FINANCING AND BUDGETING

CAPITAL

refers to resources like land, buildings, machinery, tools, and materials used in production.

FIXED CAPITAL

Assets used repeatedly in production over a long time

(e.g., land, buildings, machinery, tools, and equipment) .

NATURAL CAPITAL

Land and Natural resources

ARTIFICIAL CAPITAL

Produced assets like buildings, machinery, tools, and materials.

WORKING CAPITAL

Funds required for daily operations.

PAID-IN CAPITAL

refers to the money paid for the stock sold.

EQUITY CAPITAL

total assets of an enterprise minus debts.

INDIVIDUAL SAVINGS

Money saved by people, either directly (in banks) or indirectly (through insurance or investments), from their income.

BUSINESS SAVINGS

Profits of businesses reinvested in equipment, machinery, and other assets for production.

GOVERNMENT SAVINGS

Surplus from collected taxes used for public projects like roads and schools.

CAPITAL POOL

it fuels the economy.

MONEY MARKET

refers to a financial market segment where short-term borrowing, lending, buying, and selling of financial instruments occur.

SHORT-TERM LOANS

• Typically range from 30 days to 2 years.

• It is usually used to cover temporary needs of a business-like purchasing materials or supplies, paying for operational expenses like salaries.

INTERMEDIATE TERM LOANS

• Extend up 2 to 5 years. 

• Usually used for projects that take longer to generate returns like upgrading equipment or expanding business facilities.

LONG-TERM LOANS

• It usually lasts for more than 5 years. 

• Used for large projects or investments that require significant capital.

COMMERCIAL BANKS

Served the current credit needs of business enterprises.

TRADE CREDITS

• mainstay of intermediate and short-term financing, particularly for the small enterprise. 

• It covers not only commodities and supplies, but also machinery, fixtures, equipment, and other items of longer-term financing.

CREDIT INSTRUMENTS

These are the legal forms through which loans are made.

PROMISSORY NOTES

A written promise by the borrower to pay a specific amount of money at a designated time.

BILLS OF EXCHANGE

A written order directing a party to pay a specific amount to another party at a future date.

CREDIT CARDS

A revolving credit instrument allowing the holder to borrow money up to a certain limit, to be paid back over time.

COMMERCIAL PAPERS

It is a short-term, unsecured debt instrument issued by large corporations or financial institutions to raise funds for immediate financial needs, such as payroll, inventory, or short-term liabilities.

VENTURE CAPITAL

It is money invested in businesses in exchange for ownership (equity).

FINANCING THE NON CORPORATE ENTERPRISE

• In this case it shows how single proprietorships and partnerships are typically financed. Initially, the capital comes from the owners themselves and potentially from loans or investments made by their friends. 

• This method—funding a business through personal and property contributions by those directly involved—has been one of the oldest forms of business promotion, and it continues to be an important method of financing even today.

CORPORATE CAPITALIZATION

The key factors or chief factors in this decision are the nature and size of the business.

2 CLASSES OF STOCKS

1. Common Stock

2. Preferred Stock

COMMON STOCK

• carries no special rights or privileges.

• bear the full risk of the business, and are the legal owners, entitled to the net assets. 

• They typically control the business through the voting power of their stock.

PREFERRED STOCK

• a type of capital stock designed to attract investors by offering specific benefits, such as priority in receiving dividends and assets, convertibility to common stock, or investment security through a sinking fund. 

• However, it may have limited or no voting power, as its privileges reduce the risks common shareholders face.

BONDS

are promises to repay loans.

TYPES OF BONDS

1. Corporate Bonds

2. Government Bonds

3. Municipal Bonds

4. Convertible Bonds

5. Zero-Coupon Bonds

INVESTMENT

is a long-term responsibility of management to yield a large amount of profit or return.

BUDGETING

is a function to plan that profit or return picture.

CONTROL THROUGH THE BUDGET

• Budget is a means toward an end and is not an end within itself.

• It establishes a goal.

• Recording of actual results against estimates of the budget.

COORDINATION THROUGH THE BUDGET

Budgets should be constructive aids to all departments, within an organization in achieving their common goals.

VARIABLE BUDGET

Constructed in anticipation of variations in sales. It provides in advance for orderly change in the volume of production and in expenditures.

STEP BUDGET

A series of budgets set up at different levels of volume of production or sales.

VARIABLE RATE OF COST

Provides an estimate of the variable rate of cost per unit of production or per dollar shipments of sales.

STATIC BUDGET (FIXED BUDGET)

This depends on ability to predict income, sales, or shipments with at least a reasonable degree of accuracy.

ZERO-BASE BUDGETING

• Requires each budget unit to make a fresh start every year. from zero outlay level to how much will be needed next year to conduct operations.

• Its prominence is elevated when President Carter prescribes it for the Federal budget.

BUDGET DIRECTOR

• Often the controller or assistant controller.

• Role: They act as a coordinator between divisions or departments in budget preparation.

BUDGET COMMITTEE

• Usually, the heads of divisions together with the staff representatives.

• Role: Receiving and approving forecasts, departmental or division budgets, periodic reports, and request special studies of deviation from the budget and consider revision of budget to meet changed business conditions.

BUDGET OFFICER

• Role: Ensures that the department estimates are provided with supporting data for effective consideration of the committee, responsible for the presentation of the budgets.

• transmitting back to the departments the recommendations of acceptance or revision, organization of periodic operation reports, and preparing special reports  recommend revision to correct difficulties.

DEPARTMENTAL BUDGET PREPARATION

• This adheres to the principle of participation as means towards cooperation.

• Head of the department may act as a chairman of the department committee but, in a large department, he/she should assign detailed gathering of budget information to different teams. 

• An organization within the department will lead to better budget preparation and will prove especially useful in budget control.

ADEQUATE COST INFORMATION

essential for budgeting and constitute the foundation for the conversion of forecast and business policy into production.

SIX BASIC BUDGETS NEEDED (BASIC BUDGET MANUFACTURING)

1. PRODUCTION BUDGET

2. MATERIALS BUDGET

3. PLANT AND EQUIPMENT BUDGET

4. MAINTENANCE BUDGET

5. MANUFACTURING EXPENSE BUDGET

6. LABOR BUDGET

PRODUCTION BUDGET

Outlines the schedule of product units to be manufactured.

MATERIALS BUDGET

Specifies the direct material needed to produce the number of units scheduled.

PLANT AND EQUIPMENT BUDGET

Sets forth the requirements of space and machinery.

MAINTENANCE BUDGET

Covers maintenance of facilities and equipment.

MANUFACTURING EXPENSE BUDGET

Includes the overhead or burden charges for the period.

LABOR BUDGET

Specifying the productive personnel needed to meet the production schedule.

FINANCIAL BUDGET

Presents a summary of anticipated receipts and disbursements for the budget period.

ABSOLUTE NECESSITIES

Essential expenses like monthly requirements of materials for production, payroll, etc.

LIMITATION OF AVAILABLE CASH

Ensuring that expenses do not exceed available cash.

EXAMPLES OF VARIABLE COST

1. Raw materials

2. Packaging

3. Production supplies 

4. Delivery/shipping cost

5. Labor cost