PREPARATION OF BUDGETS

A Budget is a detailed plan of action for a future period -

expressed in quantitative and monetary terms

Budgets are essentially short-term plans which help to achieve the longer term aims of the business

BUDGETS

Budgets reflect management policy relating to all aspects of the business eg

new and existing markets products stockholdings increased use of technology workforce expected price rises etc

BUDGETS

A Budget shows what the results are likely to be if the plan is put into action, and so:

reveals problems that might arise andenables management to prepare in

advance to offset these problems

Functions of Budgets

Planning

Co-ordination

Control and performance evaluation

Participation/Motivation

Planning

Forward planning forces managers to consider alternative future courses of action, evaluate them properly and decide on the best alternative

It also encourages managers to anticipate problems before they arise giving them time to consider alternative ways of overcoming them when they do arrive.

Co-ordination Department managers may make decisions about the future which are incompatible or even in conflict with other departments egSales may be planning to extend the credit period in order to stimulate sales to a point beyond the bank overdraft arrangements Budgeting helps to avoid such conflicts by encouraging managers to consider how their plans affect other departments and how the plans of other departments affect them This also leads to better communication between departments

Control and performance evaluation

While budget preparation aids planning, the way budgets are used helps in control and performance evaluation

The system of calculating deviations from budget ie variances, after the event fosters cost-consciousness amongst workers and managers and highlights areas of over and under achievement.

Participation/Motivation

By actively involving managers at all stages of the hierarchy, the process of budgeting brings the different levels closer together

The junior members feel that they have a say in the running of the organisation

This leads to increased job satisfaction and consequently productivity.

Stages in the Preparation of Budgets

The long-term objectives of the organisation, and management policies for meeting these, should be established

Preparation of the budget is the responsibility of the Cost Accountant or a Budget Committee

A Budget Officer may be appointed, responsible for all the day-to-day work involved in the preparation of the subsidiary budgets and for the preparation of the Master Budget

TYPES OF BUDGETS

Sales Budget

Production Budget

Cash Budget

Sales Budget This allows an analysis of expected sales by quantities and revenues (units and £s) from the entire range of products

Management uses this budget as the basis for other subsidiary budgets ie production, selling cost, capital acquisition, stockholding etc

This budget helps in early decision making relating to sales policies in different sectors of the market

Sales Budget

It can also be used to compare actual results with the budget to identify areas for improvement eg checking sales staff performance

The Sales Budget provides targets for motivating staff.

Production Budget

The Production Budget is based on the Sales Budget

It shows the production of each product required to meet the Sales Budget and

provides a basis for assessing production needs in terms of labour, machine utilisation and materials.

Cash Budget

This should show opening cash/bank balance and all expected cash/bank inflows including 'spot cash sales', receipts from debtors, other receipts, dividends and sales of fixed assets It should also show expected cash/bank outflows including payments to creditors, purchases of fixed assets and payment of dividends.

Cash BudgetThis budget is used by management to highlight surpluses or shortfalls of cash/bank and when they are likely to occur

It allows planning for the use of surpluses or the arranging of cover for shortfalls eg overdraft facilities, long term loans or a share issue

As a result of the Cash Budget, other budgets may require to be revised if cash shortages forecast in this budget cannot be resolved

CASH BUDGETS It is no use budgeting for production and for sales if sometime during the budget period the firm runs out of cash funds Cash is therefore also budgeted for, so that any shortage of cash can be known in advance and action taken to obtain permission for a loan or a bank overdraft to be available (or for long term needs funds may be made available by an issue of shares or debentures) A Cash Budget will reveal what funds will be needed, how much is needed and when it will be needed

Timing of Cash Receipts and Payments

When completing the Cash Budget, therefore, we are interested in when the money is received and when it is paid out, not when the goods are sold or purchased For example, raw materials might be bought in March, incorporated in the goods being produced in April, and paid for in MayThese raw materials will be shown in the Cash Budget under May ie when the goods are paid for.