Financial Decision Making - Budgeting Notes

Module Objectives

• Explain what a budget is and describe the budgeting process.
• Identify different types of budgets.
• Understand the use of budgeting in planning and control.
• Prepare cash budgets and schedules of receipts from accounts receivable.

What is a Budget?

• A budget is a quantitative expression of an entity's plans, serving vital roles in decision making:
  • Operationalize long-term plans.
  • Assess feasibility of strategic plans.
  • Set targets and identify resource constraints.
  • Recognize periods of cash shortages or excesses.
  • Assist in planning for inventory and labor needs.

Budgeting Process

1. Review past performance.
2. Assess expected trading and operating conditions.
3. Prepare initial budget estimates.
4. Adjust estimates based on feedback from managers.
5. Create budgeted reports and sub-budgets.
6. Monitor actual performance against the budget.
7. Adjust the budget as necessary.

Types of Budgets

• Sales (or Fees) Budget
• Operating (Expenses) Budget
• Production and Inventory Budgets
• Purchases Budget
• Manufacturing Overhead Budget
• Budgeted Income Statement
• Cash Budget
• Budgeted Balance Sheet
• Capital Budgets
• Program Budget

Cash Budget

• A cash budget outlines expected cash receipts and payments, useful for:
  • Documenting cash flow timings.
  • Identifying cash shortages and surpluses.
  • Planning for asset purchases and borrowed funds.
  • Conducting 'what if' analyses.

Variance Analysis

• Favorable Variance: Actual revenues higher than budgeted or costs lower.
• Unfavorable Variance: Actual revenues lower than budgeted or costs higher.

Improving Cash Flow

• Increase Cash Inflow:

  • Enhance collections from debtors.
  • Improve sales or fees.
  • Reduce unnecessary stock levels.
  • Seek external financing.

• Reduce Cash Outflow:

  • Cut expenses by minimizing waste.
  • Optimize creditor terms.
  • Maintain optimal inventory levels.
  • Delay capital expenditures.