Finance AT

Production Budget

  • Production Budget -Describes ==how many units must be produced in order to meet sales needs== and satisfy ending Inventory requirements.

Production Budget Definition

  • -The %%production budget%% calculates ==the number of units of products that must be manufactured== and is derived from a combination of the sales forecast and the planned amount of finished goods inventory to have on hand (usuallyassafetystocktocoverforunexpectedincreasesindemandusually as safety stock to cover for unexpected increases in demand). The production budget is typically prepared for a "@@push" manufacturing system@@, as is used in a @@material requirement planning environment.@@
  • -It can be ==very difficult to create a comprehensive production budget that incorporates a forecast for every variation== on a product that a company sells, so it is @@customary to aggregate the forecast information into broad categories of products that have similar characteristics@@
  • ==-The planned amount of ending finished goods inventory== can be subject to a considerable amount of debate, since having ==too much may lead to obsolete inventory that must be disposed of at a loss,== while having ==too little inventory can result in lost sales when customers want immediate delivery.== Unless a company is planning to draw down its inventory quantities and terminate a product, there is generally a need for some ending finished goods inventory.

Sales budget

  • %%Sales budget%% -the ==first and basic component of master budget== and it shows the ==expected number of sales units of a period== and t==he expected price per unit==.
  • Sales Budget ==influences many of the other components of master budget either directly or indirectly.== This is @@due to the reason that the total sales figure provided by sales budget is used as a base figure in other component budgets@@.

For example, the schedule of receipts from customers, the production budget, pro forma income statement, etc.

  • Since many components of master budget rely on sales budget, the estimated sales volume and price ==must be forecasted with sufficient care and only reliable forecast techniques should be employed.== Otherwise, @@the master budget will be rendered ineffective for planning and control.@@
  • Where the price per unit is expected to remain constant during the period for all units in sales,

Macroeconomic Variables (external)

  • %%Macroeconomic variables%% such as the ==GDP rate, inflation rate, and interest rates==, among others play an ==important role in forecasting sales because it tells us how much the consumers are willing to spend.== A low GDP rate coupled by a high inflation rate means that consumers are spending less on their purchases of goods and services. This means that we should not forecast high sales of the periods of low GDP.

Developments in the Industry (external)

  • Products and services which have more %%developments in its industry%% would likely have a higher sales forecast than a product or service in slow moving industry. ==Consumer trends are always changing== thus the industry should be @@competitive to be able to appeal to more customers and stay in the market.@@

Competition (external)

Suppose you are selling bread and you know that each person in your community eats an average of one loaf of bread a day. The population of your community is 500 people. @@If you are the only person selling bread in your town, then your sales forecast is 500 units of bread.@@ ==However, you also have to take account your competition.== What if there are 4 other sellers of bread? You will need to have to divide the sales between the 5 of you. Does this mean your new forecast should be 100 units of bread? Not necessary. You should also know the preference of your consumers. If more of them would prefer to buy more bread from you, then you should increase your sales forecast.

Production Capacity and manpower (internal)

  • Your c==apacity cannot cover your expected demand hence,== you are limited by it. To be able to increase capacity, @@you should be able to expand your operations.@@

Suppose that you have already evaluated the macroeconomic factors and identified that there is a very strong market for your product and consumers are very likely to buy from you. You forecasted that you will be able to sell 1,000 units of your product. However, you only have 20 employees who are able to produce 20 units each.

Cash Collection Budget

Expected Cash Collections

  • %%Cash Collections%% is a ==component of master budget and it is prepared after the (preparation of) sales budget and before the preparation of cash budget.==
  • Schedule of expected %%cash collections%% from ==customers shows the budgeted cash collections on sales during a period.==
  • The calculation of expected cash collections is ==based on the total sales figure obtained from sales budget.== The management estimates the proportion in which sales are expected to be collected in the current and following periods. This is used to determine how much sales are expected to be collected during a period.

Working Capital Management

  • %%Working capital%% refers to a company's managerial accounting strategy designed to monitor and utilize the two components of working capital, current assets and current liabilities, to ensure the most financially efficient operation of the company.
  • %%Working capital%% is the amount of available capital that a company can readily use for day-to-day operations. it represents a company liquidity, operational efficiency and short term financial healtt.

Cash

  • %%Cash%% being the ==most liquid asset,== cash is an important account in the balance sheet that will affect the liquidity, and solvency of a company. It is also the ==most vulnerable when it comes to theft.==

^^A good internal control must be properly implemented to safeguard this asset:^^

  • AbasicinternalcontrolA basic internal control system entails the ==assignment of custodial function and recording function to separate individuals====,== unless you are the owner.
  • ==Cash collections should be supported by official receipts== which are summarized in a daily collection report The daily collection report is going to useful for the next control measure for cash-depositing collections,
  • AgoodinternalcontroA good internal contro==l== over cash is by ==depositing all collections intac====t==^^.^^ The daily collection reports are now compared with the deposit slips to find out if all collections are indeed deposited
  • If allcollectionsneedtobedepositedall collections need to be deposited, thenpaymentsmustbemadethroughacheckvouchersystem.then payments must be made through a check voucher system. There must also be two signatories in the check to provide a check and balance. If the business is small, then the entrepreneur's signature may suffice.
  • ==Petty cash fund== used for smallpaymentslikethefaregiventoamessenger,small payments like the fare given to a messenger, A petty cash fund which should be minimal in amount, will be issued to a petty cash fund custodian. say the office administrator. The petty cash fund may be PHP10,000 or PHP20,000. Disbursements from this petty cash funds must be supported by a petty cash voucher signed by the recipient of the petty cash. When the petty cash fund is almost depleted, the petty cash fund custodian will get reimbursements. This reimbursement will go through the check voucher system where the custodian gets a check with the petty cash vouchers as supporting documents.
  • The ==check must also be cross-checked== by drawing two lines on the payee section of the check. This cross-checking requires depositing of a check. Itcannotbeincashed.Thismakesitmoredifficultforsomebodywhostoleachecktogetthemoney.It cannot be incashed. This makes it more difficult for somebody who stole a check to get the money.

%%The following are the reasons for holding cash%%

Primary Reasons

  • %%Transactional-%% This is the cash used for ==paying expenses== such as salaries, utilities, rent and taxes, among others .
  • %%Compensating balance%% -This is the cash held ==to meet bank requirements== such as the

minimum cash balance you maintain for checking accounts and if you have existing loans, banks may also require a minimum amount of deposit with them.

Secondary Reasons

  • %%Precautionary%%- This is the ==cash maintained for emergencies== such as the additional cash you keep during political and economic uncertainties.

For example, if your business requires a substantial amount of importation, a relatively higher amount of cash has to be maintained when the exchange rate becomes highly volatile due to political instability such as what happened during EDSA II.

  • %%Speculative%% This refers to the cash held by ==the company to take advantage of==

==opportunities== .

For example: buying stocks during major corrections such as what happened

at the height of the global financial crisis in 2008 and 2009 where stock valuations went down by as much as 80% for some companies.

Accounts Receivable

a) Accounts receivables ==spring out of the need to sell merchandise.==

b) An excellent business proposition is ==to generate sales without offering a credit==

==facility to customers==. However, this concept is theoretically sound, but not sustainable

For example; a real estate company which sells condominium units at PHP5 million per unit. How many units can the property developer sell if he sells the units only on cash basis? Do you think he can sell a lot? Probably not as many as compared to providing installment payments.

c) %%Credit management strategically%% - defines the ==quality of account receivables collection.== The collectability of accounts receivables depends largely on the quality of customers. The quality of customers depends on the standards or credit policies set up and used by an organization. ==Credit policies are an integral part of the credit evaluation== and there are 5C's used in credit evaluation. These are:

%%i. Character%% - the willingness of @@the borrower to repay the loa@@==n==

%%ii. Capacity-%% a customer's @@ability to generate cash flows@@

%%iii. Collatera%%l- security pledged for payment of the loan

%%iv. Capital%% - a @@customer's financial resources@@

%%v. Condition%%- current @@economic or business conditions@@

d) Proper management of accounts receivable -entails having a good billing and collection system

i. A good system should lead to @@the sending of statements of account to customers on time.@@

ii. @@Follow-ups through phone calls or any form of gentle reminder@@==s== should be made if customers fail to pay on time. These follow-ups can also serve as the management's way of validating if the contact details given by customers are still valid and if the customers still occupy the same office

iii. Aging of receivables is also a @@control measure to determine the@@

@@amount of receivables that are still outstanding and past due.@@

INVENTORY MANAGEMENT

a) Inventory management-involves the formulation and @@administration of plans and policies to efficiently and satisfactorily meet production and merchandising requirements and minimize costs relative to inventories@@

i. Effective inventory management becomes @@critical when the nature of the product@@==s== are either perishable (e.g. fruits, vegetables), fragile (eg. glasses), or toxic (eg. bleaching agent).

b) Proper inventory management involves the ==determination of reasonable levels of inventories considering the size and nature of business.==

i. Maintaining @@too much inventories has costs such as carrying or@@

@@holding costs, possible obsolescence or spoilage.@@

ii. On the other hand, @@too low inventory can result to stockout, and@@

@@eventually lost sales.@@

%%c) Inventory In A Manufacturing Company%%

a. In a manufacturing company, there are three types of inventory:

==i. Raw materials== - these are purchased @@materials not yet put into production.@@

==ii. Work in process== - these are @@goods and labor put into production but not yet finished.@@

==iii. Finished goods== - these are goods put into @@production and finished.@@

@@These are ready to be sold.@@