Scarcity leads to Innovation

BUDGETING & Forecasting

The Basic Framework of BudgetingA budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period.The act of preparing a budget is called budgeting.The use of budgets to control an organizations activity is known as budgetary control.

Planning and ControlPlanning involves developing objectives and preparing various budgets to achieve these objectives.Control involves the steps taken by management that attempt to ensure the objectives are attained.

Advantages of BudgetsGoals and ObjectivesBudgets

Compels managersto think aheadAids managers in coordinating their effortsProvides definite expectations that are the best framework to evaluate performanceAdvantages of Budgets

Advantages of BudgetingAdvantages

BMB

Bhaag Milkha Bhag Case 31/2 years in Making. Innovations to enhance the audience base which led to increase in revenues and reduction in costs.

Human Factors in BudgetingThe success of budgeting depends upon three important factors:Top management must be enthusiastic and committed to the budget process.Top management must not use the budget to pressure employees or blame them when something goes wrong.Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget targets.

Budgeting ExampleRoyal Company is preparing budgets for the quarter ending June 30.Budgeted sales for the next five months are:April 20,000 unitsMay 50,000 unitsJune 30,000 unitsJuly 25,000 unitsAugust 15,000 units.The selling price is $10 per unit.

The Sales BudgetThe individual months of April, May, and June are summed to obtain the total projected sales in units and dollars for the quarter ended June 30th

Sales ForecastingStep 1: Create the ROLL Out PlanPlanning the Number of Doors/outlets

Step 2: Find the Sales for each outlet

A. On the basis of SPF for (EBO/LFRS):SPF= Sales /Area in square ft. Find out the benchmark SPF ( Find for atleast two competitors and calculate average SPF)2) Forecast Organizations SPF in different scenarios.

Sales ForecastingDifferent scenarios can be:Pessimistic Scenario: 10% to 30% of Benchmark SPF

Normal Scenario: 40% to 70% of Benchmark SPF

Optimistic Scenario: 80% to 100% of Benchmark SPF

Sales Forecasting 3) Forecast Sales= SPF * Area

Step 3:Cumulate the Sales of all the Outlets.

Sales ForecastingB. On the basis of Quantities for (MBOs)Find out the benchmark Quantity sold per month( Find for atleast two competitors and calculate average quantities sold)2) Forecast Organizations Quantity sold in different scenarios.

Sales ForecastingDifferent scenarios can be:Pessimistic Scenario: 10% to 30% of Quantity sold

Normal Scenario: 40% to 70% of Quantity sold

Optimistic Scenario: 80% to 100% of Quantity sold.

Sales Forecasting 3) Forecast Sales= ASP * Quantity Sold.

Step 3:Cumulate the Sales of all the Outlets.

Computation of ASPStep 1Identify key product categories Step 2Decide the pricing of each category( Competitive Benchmarking)Step 3Indentify the Weightage of each category

Computation of ASP

Purchases BudgetBudgeted purchases = Desired ending inventory+Sales Beginning inventory

*Budgeting helps managers make decisions about resources needed and financial results expected for the coming period. Budgets are used to control activities of an organization because they set out a plan for the entire organization.*To be effective, a good budgeting system must provide for both planning and control. Good planning without effective control is time wasted.

**Budgets communicate managements plans throughout the organization. Budgets force managers to think about and plan for the future. While our focus in this chapter is on preparing operating budgets for a one-year time frame, longer term budgets also can be very helpful to organizations from a planning standpoint. *Without the clear and unconditional support of top management, any budget process is bound to fail. Employees must believe that the budgets prepared are meaningful to the decision process of managers. While budgets help managers control activities, the most successful use of budgeting is to reward behavior that management is trying to encourage.*The marketing department has developed the following information that will be used to prepare a budget for the quarter ending June 30th.*Royal sells only one product and that product has a selling price of ten dollars per unit. To calculate the total sales in dollars for any period we multiply the projected sales in units times the unit selling price. As you can see, for the quarter ended June 30th, Royal forecasts unit sales of one hundred thousand and total sales revenue of one million dollars. Once we complete the sales budget, we can move on to the expected cash collections from sales.