Intro to Master BudgetIntro to Master Budget

AGEC 489-689AGEC 489-689

Spring 2010Spring 2010

Some Conclusions….

• Indicators of Indicators of growth/survival:growth/survival:– Increasing liquidity– Increasing solvency– Increasing debt

repayment capacity– Increasing profitability

• Indicators of Indicators of potential failure:potential failure:– Declining liquidity– Declining solvency– Decreasing debt

repayment capacity– Decreasing profitability

#3:Pro Forma Analysis#3:Pro Forma Analysis

• Stress testingStress testing current expected cash flows by varying prices, unit costs and yields.

• Look at implications of longer run price and unit cost trends on future future financial healthfinancial health when making major decisions.

Pro Forma AnalysisPro Forma Analysis

When going down the road, use the windshield as well as the rear view mirror!

Master Budget Preparation• Annual operating budgetsAnnual operating budgets

– Sales budget: number of units to besold– Production budget: expected output and inventory– Direct materials budget: planned material use– Direct labor budget: planned labor use– Other budgets: expected selling and administrative

– Needed to prepare the cash budget

• Other annual budgets and statementsOther annual budgets and statements– Capital expenditure budget– Needed to prepare budgeted cash flow statement – Needed to prepare budgeted income statement– Needed to prepare budgeted year end balance sheet

Sales BudgetSales Budget

Design of the Master BudgetDesign of the Master Budget

Sales BudgetSales Budget

Production BudgetProduction Budget

Design of the Master BudgetDesign of the Master Budget

Sales BudgetSales Budget

Production BudgetProduction Budget

Direct MaterialsBudget

Direct MaterialsBudget

Direct LaborBudget

Direct LaborBudget

OverheadBudget

OverheadBudget

Design of the Master BudgetDesign of the Master Budget

Sales BudgetSales Budget

Production BudgetProduction Budget

Direct MaterialsBudget

Direct MaterialsBudget

Direct LaborBudget

Direct LaborBudget

OverheadBudget

OverheadBudget

Selling and AdministrativeExpense Budget

Selling and AdministrativeExpense Budget

Design of the Master BudgetDesign of the Master Budget

Sales BudgetSales Budget

Production BudgetProduction Budget

Direct MaterialsBudget

Direct MaterialsBudget

Direct LaborBudget

Direct LaborBudget

OverheadBudget

OverheadBudget

Selling and AdministrativeExpense Budget

Selling and AdministrativeExpense Budget

Design of the Master BudgetDesign of the Master Budget

Cash BudgetCash Budget

Sales BudgetSales Budget

Production BudgetProduction Budget

Direct MaterialsBudget

Direct MaterialsBudget

Direct LaborBudget

Direct LaborBudget

OverheadBudget

OverheadBudget

Selling and AdministrativeExpense Budget

Selling and AdministrativeExpense Budget

Budgeted Cash Flow Statement

Budgeted Cash Flow Statement

Pro Forma Financial StatementsPro Forma Financial Statements

Cash BudgetCash Budget Capital expenditures

Capital expenditures

Sales BudgetSales Budget

Production BudgetProduction Budget

Direct MaterialsBudget

Direct MaterialsBudget

Direct LaborBudget

Direct LaborBudget

OverheadBudget

OverheadBudget

Selling and AdministrativeExpense Budget

Selling and AdministrativeExpense Budget

Budgeted IncomeStatement

Budgeted IncomeStatement

Budgeted Cash Flow Statement

Budgeted Cash Flow Statement

Pro Forma Financial StatementsPro Forma Financial Statements

Cash BudgetCash Budget Capital expenditures

Capital expenditures

Sales BudgetSales Budget

Production BudgetProduction Budget

Direct MaterialsBudget

Direct MaterialsBudget

Direct LaborBudget

Direct LaborBudget

OverheadBudget

OverheadBudget

Selling and AdministrativeExpense Budget

Selling and AdministrativeExpense Budget

Budgeted IncomeStatement

Budgeted IncomeStatement

Budgeted Cash Flow Statement

Budgeted Cash Flow Statement

BudgetedBalance Sheet

BudgetedBalance Sheet

Pro Forma Financial StatementsPro Forma Financial Statements

Capital expenditures

Capital expendituresCash BudgetCash Budget

Page 1 of the Master

Budget

Page 1 of the Master

Budget

Page 2 of the Master

Budget

Page 2 of the Master

Budget

Page 3 of the Master

Budget

Page 3 of the Master

Budget

Page 4 of the Master

Budget

Page 4 of the Master

Budget

This is the first of three financial statements we have discussed that isgenerated by the financial analysis we will be using later in the semester.

This is the first of three financial statements we have discussed that isgenerated by the financial analysis we will be using later in the semester.

This is the second of three financial statements we have discussed that isgenerated by the financial analysis we will be using later in the semester.

This is the second of three financial statements we have discussed that isgenerated by the financial analysis we will be using later in the semester.

This is the second of three financial statements we have discussed that isgenerated by the financial analysis we will be using later in the semester.

This is the second of three financial statements we have discussed that isgenerated by the financial analysis we will be using later in the semester.

Sources of UncertaintySources of Uncertainty

• Global trends in production and consumption

• Energy prices and core inflation trends

• Interest rates and exchange rates

• Changes in industry subsidies

Accounting for UncertaintyAccounting for Uncertainty

• Stress testing product prices

• Stress testing unit input prices like fuel costs

• Stress testing yields• Stress test interest

rates and exchange rates