m ain project of budget

8/8/2019 m Ain Project of Budget

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INTRODUCTIONA budget is generally a list of all planned expenses and

revenues. It is a plan for saving and spending. A budget is an importantconcept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods

In other terms, a budget is an organizational plan stated inmonetary terms. A Budget is a plan that outlines an organization's financialand operational goals. So a budget may be thought of as an action plan;

planning a budget helps a business allocate resources, evaluate performance,and formulate plans.

While planning a budget can occur at any time, for many businesses,planning a budget is an annual task, where the past year's budget is reviewedand budget projections are made for the next three or even five years.

The basic process of planning a budget involves listing the business's fixed andvariable costs on a monthly basis and then deciding on an allocation of funds

to reflect the business's goals.

In summary, the purpose of budgeting is to:

1. Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certainstrategies, events and plans are carried out.

2. Enable the actual financial operation of the business to be measuredagainst the forecast.


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BENEFITS OF BUDGET

KNOW WHAT IS GOING ON Personal budgeting allows you to know exactly how much money youhave. Furthermore, a budget is a self-education tool that shows you howyour funds are allocated, how they are working for you, what yourplans are for them, and how far along you are toward reaching yourgoals. "Knowledge is power," as the oft-quoted saying of George Eliotgoes, and knowing about your money is the first step toward controllingit. That leads us to our next benefit:

CONTROL a budget is the key to enabling you to take charge of your finances.With a budget, you have the tools to decide exactly what is going tohappen to your hard-earned moneyand when. You can be in controlof your money, instead of having your money limit what you do. Thisbears repeating: you can be in control of your money, instead of lettingit control you!

ORGANIZATION Even in its simplest form, a budget divides funds into categories of expenditures and savings. Beyond that, however, budgets can providefurther organization by automatically providing records of all yourmonetary transactions. They can also provide the foundation for asimple filing system to organize bills, receipts, and financial statements.

COMMUNICATION If you are married, have a family, or share money with anyone, having abudget that you both (or all) create together is a key to resolvingpersonal differences about money handling. The budget is acommunication tool to discuss the priorities for where your moneyshould be spent, as well as enabling all involved parties to "run" the


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system .

TAKE ADVANTAGE OF OPPORTUNITIES knowing the exact state of your personal monetary affairs, and being in

control of them, allows you to take advantage of opportunities that youmight otherwise miss. Have you ever wondered if you could affordsomething? With a budget, you will never have to wonder againyouwill know.

EXTRA TIME all your financial transactions are automatically organized for tax time,for creditor questions, in fact, for any query which may come up

regarding how and when you spent money. Being armed with suchinformation sure saves time digging through old records.

EX TRA MONEY THIS might be everyone's favorite benefit. A budget will almostcertainly produce extra money for you to do with as you wish. Hiddenfees and lost interest paid to outsiders can be eliminated forever.Unnecessary expenditures, once identified, can be stripped out. Savings,even small ones, can be accumulated and made to work for you.


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TYPES OF BUDGET

Master Budget

Sales Budget Production Budget Purchase Budget Expenditure BudgetsCash Budget Zero Base Budget Flexible Budget


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I. MA STER BUDGET The master budget is a summary of company's plans that sets specific targetsfor sales, production, distribution and financing activities. It generallyculminates in a CASH BUDGET, a BUDGETED INCOME STATEMENT,and A budgeted balance sheet. In short, this budget represents acomprehensive expression of management's plans for future and how theseplans are to be accomplished.

It usually consists of a number of separate but interdependent budgets. Onebudget may be necessary before the other can be initiated. More one budgetestimate affects other budget estimates because the figure of one budget isusually used in the preparation of other budget. This is the reason why thesebudgets are called interdependent budgets.

The master budget interrelationship

Sales Budget

EndingInventory

Budget Production Budget

Direct Materials Budget Direct Labor Budget Overhead Budget

Cash Budget

Budgeted

IncomeStatement

Budgeted BalanceSheet Selling and Admn.

Budget


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Advantages and disadvantages of a master

budgetsome advantages of a master budget are that it can give an idea of where a company wants to go and what it has to do in order to getthere .it will also allow the company to realistically project futurecash flows which in turn would help in getting certain types of finances

Some disadvantages of a master budget include the time involved in

producing such a budget. This is primarily the reason a smallercompany may not make a master budget if the company has a verysmall managerial staff.


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II. SAL ES BUDGET The sales budget is the first component of the master operating budget. This isbecause sales affect all other parts of the master budget. It includes the totalsales valued in quantity. It consists of three parts; break even, target andprojected sales. The budget also includes sales by product, location, customerdensity and seasonal sales patterns. It provides a plan for both cash and creditsales. The basis of a sales budget is the sale price per unit of goods to be soldmultiplied by the quantity of goods to be sold. A sales budget is plannedaround the competition, the material available, cost of distribution,

government controls and the political climate. Sales budget is a functionalbudget. The product wise as well as regional breaks up of sales estimates areincorporated in the sales budget. The sales budget begins with the previousyear actual and incorporates the likely changes.

SIGNIFI CANCE: A sales budget controls the finances allocated for achieving sales targets of acompany. It is the standpoint for comparing the actual sales performance andthe budgetary sales performance of a company. The budget guides thecompany with regard to how much money should be allocated to sellingdistribution and sometimes for advertising and marketing. A sales budget thatsets realistic targets will help the company make a profit.

E FFEC TSA good sales budget should serve as a guide to company with regard to itssales target. It should be flexible and resilient to the volatile changes in themarket. The budget should not put too many restraints on the sales functionsof the company. A sales budget is a financial plan for the sales of goods andservices of a company. It is the basis on which all the financial decisions of acompany with regard to sales are taken. The budget also controls the generalsales prospects of a company. Online and off line marketing, marketing in themedia and other advertising expenditures are planned around a sales budget.


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BENEFITSA sales budget helps a company achieve its sales targets. It helps prevent saleslosses and provides a basis for sales evaluation. A sales budget helps tointegrate all departments in a company because achieving a sales target is thesecret of making profits. It helps each department to assess their performanceand correct any mistakes in function. It helps a company distribute goods andservices in a cost effective way. It also helps the company to keep itsmarketing expenditure within affordable limits.

W ARNINGA sales budget comes with inherent limitations and a good sales budget ismade by overcoming these limitations. A sales budget cannot effectivelyforecast the future trends of events. It may not be easily accepted by all peoplein the organization. Preparing a sales budget takes up too much managerialtime. Usually sales budgets shy away from expenditure that will give returnsin the long run.


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III. PRODUCTION BUDGET

The production budget is prepared after the sales budget.The production budget lists the number of units that must be producedduring each budget period to meet sales needs and to provide for the desiredend in given inventory. The production budget is prepared based on the salesestimate incorporated in the sales budget. The adjustments with respect to theopening and closing stock positions that are policy decisions of the businessare then made to prepare the production budget.

H IGHL IGH TSan estimate of the number of units to be produced in the next fiscal yearuses the sales budget for projected units neededthe production budget is the basis for projecting the Cost of GoodsManufactured Budget

a manufacturing firm prepares the production budget instead of apurchases budgetis similar to the purchases budgets except the number of units to bepurchased is replaced by the number of units to be manufacturedexpressed in units of product

THE IMPORTAN CE OF PRODUCTION BUDGETSThe typical university press spends much more on production than it does onany other type of expense. For this reason, it is important to budgetproduction expenditures in order to estimate working capital needs and toproject future effects on cash position and inventory levels. The productionbudget is a comprehensive plan that takes into account all manufacturing jobs


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that will be worked on during a given fiscal year and reveals the timing andamount of expenditure on these projects. Neither cost of sales in the operatingbudget nor cash and inventory in a proforma balance sheet can be projecteduntil the production budget is completed.

DEVE LOPING TH E PRODUCTION BUDGET The first step in forming the production budget is to review the productionschedules and identify all projects that are expected to be worked on duringthe new fiscal year. Next, judgments must be made about which portion of

each job will be completed during the budget period. It could be the entire job, just the typesetting, just the binding, or perhaps other parts of themanufacturing process. Once this has been done, the relevant productionexpenses for all jobs should be totaled to provide overall production expenseand expense by type (i.e., plant, paper, printing, binding, etc.). Since it is likelythat not all the titles in next year's or the following year's lists will be knownat the budget preparation time, it is important to include in the budget adollar allowance for the unknown titles.


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IV. EXPENDITURE BUDGET Definition and explanationSelling and administrative expense budget lists the budgeted expenses forareas other than manufacturing. In large organization this budget would be acompilation of many smaller, individual budgets submitted by departmentheads and other persons responsible for selling and administrative expenses.For example, the marketing manager in a large organization would submit abudget detailing the advertising expenses for each budget period.

The annual expense plan of a commercial enterprise is explicitly stated in theExpenditure Budget. The primary purpose of an Expenditure Budget is todefine an economic policy, with respect to the financial spending made forinfrastructural and equipment purposes, which include their making andmaintenances.

In an Expenditure Budget, capital expenses are described in terms of theconstruction, refurbish, and lease or buying of assets like software,machineries and other facilities. However, the prices of these assets shouldeither be $50,000 or more than that, having an anticipated utility for at least ayear or so. In fact, all the possible expenses are listed and recorded in anExpenditure Budget.

As an integral part of the Expenditure Budget, the calculation of capitalspending is based on the submission of facts for acceptance, from variousportfolio departments to the Administration and Finance Divisions. It is theAdministration and Finance Division, which suggests a capital budget schemeto the President and the Board of Trustees of the concerned company for finalapproval. In fact, approval of unbudgeted commercial programs andequipments worth a total expense of $50,000 or more, comes from the CapitalBudget Expenditure Request or CER.


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In case of Expenditure Budgets, there may arise a necessity for buying orrenting equipments, even after the sales and the production budgets arecompiled simultaneously. This is because there is deficit in the availability of resources which are unable to satisfy the demand at a particular point of time.This ultimately leads to an escalation of the total expenses.

PRIMAR Y OBJ EC TI VE S OF EX PENDITUR E BUDGET : At the time of allocation and spending of money, an Expenditure Budget takesinto account the following few factors:

y The budgetary financial acquisitions are allocated in a manner to createsymmetry and bring about parity among the collective requirements of allcustomers.

y Expenditure Budgets aim to maintain parity between the persistingcommitments and fresh initiatives.

y Expenditure Budgets balance different subject disciplines as well.

y Symmetry is preserved by all Expenditure Budgets between all the availablefinancial resources of a company as well as resources like research work.This ultimately earns funds for the organization.

EX PENDITUR E BUDGETS ON GO VE RNME NT L EVE LS: The government also prepares Expenditure Budget to calculate and record itspotential spendings in detail. It involves the expenses of different ministriesand departments, included in different statements, in the form of net financialreceipts and recoveries.


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V. CA SH BUDGET

WHAT DO ES CASH BUDG ET M EAN? An estimation of the cash inflows and outflows for a business or individual fora specific period of time. Cash budgets are often used to assess whether theentity has sufficient cash to fulfill regular operations and/or whether too muchcash is being left in unproductive capacities.

A cash budget is extremely important, especially for small businesses, becauseit allows a company to determine how much credit it can extend to customersbefore it begins to have liquidity problems.

For individuals, creating a cash budget is a good method for determiningwhere their cash is regularly being spent. This awareness can bebeneficial because knowing the value of certain expenditures can yieldopportunities for additional savings by cutting unnecessary costs.

For example, without setting a cash budget, spending a dollar a day on a cupof coffee seems fairly unimpressive. However, upon setting a cash budget toaccount for regular annual cash expenditures, this seemingly small dailyexpenditure comes out to an annual total of $365, which may be better spenton other things. If you frequently visit specialty coffee shops, your annualexpenditure will be substantially more.

CASH BUDGE T MANAGE ME NT

The main task of Cash Budget Management is to identify control paymentflows in light of liquidity considerations. This means, for example, identifyingimpending illiquidity or possible budget overshoots promptly.While Cash Management takes a short term view, Cash Budget Managementdeals with medium-term and long-term liquidity developments.Before you can use Cash Budget Management, you must also have FinancialAccounting. The cash balances come from cash and bank accounts in


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Financial Accounting. Every posting made in Financial Accounting affects thebalances in Cash Budget Management.

Cash Budget Management includes the following functions:Displaying business transactions having an effect on liquidity, byrevenue and expenditure itemPlanning and displaying the payment flows and funds balances for anyperiod you choose

In Business | Co ncentrating on the Cash Flow Burlington Northern Fe (BNSF) operates the second largest railroad in the United States. Thecompany's senior vice president, CFO, and treasure is Tom Hunt, who reports that "as a generaltheme, we have become very cash-flow oriented." After the manager of the Burlington Northernand Santa Fe railroads, the company went through a number of years in which they were investingheavily and consequently had negative cash flow. To keep on top of the company's cash position,Hunt has cash forecast prepared every month. "Everything falls like dominoes from free cashflows," Hunt says. "It provides us with alternatives." Right now, the alternative of choice is buyingback our own stockbut it could be increasing dividends or making acquisitions. All those thingsare not even on the radar screen if you don't have free cash flow."


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VI.

ZERO B A SE BUDGET

Z ero-based budgeting is a technique of planning and decision-makingwhich reverses the working process of traditional budgeting. In traditionalincremental budgeting, departmental managers justify only increases over theprevious year budget and what has been already spent is automaticallysanctioned. No reference is made to the previous level of expenditure. Bycontrast, in zero-based budgeting, every department function is reviewedcomprehensively and all expenditures must be approved, rather than onlyincreases. Z ero-based budgeting requires the budget request be justified incomplete detail by each division manager starting from the zero-base. Thezero-base is indifferent to whether the total budget is increasing or decreasing.

The term "zero-based budgeting" is sometimes used in personalfinance to describe the practice of budgeting every dollar of income received,and then adjusting some part of the budget downward for every other part

that needs to be adjusted upward. It is more technically correct to refer to thispractice as "zero-sum budgeting".

Z ero based budgeting also refers to the identification of a task ortasks and then funding resources to complete the task independent of currentresourcing.

Advantages of zero based budgetingEfficient allocation of resources, as it is based on needs and benefits.Drives managers to find cost effective ways to improve operations.Detects inflated budgets.


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Useful for service departments where the output is difficult to identify.Increases staff motivation by providing greater initiative andresponsibility in decision-making.Increases communication and coordination within the organization.Identifies and eliminates wasteful and obsolete operations.Identifies opportunities for outsourcing.Forces cost centers to identify their mission and their relationship tooverall goals.

Disadvantages of zero based budgetingDifficult to define decision units and decision packages, as it is time-consuming and exhaustive.Forced to justify every detail related to expenditure. The R&Ddepartment is threatened whereas the production department benefits.Necessary to train managers. Z ero-based budgeting must be clearlyunderstood by managers at various levels to be successfullyimplemented. Difficult to administer and communicate the budgetingbecause more managers are involved in the process.In a large organization, the volume of forms may be so large that no oneperson could read it all. Compressing the information down to a usablesize might remove critically important details.Honesty of the managers must be reliable and uniform. Any managerthat exaggerates skews the results.


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VII. REVENUE BUDGET

The revenue budget consists of revenue receipts of the government i.e.revenues from tax and other sources, and its expenditure.

Revenue receipts are divided into tax and non tax revenue. Taxrevenues are made up of taxes such as income tax, corporate tax, excise,customs and other duties that the government levies.

In non-tax revenue, the government sources are interest on loansand dividend on investment like psu s, fees, and other receipts for servicesthat it renders. Revenue expenditure is the payment incurred for thenormal day-to-day running of government departments and various

services that it offers to its citizens.The government also has other expenditure like servicing intereston its borrowings, subsidies, etc.

Usually, expenditure that does not result in the creation of assets,and grants given to state governments and other parties are revenueexpenditures. The difference between revenue receipts and revenueexpenditure is usually negative. This means that the government spendsmore than it earns. The difference is called the revenue deficit.

m ain project of budget

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