Budgeting

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					Three Levels of Planning
1. Strategic planning involves making long-term
   decisions such as defining the scope of the business,
   determining which products to develop or
   discounting, and identifying the most profitable
   markets.
2. Capital budgeting focuses on intermediate range
   planning and involves decisions as whether to buy or
   lease equipment, whether to stimulate sales, or
   whether to increase company assets.
3. Master budget describes short-term objectives in
   specific sales targets, production goals, and financing
   plans.
Advantages of Budgeting

   Promotes                  Promotes
   Planning                 Coordination



                Budgeting


   Enhances                  Enhances
  Performance                Corrective
  Measurement                 Actions
Budgeting and Human Behavior
Upper management must be sensitive to the impact of
the budgeting process on employees.

       Budgets are                 Many people find
   constraining. They            evaluation based on
     limit individual            budget expectations
  freedom in favor of              stressful. Think of
  an established plan.           students and exams.


     Upper management must demonstrate that
    budgets are sincere efforts to express realistic
       goals employees are expected to meet.
Cash Receipts   Operating    Pro forma
and Payments     Budgets      Financial
  Schedules       Start      Statements

    Cash          Sales       Income
  receipts       budget      Statement


     Cash       Inventory
                              Balance
  payments      purchases
                               Sheet
for inventory    budget

   Cash           S&A
                            Statement of
 payments       expense
                            Cash Flows
 for S & A       budget


                  Cash
                 budget
Sales Budget
       Detailed schedule prepared by the
   marketing department showing expected
  sales for the coming periods and expected
   collections on those sales. It is critical to
      the success of the entire budgeting
                    process.
Sales Budget
Hampton Hams (HH) is preparing a sales budget for
the last quarter of the year. Ham sales are expected
 to peak in the months of October, November, and
December (the holiday seasons). The store sales for
October are expected to total $160,000 ($40,000 in
cash sales, and $120,000 in sales on account). Sales
  are expected to increase by 20% per month for
              November and December.
           Let’s prepare a sales budget.
Sales Budget
            Accounts receivable at December 31st are
           $172,800, the uncollected sales on account.




 $40,000 × 120% = $48,000
                                 $120,000 × 120% = $144,000
Schedule of Cash Receipts
  Hampton Hams (HH) will collect cash sales in the
   month of sale. Past experience shows that the
 company will collect cash from its credit sales in the
month following the month of the sale (October credit
    sales will be collected in full in November).
       Let’s prepare the cash receipts budget.
Schedule of Cash Receipts
      Sales revenue on the income statement will be
        the sum of the monthly sales ($582,400).
Inventory Purchases Budget
  The total amount of inventory needed for
  each month is equal to the amount of the
   cost of budgeted sales plus the desired
              ending inventory.
  Cost of budgeted sales            XXX
  Plus: Desired ending inventory    XXX
  Total inventory needed            XXX
  Less: Beginning inventory        (XXX)
  Amount to purchase                XXX
Inventory Purchases Budget
HH maintains a policy that ending inventory should
be equal to 25% of the next month’s projected cost
 of goods sold. At HH, cost of goods sold normally
                equal 70% of sales.
    Suppliers require HH to pay 60% of inventory
purchases in the month goods are purchased and the
  remaining 40% in the month after the purchase.
Let’s prepare the inventory purchases budget and the
 schedule of cash payments for inventory purchases.
Inventory Purchases Budget



       $134,400 × 25% = $33,600




         $155,960 × 40% = $62,384 Accounts Payable
                           $145,600 × 40% = $58,240
$145,600 × 60% = $87,360
Selling and Administrative
Expense Budget
  The details of the Selling and Administrative (S&A)
   Budget are shown on the next two screens. It is
 important to note that sales commissions (based on
   2% of sales) are paid in the month following the
 sale, while supplies expense, based on 1% of sales)
     are paid in the month of the sale. The utility
 expense is paid in the month following the usage of
             the electricity, gas, and water.
Selling and Administrative
Expense Budget
Cash Budget
HH plans to purchase, for cash, store fixtures with a
 cost of $130,000 in October. HH borrows or repays
principal and interest on the last day of each month.
Any monies borrowed from the bank bear interest at
    an annual rate of 12% (1% per month). The
  management at HH wants to maintain an end of
       month cash balance of at least $10,000.
Cash Budget
Cash Budget
Pro Forma Income Statement
The pro forma income statement gives management
  an estimate of the expected profitability of HH. If
the project appears to be unprofitable, management
   can make the decision to abandon it. Although
 managers remain responsible for data analysis and
    decision making, computer technology offers
       powerful tools to asset in those tasks.
Pro Forma Income Statement
Pro Forma Balance Sheet
  This new store has no contributed capital because
its operations will be financed through debt (line-of-
    credit) and earnings. The amount of retained
  earnings will be equal to the net income because
 there are not prior periods. The fixtures purchased
    in October will be depreciated for a full three
   months. Total accumulated depreciation will be
                         $3,000.
Pro Forma Statement of Cash
Flows
 Almost all the information for the Pro Forma
Statement of Cash Flows can be found on the
                 Cash Budget.

				
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