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    Chapter 5 Financial Plans: Budgets: Prepared By: Ericka Tarroquin, Fernan Marc Salenga & Alliah Domingo

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    Annalyn Arnaldo
    The document discusses the budget process and creating comprehensive budgets. It states that the budget process involves projecting incomes and expenses based on past financial history and current circumstances. The budget then needs to be reconciled with original expectations. A comprehensive budget includes projections for recurring incomes/expenses as well as non-recurring capital expenditures and investments, and considers both micro factors like family structure and macro factors like economic conditions. It also discusses creating specialized budgets and analyzing variances between actual results and budget projections.

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    Chapter 5 Financial Plans: Budgets: Prepared By: Ericka Tarroquin, Fernan Marc Salenga & Alliah Domingo

    Uploaded by

    Annalyn Arnaldo
    74 views30 pages
    The document discusses the budget process and creating comprehensive budgets. It states that the budget process involves projecting incomes and expenses based on past financial history and current circumstances. The budget then needs to be reconciled with original expectations. A comprehensive budget includes projections for recurring incomes/expenses as well as non-recurring capital expenditures and investments, and considers both micro factors like family structure and macro factors like economic conditions. It also discusses creating specialized budgets and analyzing variances between actual results and budget projections.

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    The document discusses the budget process and creating comprehensive budgets. It states that the budget process involves projecting incomes and expenses based on past financial history and current circumstances. The budget then needs to be reconciled with original expectations. A comprehensive budget includes projections for recurring incomes/expenses as well as non-recurring capital expenditures and investments, and considers both micro factors like family structure and macro factors like economic conditions. It also discusses creating specialized budgets and analyzing variances between actual results and budget projections.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    74 views30 pages

    Chapter 5 Financial Plans: Budgets: Prepared By: Ericka Tarroquin, Fernan Marc Salenga & Alliah Domingo

    Uploaded by

    Annalyn Arnaldo
    The document discusses the budget process and creating comprehensive budgets. It states that the budget process involves projecting incomes and expenses based on past financial history and current circumstances. The budget then needs to be reconciled with original expectations. A comprehensive budget includes projections for recurring incomes/expenses as well as non-recurring capital expenditures and investments, and considers both micro factors like family structure and macro factors like economic conditions. It also discusses creating specialized budgets and analyzing variances between actual results and budget projections.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 30

    CHAPTER 5 FINANCIAL PLANS:

    BUDGETS

    PREPARED BY: ERICKA TARROQUIN, FERNAN MARC SALENGA &


    ALLIAH DOMINGO
    5.1 THE BUDGET PROCESS
    The budget process is an infinite loop similar
    to the financial planning process.
     should indicate immediate and long-term goals.

     the process of creating a budget can be instructive.


    Creating a budget involves projecting realistic behavior.
    Your assumptions may come from your actual past
    behavior based on accurate records that you have
    gathered.
     after formulating realistic behavior based on your past
    behavior and current circumstances, you still must reconcile
    your future behavior with your original expectations.

     whether it results sobering dismay or ambitious joy, the


    budget process is one of the reconciling your financial
    realities to your financial dreams.
     a budget is a projection of how things should work out, but
    there is always some uncertainty.

     to avoid unwelcome adjustments, you should be


    conservative in your expectations so as to maximize the
    probability that your actual results will be better than
    expected.
    5.2 CREATING A COMPREHENSIVE
    BUDGET
    COMPREHENSIVE BUDGET

    a budget covering all aspects of financial life—will include a


    projection of recurring incomes and expenses and of
    nonrecurring expenditures.
    What is recurring income and expenses?
    Recurring incomes would be earnings from wages, interest, or
    dividends.
    Recurring expenditures include living expenses, loan repayments, and
    regular savings or investment deposits.

    What is nonrecurring expenditures?

    Unusual charges, expense or loss that is unlikely to occur again in the


    normal course of business.
    COMPREHENSIVE BUDGET DIAGRAM

    COMPREHENSIVE
    BUDGET

    OPERATING BUDGET: CAPITAL BUDGET:


    RECURRING NONRECURRING
    INCOME/EXPEXPENSES ITEMS

    SAVINGS CAPITAL
    LIVING INCOME LOAN EXPENDITURES;
    /INVESTMENT
    /EXPENSE PAYMENTS DEPOSITS PURCHASE OF
    DURABLE ITEMS
    OPERATING BUDGET: RECURRING INCOME/EXPENSES

    USING FINANCIAL HISTORY


    Recurring incomes and expenditures are usually the easiest to
    determine and project, as they happen consistently and have an immediate
    effect on your everyday living. It is also planned in the context of short term
    lifestyle goals or preferences.

    Using New Information and “Micro” Factors

    Along with your known financial history, you would want to


    include any new information that may change your expectations. As with
    any forecast, the more information you can include in your projections,
    the more accurate it is likely to be.
    Using Economics and “Macro” Factors

    Macro factors affecting your budget come from the context


    of the wider economy, so understanding how incomes and expenses are
    created is useful in forming estimates. Incomes are created when labor
    or capital (liquidity or assets) is sold.
    Expenses are created when a quantity of goods or services
    is consumed for a price.

    those goods and services and also on the larger context of price levels in the economy.
    If inflation or deflation is decreasing or increasing the value of our currency, then its purchasing
    power is changing and so is the real cost of expenses. As a rule, the budget period should be short
    enough so that changes in purchasing power won’t affect the budget too much.

    A good financial planner will also be keeping a sharp eye


    on economic indicators and forecasts
    Factors for Determining a Projected
    Operating Budget Item

    PROJECTED OPERATING
    BUDGET ITEM

    MICRO
    FINANCIAL MACRO
    FACTORS/ NEW
    HISTORY INFORMATION FACTORS

    FAMILY CAREER ECONOMIC INFLATION/


    STRUCTURE HEALTH AGE UNEMPLOYMENT
    DEFLATION
    CHOICE CYCLE
    CAPITAL BUDGET: CAPITAL EXPENSE AND INVESTMENTS

    Capital expenditures are usually part of a long-term plan of


    building an asset base. Investment may also be part of a longer-term plan
    to build an asset base or to achieve a specific goal such as financing
    education or retirement.

    Capital expenditures may be a one-time investment, like a new


    roof. A capital expenditure may also be a step toward a long-term goal, like
    an annual savings deposit. That goal should be assessed with each
    budget, and that “step” or capital expenditure should be reviewed
    Factors for Determining the Projected
    Capital Budget Item

    PROJECTED OPERATING
    BUDGET ITEM

    THE TIME MICRO


    MACRO
    VALUE OF FACTORS/ NEW
    MONEY INFORMATION FACTORS

    FAMILY CAREER ECONOMIC INFLATION/


    STRUCTURE HEALTH AGE UNEMPLOYMENT
    DEFLATION
    CHOICE CYCLE
    5.3 THE CASH BUDGET AND OTHER
    SPECIALIZED BUDGETS
    The Cash Budget
    a good management tool is the cash budget, which is rearrangement of
    budget items to show each month in detail. Irregular cash flows can be
    placed in the specific months when they will occur, allowing you to see
    the effects of cash flows timing more clearly.

    Helps determine when the firm should experience cash surpluses and
    when it will need to borrow cover working-capital costs

    Allows a company to plan ahead and begin the search for financing before
    the money is actually needed
    Types of Budget

    • Capital Budget - highlights a firm’s spending plans for major asset


    purchases that often require large sums of money

    • Cash Budget - estimates cash inflows and outflows during


    particular period like a month or quarter

    • Operating (Master) Budget - ties together all the firm’s other budgets
    and summarize its proposed financial activities
    Timing matters for cash flows because you need to get cash before you spend
    it, but also because time affects value, so it is always better to have liquidity
    sooner and hang onto it longer. A cash budget provides a much more detailed
    look at these timing issues, and the risks-and opportunities-of cash
    management that you may otherwise have missed.
    Other specialized budgets

    Other kinds of specialized budgets focus on one particular financial aspect or goal. A
    specialized budget is ultimately included in the comprehensive budget, as it is a part
    of total financial activity. You create a budget for that asset or that activity by
    segregating its incomes and expenses from your comprehensive budget.

    For example, suppose you decide to take up weekend backpacking as a recreational


    activity. You are going to try it for two years, and then decide if you want to continue.
    You want to create a separate budget for your backpacking investment and expenses in
    order to assess the value of this new recreational activity
    One common type of specialized budget is a tax budget. A tax budget can be
    useful in planning for or anticipating an event that will have significant tax
    consequences.

    While it can be valuable to isolate and identify the effects of a specific activity or
    the progress toward a specific goal, that activity or that goal is ultimately just a
    part of your larger financial picture.
    5.4 Budget Variances
    Budget Variance
    - It occurs when the actual results of your financial
    activity differ from your budgeted projections.

    - The sooner you notice a budget variance, the sooner you


    can analyze it and if necessary, adjust for it.

    - The sooner you correct the variance, the less it costs.


    Variances can be:

    Positive/favorable (Better than expected)

    Adverse/Unfavorable (worse than expected)


    Favorable Variances

    • Actual Figures are better than budgeted than budgeted figure

    • Example:
    • cost is lower than expected
    • Revenue or profit is higher than expected

    Adverse Variances
    • Actual Figures are worse than budgeted figure

    • Example:
    • Cost is higher than expected
    • Revenue or profit is lower than expected
    Simple Examples of Variances
    ₱‘000 Budget Actual Variance
    Sales 100 120 20 (F)
    Cost of Sales 60 70 10 (A)
    Gross Profit 40 50 10 (F)
    Overheads 15 20 5 (A)
    Operating profit 25 30 5 (F)
     Recognizing and analyzing variances between actual results and budget
    expectations:
     identifies potential problems,
     identifies potential remedies.

     The more frequently the budget is monitored, generally


     the sooner adjustments may be made
     the less costly adjustments are to make.
     Budget variances for incomes and expenses should be analyzed to
    see if they are caused by a difference in :
     actual quantity,
     actual price,
     both actual quantity and actual price.
     Variances also need to be analyzed in the context of
    micro and macro factors that may change.
    5.5 Budgets, Financial
    Statements, and Financial
    Decisions
    Budgets, Financial Statements, and Financial
    Decisions

    • Provides a clearer view of “what is” and “what is


    possible.”

    • Financial planning is a continuous process of making


    financial decisions.
    • Financial statements are ways of summarizing
    the current situation.

    • Budgets are ways of projecting the outcomes of choices.

    • Financial statement analysis and budget variance


    analysis are ways of assessing the effects of
    choices.

    • Personal factors, economic factors, and the


    relationships of time, risk, and value affect
    choices, as their dynamics affect outcomes.

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