BUS114 BUDGETING : INTRODUCTION AND REVIEW

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Module Two: Budgeting Overview

  • Focus on learning objective 3.1 related to preparing an operational budget for retail businesses.
  • Reference: Lecture slides 17 to 25.

Preparing an Operating Budget

Key Components:
  1. Forecast Sales Revenue
    • The business needs to set sales targets for the units of product expected to sell in the upcoming period.
  2. Forecast Inventory Purchase Requirement
    • Determine necessary inventory purchases to meet sales targets.
  3. Forecast Other Business Expenses
    • Include selling, general, and administrative expenses required to operate the business.

Class Example: Organic Body Oil Shop

  • Used to understand the preparation of an operating budget for a retail business.
  • Primary product: Premium organic body oil sold in bottles.
Sales Budget

  1. Forecasting Sales Revenue

    • Start with estimating the number of units to sell and the selling price.
    • Sales revenue formula:
      Sales Revenue=Total Sales Units×Selling Price per Unit\text{Sales Revenue} = \text{Total Sales Units} \times \text{Selling Price per Unit}

  2. Sales Volume Estimation

    • Historical sales data assists in forecasting future sales volume.
    • Example: If 1,000 units were sold last year, project an increase if economic conditions are expected to improve.
    • Special note on economic events affecting sales (e.g., COVID-19 in 2020).

  3. Sales Target Data for Organic Body Oil Shop:

    • Selling Price per Bottle: $40
    • Sales Projection:
      • April: 1,000 bottles
      • May: Higher sales (forecasted at 1,400 bottles)
      • June: Even higher sales (forecasted at 1,700 bottles)
    • Calculating Sales Revenue for April:
      • Sales Revenue (April)=1,000×40=$40,000\text{Sales Revenue (April)} = 1,000 \times 40 = \$40,000
    • Cash Collections for April:
      • All sales are cash sales leading to cash inflow of $40,000 in April.
Consolidated Sales Forecast for Second Quarter:
  1. Total Sales Volume
    • April + May + June = 1,000 + 1,400 + 1,700 = 4,100 units.
  2. Total Sales Revenue
    • Total Revenue=4,100×40=$164,000\text{Total Revenue} = 4,100 \times 40 = \$164,000
  3. Expected Cash Collections:
    • Cash collections will also total $164,000 for the quarter.
Inventory Purchase Budget

  1. Purchasing to Meet Sales Volume

    • Required purchase volumes to maintain availability.

  2. Considerations for Inventory Levels:

    • Meeting forecasted sales demands.
    • Maintaining desired stock levels to handle increased demand.

  3. Inventory Purchase Projections for Organic Body Oil Shop:

    • April: 1,500 bottles at $20 each → Total Cost:
      Total Cost (April)=1,500×20=$30,000\text{Total Cost (April)} = 1,500 \times 20 = \$30,000
    • Cash Payment to Suppliers (April): $30,000 (all transactions are cash).

  4. Forecast for May and June:

    • May: 1,600 bottles → Total Cost =
      Total Cost (May)=1,600×20=$32,000\text{Total Cost (May)} = 1,600 \times 20 = \$32,000
    • June: 1,800 bottles → Total Cost =
      Total Cost (June)=1,800×20=$36,000\text{Total Cost (June)} = 1,800 \times 20 = \$36,000
    • Total for Second Quarter:
      • Total units purchased = 4,900 bottles at $20 → Total Cost:
        Total Cost (Q2)=4,900×20=$98,000\text{Total Cost (Q2)} = 4,900 \times 20 = \$98,000
    • Cash payments total $98,000 for the quarter.
Other Business Expense Budget
  1. Components of Business Expenses:
    • Selling expenses, general and administrative expenses, and their cash payments.
  2. Example Costs for Organic Body Oil Shop:
    • Total salary expense for two staff: $8,000/month.
    • Rental expense: $6,000/month.
    • General operating expenses: $2,000/month.
    • Total Monthly Expenses:
      Total Expenses=8,000+6,000+2,000=$16,000\text{Total Expenses} = 8,000 + 6,000 + 2,000 = \$16,000
    • All expenses paid in cash during the same month.
Forecasting Other Expenses for the Months:
  • Each month from April to June carries the same expense structure totaling $16,000 cash paid out.

Summary of Learning Objective 3.1

  • Preparation of operating budgets involves creating a sales budget, an inventory purchase budget, and other expenses budget.
  • Next phase in upcoming video: Preparing a cash budget using collected data from sales, inventory, and expenses.