MG529 - Budgeting PDF

MG529 - Budgeting Functions of a Budget Preparing a budget is an essential step in business planning A budget will have the following functions for a business:  Compels Planning  Quantifies target to be achieved  Co-ordinates the activities of all departments...

MG529 - Budgeting Functions of a Budget Preparing a budget is an essential step in business planning A budget will have the following functions for a business:  Compels Planning  Quantifies target to be achieved  Co-ordinates the activities of all departments  Communicates the targets and plans to the whole organisation  Motivation for employees  Establishes a system of control Cash Budget  Inflows & Outflows for a period of time  The format of a cash budget is fairly standard: 1. Cash inflows are identified for the period 2. Cash outflows for the period are identified 3. The net cash inflow/outflow is calculated 4. The opening balance of cash is added 5. The closing balance at cash for the period is calculated. Cash Inflows  Cash sale receipts  Receipts from credit sales, i.e. trade receivables  Receipts from sale of assets  Loan proceeds  Issue of shares  Receipt of government grants Cash Outflows  Cash purchases  Payments to suppliers for purchases made on credit  Payments for expenses e.g. wages, electricity, stationery, rent and rates, insurance etc.  Purchase of Assets  Loan Repayment Preparing a Cash Budget  In the cash budget, we will look at the flow of cash in a particular period — it doesn’t matter what period regarding revenue or expense it is recognised in the Statement of Profit and Loss Account. Production Budgets, Material Usage Budgets and Material Purchases Budgets Budgets  The production budgets show the requirements of the business in terms of finished product..  Having decided on the amount of finished product that needs to be produced in each month, the business must look at the raw material required for that level of production..  Having decided on the amount of materials to be used in the production of the products the business needs to decide how much needs to be purchased Control Aspects of Budgeting  Budgeting is the quantitative expression of the future plans for the business  One of the key aspects of budgeting is the control aspect - that is the monitoring of actual results against budgeted results to note the differences and explore the reasons for those differences. Budgeting for your project!  Monthly cash budgets for 3 years.  Need to consider all receipts and all expenditure.  Show in cash budget when the money is received or paid.  Cannot have negative cash balance.  Identify times of cash shortfall.  Raise more funding  Reduce discretionary expenditure. Cash budget - Timings  When considering timing of receipts & payments need to consider:  Credit terms granted to your business.  Credit terms granted by your business.  Whether expenses are prepaid or paid in arrears.  Do not include non-cash expenses (such as depreciation). EXCEL IS YOUR FRIEND!