costs include both
fixed costs
of a business.
Zero based budgeting
Zero based budgeting sets the initial figures for each activity to zero.

To receive funding from the budgeting process each activity must justified in terms of,

Usefulness &
Resource needed
Zero based budgeting
This forces management to think
carefully about the operations of the organisation before allocating resources.
Period budgets
Budgets are usualy developed for
a specified period of time.

Short range budgets cover a,

Quarter or
Rolling budgets
Rolling budgets are continually updated by periodically adding a new time period or starting point.

The last period that is completed is dropped & the new period starts.

This is also known as a continuous budget.
Master budgets
A master budget is a combination of all budgets of an organisation.

Dealing with all phases of the operations of the business for particular period of time.
Master budgets
A master budget would cover,

1. Sales, production costs, purchases & incomes


2. Pro forma financial statements

Mast budgets
The master budget can be divided into two main sections,

1. Operational Budget


2. Financial Budget

Master budgets
Operational Budgets
include the following,

Sales Budget
Production Budget
Direct Material Purchases Budget
Direct Labor Budget
Overhead Budget
Selling and Administrative Expenses Budget
Cost of Goods Manufactured Budget
Master budget
Financial Budgets
include the
Schedule of Expected Cash Receipts from Customers
Schedule of Expected Cash Payments to Suppliers
Cash Budget
Budgeted Income Statement
Budgeted Balance Sheet
Sales budget
AB Trading
Sales budget
for the March quarter 2008

Jan Feb March Total
Sales- Cash
56,000 56,000 56,000 168,000
Sales- Credit
14,000 14,000 14,000 42,000

Total $
70,000 70,000 70,000 210,000

Sales budget
Sales are the main source of income for trading.

This is what has been bought by customers of the business.

Cash flow of the business is dependent on sales.
Sales budget
A sales budget is an
of the amount of sales to be achieved in a given period of time.

Such as,
Half yearly or a
Full year
Sales budget
The four quarters that make up the year are:
January, February and March
April, May and June
July, August and September
; and
October, November and December

A quarter is often shown with its relevant year, as in Q1 2012 or Q1/12, which represents the first quarter of the year 2012.
Revenue Budgets
budgets are
of income of an organisation for a set period of time.

Consider a manufacturing company that produces concrete pipes.

It need to estimate the number of concrete pipes it will sell so that it knows how many to produce.

This in turn will specify the following,

1. Materials needed
2. How many employees required (& skills)
3. Production hours required


Operating budgets
Operating budgets are estimates on activities that will
effect profit.

For example,

A manufacturing company that produces concrete pipes, some of the operating budgets would be as follows;

1. Production budget
2. Direct materials budget
3. Factory overhead budget
4. Cost of goods sold budget (Cogs)
5. Cash budget
How to read a profit and loss statement
The following figure presents a P&L report for a profit center example that classifies operating expenses according to how they behave relative to sales activity.

The detailed expenses under each major heading are not presented in the P&L report itself.
Instead, this information is presented in supporting schedules that supplement the main page of the P&L report.

How to read a profit
and loss statement

The P&L report shown in the figure includes sales volume, which is the total number of units of product sold during the period.

The accounting system of a business has to be designed to accumulate sales volume information for the P&L report of each profit center.
How to read a profit
and loss statement

How to read a profit
and loss statement

another example

Raw materials $215 $32,250,000

($215 x 150,000 units)

Direct Labour $125 $18,750,000

($125 x 150,000 units)
Calculations on example
Calculations on example
To 40,000 units inventory increase ($247,600,000)

($690 x 40,000 units)

To 110,000 unit sold $75,900,000

($690 x 110,000)

Questions &
A Peacock in a land of Penguins
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