SHORT TERM BUDGETING
FINMAN 2nd SEM | Dr. Lalaine MIDTERM
BUDGET COMMITTEE
THE BUDGET PROCESS
is normally headed by a Budget Director,
administers the budgetary process.
BUDGET
A financial plan of the resources needed to BUDGET PANNING CALENDAR
carry out tasks and meet financial goals. is the schedule of activities for the
development and production of the budget.
BUDGETING
The act of preparing a budget
BUDGETARY CONTROL
The budgets to control a firm’s activities
MASTER BUDGET
Summary of all phases of a company’s plan
and goals for the future
THE BUDGETARY SYSTEM
1. Communication BUDGETED INCOME STATEMENT
refers to the projection of revenue, expenses,
and results of operations for a definite period.
The most important process of management is
communication. Vision, mission, goals, objvs,
CASH BUDGET
plans, standards, and performance evaluation
measures must be clearly articulated and A period-by-period statement of cash at the
understood among officers and personnel. start of a budget period, expected cash
receipts classified by source; expected
cash disbursements, classified by function,
2. Motivation
responsibility, and form; and the resulting cash
balance at the end of the budget period.
As communication lines are cleared and made
more transparent, people will understand the FINANCIAL BUDGET
end-results of organizational plans and ask. refers to the budget of the financial resources
as reflected in the budget statement of
3. Standards financial position and cash budget.
After the actions, results should be FIXED BUDGET
summarized and evaluated. Projection of cost at a particular or one level of
production (usually at normal capacity) for a
4. Planning definite time period.
FLEXIBLE (VARIABLE) BUDGET
As standards are set, plans could be done
better. A good plan must be S.M.A.R.T. (i.e., Projection of cost at different levels of
specific, measurable, attainable, realistic, and production for a definite period of time.
time-bounded).
PARTICIPATIVE BUDGET
5. Organizing and directing budget prepared using employees at all levels
in the organization.
As plans are framed, resources are organized PRODUCTION BUDGET
accordingly.
production plan of resources needed to meet
current sales demand and ensure adequate
5. Controlling & Performance inventory levels.
Evaluation
PROGRAM BUDGET
Controls are to be devised and installed prior to budget for the major programs or projects that
business and operational processes. the company plans to undertake.
SHORT TERM BUDGETING
FINMAN 2nd SEM | Dr. Lalaine MIDTERM
OPERATING BUDGET
refers to the plans for the conduct of business
for the planning period; it includes the
budgeted income statement and all its
supporting budgets.
RESPONSIBILITY BUDGET
budget for a responsibility center.
ROLLING BUDGET
budget which is prepared throughout the year,
that is, as one month elapses, a budget is
prepared for one more month in the future.
SALES BUDGET
budget that shows the quantity of each product
and the revenue expected to be sold.
TRADITIONAL BUDGETING
a system of budgeting which concentrates on
the incremental change from the previous year
assuming that the previous year’s activities are
essential and must be continued.
PRODUCTION BUDGET
SALES BUDGET Also called the manufacturing budget, is a
budget that determines the quantity of the
Management’s estimation of sales for a future firm's product that needs to be produced
financial period. A company uses sales budgets during a budgetary time period. This budget is
to set department goals, estimate earnings and stated in units of the product or the quantity.
forecast production requirements.
Sample: Estimated Sales in Units and
Pesos
The management of New Corporation is
considering three state economic
conditions: strong, fair, and weak. Based
on some macro studies, it has been agreed
that the economy in coming year may be
40% strong, 50% fair and 10% weak. The
projected numbers of units are 120,000
units, 90,000 units, and 50,000 units for
Sample:
strong, fair, and weak economic conditions,
respectively. The budgeted unit sales price
given the estimates in units sold is P 120.
Five percent (5%) of the gross sales are
estimated to be uncollectible.
Required:
1. Budgeted units to be sold in coming year
2. Budgeted amount of sales, net of doubtful
accounts.
SHORT TERM BUDGETING
FINMAN 2nd SEM | Dr. Lalaine MIDTERM
SHORT-TERM BUDGETING
1. RAW MATERIALS BUDGETING
Direct material is the physical items built into a
product. Sample
ABC Company plans to produce a number of
calculates the materials that must be plastic pails during the budget period. The
purchased, by time period, in order to fulfill the
pails are all within a limited size range, so
requirements of the production budget. the amount of processing labor related to
each one is nearly identical. The labor
There are 2 materials budgets to be estimated; routing for each pail is 0.1 hours per pail for
1. Budgeted direct materials used the machine operator, and 0.05 hours per
2. Budgeted direct materials purchases pail for all other labor. The labor rates for
machine operators and other staff are
substantially different, so they are recorded
separately in the budget. ABC's direct labor
needs are outlined as follows:
Sample
ABC Company plans to produce a variety of
plastic goods, and 98 percent of its raw
materials involve plastic resin. Thus, there is
only one key commodity to be concerned
with. Its production needs are outlined as
follows:
3. FACTORY OVERHEAD BUDGET
Contains all manufacturing costs other than
direct materials and direct labor. The
information in this budget becomes part of the
cost of goods sold line item in the master
budget.
It should be budgeted separately for the fixed
overhead in the variable overhead
components.
The information in this budget is among the
2. DIRECT LABOR BUDGET most important of the various departmental
budget models, since it may contain a large
proportion of the total amount of a company's
Used to calculate the number of labor hours
expenditure.
that will be needed to produce the units
itemized in the production budget.
The direct labor budget is useful for
anticipating the number of employees who will
be needed to staff the manufacturing area
throughout the budget period.
SHORT TERM BUDGETING
FINMAN 2nd SEM | Dr. Lalaine MIDTERM
Sample
BUDGETED STATEMENT OF CASH
FLOWS
CASH RECEIPTS
includes all the cash inflow expected to be
received from customer sales.
CASH PAYMENTS
includes all the cash outflows, showing when
cash will be used to pay for direct material
purchases or other expenses.
CASH RECEIPTS VS. CASH PAYMENTS
CASH BUDGET
Sample
From the information below, prepare a cash
budget for the period from January to April.
SHORT TERM BUDGETING
FINMAN 2nd SEM | Dr. Lalaine MIDTERM
BUDGETING MODELS
Tool that businesses use to align their current
performance with their financial goals.
consists of management estimation of future
costs and revenues.
The wages to be paid to workers amount to
$5,000 each month. Also, the bank balance
on 1st January was $8,000. The
management decided on the following: CONTINUOUS OR ROLLING BUDGETING
1. If the deficit fund is within the limit of A time frame is maintained and when a
$10,000, it is possible to make segment in a budgeted time frame expires and
arrangements with the bank. is dropped, a new segment is to be added to
maintain the same frame.
2. If the deficit fund exceeds $10,000 but is
FLEXIBLE BUDGETING
within the limit of $42,000, the issue
of debentures is preferred. Cost and expenses are segregated to fixed and
variable components giving way to the
3. If the deficit fund exceeds $42,000, the determination of estimated costs based on
issue of shares is preferred (considering the actual capacity.
fact that it is within the limit of STATIC BUDGETING
authorized capital).
Cost and expenses are not segregated to fixed
and variable components and the budgeted
costs, without adjustments to actual capacity,
ACCRUALS AND PREPAYMENTS serve as the basis in evaluating actual
performance.
ACCRUALS IMPOSED BUDGETING
An accrual is when you pay for something in Budgets are prepared by top management
arrears. This where you are billed for then imposes it on lower-level managers for
something at the end of a quarter and want to implementation.
spread the cost across each month.
PARTICIPATORY BUDGETING
Prepayment referred to the types of expenses
Budgets are developed through joint decision
not incurred yet but for which payment is made
making by top management and operating
in advance.
personnel.
PROGRAM BUDGETING
An approach that relates resource inputs to
service outputs; it generally starts by defining
the objectives by output results rather than in
terms of quantity of input activities.
ZERO-BASED BUDGETING
Activities to be incurred are to be prioritized
based on their order of relevance in line with a
defined goal in the coming period without
regard to past experiences or present condition
LIFE CYCLE BUDGETING
costing is done over the entire life span of a
product starting from its period of conception
to infancy, growth, expansion, up to maturity.
WORKING CAPITAL MANAGEMENT
The management of current assets and current
liabilities.
SHORT TERM BUDGETING
FINMAN 2nd SEM | Dr. Lalaine MIDTERM
REASONS FOR HOLDING CASH
The goal of working capital or short-term
financial management is to manage each of
the firm's current assets like inventories, TRANSACTION MOTIVE
accounts receivable, marketable securities, A firm needs cash for making transactions in
and cash; and current liabilities like notes the day to day operations
payable, accruals, and accounts payables to
achieve a balance between profitability and PRECAUTIONARY MOTIVE
risk that contributes positively to the firm's A firm is required to keep cash for meeting
value. various contingencies
WORKING CAPITAL SPECULATIVE MOTIVE
A current asset that represents the portion of The speculative motive relates to holding cash
investment that circulates from one form to is for invest in profitable
another in the ordinary conduct of business. opportunity when they arise
Working capital constitutes cash up to
inventories. As cash substitutes, marketable CASH CONVERSION CYCLE (CCC)
securities are considered part of working
capital. Measures the length of time required for a
company to convert cash invested in its
CURRENT LIABILITIES operations to cash received because of its
operations.
Represent the firm's short-term financing,
because they include all debts of the firm that The formula for the cash conversion cycle is
come due in 1 year or less. These debts include CCC = OC – APP
accounts payables (owed to suppliers),
accruals (owed to governments and The cash conversion cycle has three main
employees, and notes payable (owed to banks. components, namely:
1. average age of the inventory,
NET WORKING CAPITAL 2. average collection period, and
The difference between the firm's current 3. average payment period
assets and its current liabilities.
CCC = AAI + ACP - APP
PROFITABILITY
The relationship between revenues and costs
OPERATING CYCLE (OC)
generated by using the firm's assets both in
current and fixed in productive activities. The The time from the beginning of the production
firm can increase its profits in two ways: process to collection of cash from the sale of
Increase revenue; and the finished product. The operating cycle
Decrease cost encompasses two major short-term asset
categories, inventory, and accounts receivable.
RISK
the probability that a firm will be unable to pay It is measured in elapsed time by summing the
its bills as they come dure. A firm that cannot average age of inventory (AAI) and the average
pay its bills as they come due is said to be collection period (ACP): OC = AAI + ACP
insolvent. It is generally assumed that the
greater the firm's net working capital, the
lower its risk. MANAGEMENT OF RECEIVABLES
Credit selection and standards
In other words, the more net working capital,
the more liquid the firm and therefore the
lower its risk of becoming insolvent. FIVE C’S OF CREDITS
which provides a framework for in-depth credit
MANAGEMENT OF CASH analysis
It involves the maintenance of the appropriate 1. Character: applicant's record of meeting
level of cash and investment in marketable past obligations.
securities to meet the firm's cash requirements
and to maximize income on idle funds.
2. Capacity: The applicant's ability to repay
the requested credit, as judged in terms of
SHORT TERM BUDGETING
FINMAN 2nd SEM | Dr. Lalaine MIDTERM
financial statement CREDIT PERIOD
The number of days after the beginning of the
3. Capital: The applicant's debt relative to credit period until full payment of the account
equity is due.
4. Collateral: The amount of assets the
applicant has available for use in securing
the credit.
The larger the amount of available assets, CREDIT MONITORING
the greater the chance that a firm will An ongoing review of the firm's accounts
recover funds if the applicant defaults. receivable to determine whether customers are
paying according to the stated credit terms.
5. Conditions: Current general and AVERAGE COLLECTION PERIOD
industry-specific economic conditions, and The second component of the cash conversion
any unique conditions surrounding specific cycle. It is the average number of days that
transaction. credit sales are outstanding.
AGING OF ACCOUNTS RECEIVABLE
CREDIT SCORING Breaks down accounts receivable into groups
A method of credit selection that firms based on their time of origin. The breakdown is
commonly use with high volume/small-dollar typically made on a month-by-month basis,
credit requests. going back 3 or 4 months.
CHANGING CREDIT STANDARDS The resulting schedule indicates the
The firm sometimes will contemplate changing percentages of the total accounts receivable
its credit standards to improve its returns and balance that have been outstanding for
create greater value for its owners. If credit specified periods of time. The purpose of the
standards were tightened, the opposite effects aging schedule is to enable the firm to pinpoint
would be expected. problems. A simple example will illustrate the
form and evaluation of an aging schedule.
MANAGEMENT OF INVENTORIES
COMMON TECHNIQUES FOR MANAGING
INVENTORIES
ABC SYSTEM INVENTORY MANAGEMENT
technique that divides inventory into three
groups- A, B, and C, in descending order of
importance and level of monitoring, based on
the peso investment in each.
CREDIT TERMS
ECONOMIC ORDER QUANTITY
terms of sale for customers who have extended
credit by the firm. Model Inventory management technique for
determining an item's optimal order size, which
CASH DISCOUNTS is the size that minimizes the total of its order
costs and carrying costs.
provides an incentive for customers to pay
sooner. By speeding collections, the discount ORDER COSTS
decreases the firm's investment in accounts Include the fixed clerical costs of placing and
receivable, but it also decreases the per-unit receiving orders: the cost of writing a purchase
profit. order, of processing the resulting paperwork,
and of receiving an order and checking it
CASH DISCOUNTS PERIOD against the invoice. Order costs are stated in
The number of days after the beginning of the pesos per order.
credit period during which the cash discount is
available. CARRYING COSTS
SHORT TERM BUDGETING
FINMAN 2nd SEM | Dr. Lalaine MIDTERM
The variable costs per unit of holding an item
of inventory for a specific period of time.
Carrying costs include storage costs, insurance
costs, the costs of deterioration and
obsolescence, and the opportunity or financial
cost of having funds invested in inventory.
These costs are stated in pesos per unit per
period
