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Defining Budgetary Control
Budgetary control is defined by the Institute of Cost and Management Accountants (CIMA) as: •"The establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy, or to provide a basis for its revision".
• Budgetary control is the process of ascertaining several budgeted figures for the future of a business enterprise and then making comparison of these budgeted figures with the actual results for finding out discrepancies, if any. The comparison of budgeted and actual figures will allow the management to take curative actions at a proper time. • Budgetary control can be defined as, “A means of achieving the financial control of an entity whereby the actual results for a defined period of time are compared with the budgeted results, any differences (or variances) being noted, and some corrective action taken to bring the actual activities back into line with the budgeted ones if such variances need to be dealt with.”
It helps in amending deviations from the established standards. . . .It is essential for planning.It coordinates the actions of various departments.Budgetary control helps in eliminating wastes and raises the profitability position of a business enterprise. controlling and also acts as an instrument of coordination. .Objectives of Budgetary Control .It centralizes the control system. . . .Budgetary control operates various cost centres and departments with efficiency and economy.It makes a prediction about capital expenditure for future.
#Good budgetary planning and control is key to all these areas. • Assisting in sound management decisionmaking. . • Maintaining sound internal control. • Demonstrating accountability • Taking remedial action where needed.Uses of Budgetary Control • Ensuring efficient and effective use of resources.
Relationship of budgets to the objectives of the organisation • Directors of finance should take all reasonable steps to ensure that budgets are planned as an integral part of the strategic and operational management of the organisation and are aligned with its structure of managerial responsibilities. .
. 2 Alignment of the construction and approval of the budget with policy planning.Guidance 1 Multi-year planning of income & expenditure. covering capital expenditure & disposal and the sources & applications of funding.
This may require more than one analysis and presentation of budget information in order to deal with issues that affect more than one organisational unit or do not match normal authorization and management structures.Guidance 3 Construction of the budget analysis in such a way as to be able to identify resources against policies or other appropriate divisions of business activity. .
It helps to co-ordinate the activities of the organisation. . An example would be an advertising budget or sales force budget.Budgetary control methods a) Budget: • A formal statement of the financial resources set aside for carrying out specific activities in a given period of time.
Budgetary control methods b) Budgetary control: • A control technique whereby actual results are compared with budgets. . • Any differences (variances) are made the responsibility of key individuals who can either exercise control action or revise the original budgets.
b) Expense centre Units where inputs are measured in monetary terms but outputs are not. . There are four types of responsibility centre: a) Revenue centre Organisational units in which outputs are measured in monetary terms but are not directly compared to input costs.Budgetary control and responsibility centre • A responsibility centre can be defined as any functional unit headed by a manager who is responsible for the activities of that unit.
i. d) Investment centre Where outputs are compared with the assets employed in producing them. ROI.e. Inter-departmental sales are often made using "transfer prices". .Budgetary control and responsibility centre c) Profit centre Where performance is measured by the difference between revenues (outputs) and expenditure (inputs).
. Forces management to look ahead. to anticipate and give the organisation purpose and direction. · Promotes coordination and communication. operation and (ideally) each manager. to set out detailed plans for achieving the targets for each department.Advantages of budgeting and budgetary control There are a number of advantages to budgeting and budgetary control: • Compels management to think about the future. which is probably the most important feature of a budgetary planning and control system.
Departures from budget can then be investigated and the reasons for the differences can be divided into controllable and non-controllable factors. Requires managers of budget centre to be made responsible for the achievement of budget targets for the operations under their personal control. Control is provided by comparisons of actual results against budget plan. A budget is basically a yardstick against which actual performance is measured and assessed.Advantages of budgeting and budgetary control 2. Provides a basis for performance appraisal (variance analysis). . Clearly defines areas of responsibility. 3.
Advantages of budgeting and budgetary control 4. Enables remedial action to be taken as variances emerge. . Motivates employees by participating in the setting of budgets. 5. 7. Economizes management time by using the management by exception principle. Improves the allocation of scarce resources. 6.
Problems in budgeting • Budgets can be seen as pressure devices imposed by management. · • Departmental conflict arises due to: a) disputes over resource allocation b) departments blaming each other if targets are not attained. . · It is difficult to reconcile personal/individual and corporate goals. thus resulting in: a) bad labour relations b) inaccurate record-keeping.
Problems in budgeting • Waste may arise as managers adopt the view. • Managers may overestimate costs so that they will not be blamed in the future should they overspend . power costs. "we had better spend it or we will lose it". some costs are under the influence of more than one person. i.g. This is often coupled with "empire building" in order to enhance the prestige of a department. e. • Responsibility versus controlling.e.
. • Standards: base it on established standards of performance.Characteristics of a budget A good budget is characterized by the following: • Participation: involve as many people as possible in drawing up a budget. • Comprehensiveness: embrace the whole organisation. • Feedback: constantly monitor performance. • Analysis of costs and revenues: this can be done on the basis of product lines. departments or cost centre. • Flexibility: allow for changing circumstances.
Budget organisation and administration In organizing and administering a budget system the following characteristics may apply: • Budget centres: Units responsible for the preparation of budgets. A budget centre may encompass several cost centres. .
so there should be a representative from sales. departmental heads and executives (with the managing director as chairman). • Functions of the budget committee include: · Coordination of the preparation of budgets. marketing and so on. . production. including the issue of a manual · Issuing of timetables for preparation of budgets · Provision of information to assist budget preparations · Comparison of actual results with budget and investigation of variances.g.Budget organisation and administration b) Budget committee: This may consist of senior members of the organisation. Every part of the organisation should be represented on the committee. e.
. liaising between the budget committee and managers responsible for budget preparation 3.Budget organisation and administration c) Budget Officer: Controls the budget administration The job involves: 2. dealing with budgetary control problems 4. ensuring that deadlines are met 5. educating people about budgetary control.
Budget organisation and administration d) Budget manual: This document: charts the organisation details the budget procedures contains account codes for items of expenditure and revenue timetables the process clearly defines the responsibility of persons involved in the budgeting system. .
Budget preparation Sales budget Production Purchases Marketing Budget Cash Budget Labour Supplemental Investments .
Budget preparation • Firstly. sales. material or labour. determine the principal budget factor.g. . This is also known as the key budget factor or limiting budget factor and is the factor which will limit the activities of an undertaking. This limits output. e.
• Methods of sales forecasting include: · sales force opinions · market research · statistical methods (correlation analysis and examination of trends) · mathematical models. This is prepared in units of each product and also in sales value. .Budget preparation a) Sales budget: this involves a realistic sales forecast.
.Budget preparation • In using these techniques consider: · company's pricing policy · general economic and political conditions · changes in the population · competition · consumers' income and tastes · advertising and other sales promotion techniques · after sales service · credit terms offered.
Budget preparation b) Production budget: expressed in quantitative terms only and is geared to the sales budget. The production manager's duties include: • · analysis of plant utilization · work-in-progress budgets. . • If requirements exceed capacity he may: · subcontract · plan for overtime · introduce shift work · hire or buy additional machinery · The materials purchases budget's both quantitative and financial.
• The materials purchases budget is both quantitative and financial. Factors influencing a) and b) include: · production requirements · planning stock levels · storage space · trends of material prices.Budget preparation c) Raw materials and purchasing budget: • The materials usage budget is in quantities. .
.Budget preparation d) Labour budget: is both quantitative and financial. This is influenced by: · production requirements · man-hours available · grades of labour required · wage rates (union agreements) · the need for incentives.
it highlights monthly surpluses and deficits of actual cash.g. Its main uses are: • to maintain control over a firm's cash requirements.Budget preparation e) Cash budget: a cash plan for a defined period of time. stock and debtors . It summarizes monthly receipts and payments. Hence. e.
.Budget preparation • to enable a firm to take precautionary measures and arrange in advance for investment and loan facilities whenever cash surpluses or deficits arises • to show the feasibility of management's plans in cash terms • to illustrate the financial impact of changes in management policy. change of credit terms offered to customers. e.g.
• Payments of cash may be for one or more of the following: · purchase of stocks · payments of wages or other expenses · purchase of capital items · payment of interest. . dividends or taxation.Receipts & Payments of Cash • Receipts of cash may come from one of the following: · cash sales · payments by debtors · the sale of fixed assets · the issue of new shares · the receipt of interest and dividends from investments.
The Ingredients of a Financial Plan • A financial plan consists of several ingredients – Expectations about the economic environment – A sales forecast – Pro forma (forecasted) financial statements – Asset requirements – Required new financing – Cash Budget .
Steps in Financial Forecasting • • • • • • Forecast sales Project the assets needed to support sales Project internally generated funds Project outside funds needed Decide how to raise funds See effects of plan on ratios and stock price .
52% 20.56% 87. 1997 ($ 000's) 1998%* 1998* 1997% 1997 1996% 1996 Sales 100.99% 240.04 0.42% 3.00% 3.55% 18.00% 4.250.97% 76.93% 3.89% 149.00 83.00 100.00 16.64 Net Income 96.70 4.00 100.91% 100.58% 600.00 1.80 8.00 Cost of Goods Sold 83.50 Earnings Before Taxes 160.71% 58.89 15.00 Depreciation Expense 20. 31.00 2.00 Selling and G&A Expenses 7.00 Gross Profit 690.82% 62.11 84.609.09% 209.22 2.58% 330.432.09 1.00 Fixed Expenses 100.00 0.55% 568.79% 334.91% 73.00 0.96 *Forecasted No change .45% 2.00% 3.864.70 6.30 6.15% 44.05 1.60% 100.00 1.300.77% 29.09 3.Forecasting the Income Statement Elvis Products International Pro-forma Income Statement For the Year Ended Dec.90 EBIT 236.48 1.850.00 2.60 Taxes @ 40% 64.27% 146.10 Interest Expense 76.
77 1468.80 344.51 914.00 140.99 685.05% 42.43 424.00 402.20 424.69% 4.60 351.88% 4. 1997 Assets Cash and Equivalents Accounts Receivable Inventory Total Current Assets Plant & Equipment Accumulated Depreciation Net Fixed Assets Total Assets Liabilities and Owner's Equity Accounts Payable Short-term Notes Payable Other Current Liabilities Total Current Liabilities Long-term Debt Total Liabilities Common Stock Retained Earnings Total Shareholder's Equity Total Liabilities and Owner's Equity Discretionary Financing Needed * Forecasted Other Information Sales Dividend 1998* 52.35% 10.00 1290.03% 9.00 360.82% 42.87% 17.Forecasting the Balance Sheet Elvis Products International Balance Sheet As of Dec.84% 3.20 225.80 1468.81 460.80 175.03 460.61 964.26% 10.00 836.68% 10.90 1411.03% 11.61 1002.99 1650.80% 1996 57.20 1996% 1.80 1650.44% 21.32% 9.04 460.20 340. 31.20 1997% 1.88 Forecast 4300.00 22.20 715.00 527.08 -9.34% 42.71% 33.75% 14.20 189.00 1997 52.80 145.05 225.60 323.60 200.84% 32.83% 3.00 186.40 527.96% 14.00 136.64% 14.00 Actual 3432.04 1762.80 .40% 5.46% 13.38 577.42% 23.00 146.31% 4.00 444.24% 5.23% 20.00 300.00 540.94% 19.00 481.00 225.00 203.03% 25.00 163.37% 42.80% 4.06% 11.77 663.55% 5.00 491.51% 13.04 760.00 166.80 1752.43 805.20 1124.95% 5.88% Surplus Actual 3850.
• The benefits of the cash budget are: – It provides an estimate of the ending cash balance in each month – It provides estimates and sources of the cash inflows and outflows – It provides a basis of comparison against which managers can be evaluated .The Cash Budget • A cash budget is a document which shows the expected cash inflows and outflows for a chosen time period (say. 6 or 9 months).
adds expected cash inflows. . The result is the expected ending cash balance.Parts of the Cash Budget • In a simple cash budget. a cash budget starts with the beginning cash balance. there are three parts: – The Worksheet Area – The Inflows and Outflows – The calculation of the ending cash balance • Essentially. and subtracts any expected cash outflows.
650 54.500 47.000 40% 45% 15% 50% 182.000 72.500 60% 40% 154.250 174.500 193.150 148.600 91. Sales Collections: Cash First Month Second Month Total Collections Purchases Payments: First Month Second Month Total Payments Bithlo Barbeques Cash Budget For the Period June to September 1998 April May June July August September October 291.500 301.700 71.500 58.750 58.000 107.600 95.100 176.450 46.000 145.000 365.100 98.350 214.400 65.050 43.100 49.100 116.000 92.300 164.000 329.000 77.700 360.000 238.200 .100 137.000 387.Cash Budget: Worksheet Area • The worksheet area is where we gather certain key numbers which will be used in the rest of the cash budget.000 43.200 164.050 362.800 189.800 131.400 73.500 119.
000 0 0 50.900 194.000 0 25.000 10.700 360. The cash budget is not the same as the income statement.000 0 0 25.300 214.000 30.500 451.000 0 0 0 200.100 137.100 176.600 10.100 29. Collections Less Disbursements: Inventory Payments Wages Lease Payment Interest Dividend (Common) Taxes Capital Outlays Total Disbursement 362.000 30.000 10.Cash Budget: Inflows & Outflows • This section shows all of the cash collections and disbursements.800 .800 47.000 10.400 65. Note that these are only cash inflows and outflows.450 91.000 0 185.500 301.100 20% 189.000 0 381.200 77.
350 150.800) (91.850 20.000 15.200 (76.400 0 15.000 20.500 121.400) 121. Beginning Cash Balance Collections .500 13.Disbursement Unadjusted Cash Balance Current Borrowing Needed Ending Cash Balance Notes: Minimum Acceptable Cash 15.000 0 20.000 121. and will have excess cash in August and September.000 15. .500 1.800 91.Cash Budget: The Ending Cash Balance • This section is where we calculate the ending cash balance and determine if we will need to borrow for each month.850 0 150.500 29.000 15.400) 106.000 (18.000 Note that Bithlo Barbecues will need to borrow in June and July.
Other Budgets f) Other budgets: These include budgets for: · administration · research and development · selling and distribution expenses · capital expenditures · working capital (debtors and creditors).
• The comprehensible budget plan encompassing all the individual budgets related to sales, cost of goods sold, operating expenses, capital expenditures, and cash. • Set of operating budgets related to finance, operations, production, sales, etc., and including projected (pro forma) cash flow statement, income statement, and balance sheet.
• • Composition of a master budget OPERATING BUDGET consists of Cash Budget; P/L account; Production budget; Materials budget; Labour budget; Admin. Budget; Stocks budget FINANCIAL BUDGET consists of:- Cash Flows Statement; Balance sheet; Funds statement
5 Programme. Some techniques are as follows – 1 Base. . 2 Incremental.Budget Construction Techniques • A consistent application of budget construction techniques is needed. 3 Zero base. 4 Activity base.
• A consistent application of the chosen budgeting techniques is fundamental. .Considerations before selection • The choice as to which approach or mixture of methods to use is a matter of local discretion. and existing figures re-worked to be compatible. • Any changes to the conventions used must be explained. but the responsibility of the director of finance is to ensure that there is a clear understanding of the reasons for the choice and the advantages and disadvantages of each of the options. The starting point from which budgets are considered is a crucial factor in determining future variations and equality of treatment of competing budgets.
Zero base budgeting (ZBB) • After a budgeting system has been in operation for some time. but the proper analysis process takes into account all the changes which should affect the future activities of the company. In fact this is part of the financial analysis discussed so far. there is a tendency for next year's budget to be justified by reference to the actual levels being achieved at present. .
Zero base budgeting (ZBB) • Even using such an analytical base. and particularly the current level of constraints on resources. it will be difficult for the business to make the progress necessary to achieve longer term objectives. can inhibit really innovative changes in budgets. This can cause a severe handicap for the business because the budget should be the first year of the long range plan. . if changes are not started in the budget period. Thus. some businesses find that historical comparisons.
For example. or a different-sized team. . the current existing field sales force will be ignored. in the sales area. a zero base). and the company then has to plan how to implement this new strategy.Zero base budgeting (ZBB) • One way of breaking out of this cyclical budgeting problem is to go back to basics and develop the budget from an assumption of no existing resources (that is. This means all resources will have to be justified and the chosen way of achieving any specified objectives will have to be compared with the alternatives. and the optimum way of achieving the sales objectives in that particular market for the particular goods or services should be developed. This might not include any field sales force.
an alternative way is to look in depth at one area of the business each year on a rolling basis. but in that year the business can almost grind to a halt. Hence. . so that each sector does a zero base budget every five years or so. Thus.Zero base budgeting (ZBB) • The obvious problem of this zero-base budgeting process is the massive amount of managerial time needed to carry out the exercise. some companies carry out the full process every five years.
Management action and cost control • Steps . and e) taking any appropriate action based on the analysis of the variances in d) above.a) preparation of budgets b) communicating and agreeing budgets with all concerned c) having an accounting system that will record all actual costs d) preparing statements that will compare actual costs with budgets. showing any variances and disclosing the reasons for them. .
transparency. consistent and thorough manner. and that policies and priorities are evaluated in an open. . prudence and accuracy of budgets • Directors of finance should take all reasonable steps to ensure that budgets are constructed on the basis of reliable data of past performance and rigorous assessments of future resources and commitments.Consistency.
. fees and other operating income by class of business. 1.2 Grants and subsidies.1 Taxes. 1.3 Sales.Guidance Robust budgets require the assessment or forecasting of the following (where applicable to the specific organisation): 1 Incoming financial resources: 1.
1.6 Recurrent and non-recurrent funds. 1.Guidance 1. 1.8 Loans.5 Partnership contributions. . 1.4 Donations.7 Investment income.
3 Contracts.2 Property.4 Other operating expenses. 3.5 Financing costs.1 Staff. . 3. 3 Expenditure commitments on: 3.Guidance 2 Cash flows. 3. 3.
4.2 Changes in the volume of activity. 4. 6 Human and physical resources needed to support expenditure plans. 4.4 Legislation and Government regulations or other externally imposed targets.1 Strategy and policy changes. .3 Demographic changes. 5 The impact of inflation and taxation changes on levels of income and expenditure.Guidance 4 Variations to service levels arising from: 4.
Using Budgeting for Strategic Purposes .
Key Questions for Budgeting -Is the organization's mission consistent with its financial resources? -Is the organization practicing intergenerational equity by balancing the needs of the present and the future? -Are the sources and uses of funds appropriately matched? -Is the organizations sustainable? .
share holders .Strategic Issues in Budgeting • • • • • • • • Development Capital Profitability Technology Investments Green-filed ventures Restructuring Investments Numerical Targets Theoretical benchmarks Top management vs.
g. whether the budget should be cash-based or be constructed on a real-terms basis. e. 5 Treatment of inflation.Strategic Implication of a budget • A budget should safeguard an organisation’s capacity to respond to unforeseen changes in circumstances and demands. 2 Provisions for identifiable liabilities. . 4 Contingency planning. To do this. 6 Borrowing levels and costs. 3 Working balances. the director of finance should recommend appropriate policies on: 1 The level of general and earmarked reserves.
such as service maintenance & development and asset maintenance & development. The director of finance should take all reasonable steps to ensure that the relationship between these aspects is clearly demonstrated and understood. or between front-line services and support functions.Strategic Implication of a budget • A budget will often contain a balance between sub-objectives or policies. or between products. .
Strategic Implication of a budget • Budgets should be accompanied by a clear explanatory and interpretative report. . highlighting the basis of preparation and risk issues.
Strategy and Budgeting support Organisational Objectives Operational Plans Other plans Financial Plans Customer responses Environmental Influences Profits & liquidity Monitoring & Control .
that commitments are properly authorised. and that budgets are related to clear objectives and outputs. .Effective and controlled implementation of budgets • Directors of finance should take all reasonable steps to ensure that responsibilities for budget management and control are unambiguously allocated.
. Budget targets should be expressed in output terms as well as financial terms wherever possible. whether capital or revenue. are communicated to all those that need to know.Guidance 1 Each part of the budget is compiled with the participation of whoever will be responsible for its control and performance 2 The outcome of budget decisions.
There must be no ambiguity about the responsibility for the authorisation and monitoring of any financial or non-financial element.1 Additions to budgets.Guidance 3 Responsibility for each element of the budget is delegated to a named individual. 4 There are clear rules for dealing with: 4. including any additions for inflation. .
Guidance 4. . 5 Appropriate systems are in place to authorise. 4.2 Virement between budget headings.and under-spending at the year end.4 The treatment of over. 4. verify and record budget commitments and actuals. including comprehensive systems of internal control.3 The commitment of future years’ budgets by spending decisions in the current year.
7 Budget data is accessible to those responsible for budgets in a timely and understandable way. .Guidance 6 There are links to operational systems so that operational performance can be assessed alongside financial performance.
not just to verify expenditure or income against targets but also to identify changing patterns or circumstances that may give rise to the need for corrective management action or changes in policy.Measurement and monitoring of performance against budgets and objectives • Monitoring of budgets is essential. .
.Measurement and monitoring of performance against budgets and objectives • It is normally the responsibility of the director of finance to monitor and report on the overall financial position of the organisation at appropriate intervals and in time for corrective action to be taken.
Using the Budgets .
Payroll. Capital Investment .Reporting Decision Making Analysis Capital Investment Budgeting Driver based Planning Data from Marketing.
Budgeting Grid High Financial need Low Budgeting control Low High Colour Area Green Field Demolition Tranquil Prospective .
Case Study: Budgeting / Financial Reporting • CUSTOMER An international group of companies with very large subsidiary network • PROBLEM Ill-formed and error-prone financial reporting • SOLUTION Budgeting and financial reporting automation BENEFITS • Better and faster financial flow control • Minimal errors and omissions in financial documentation .
Case Study: Budgeting / Financial Reporting • Real-time monitoring of financial plans execution FEATURES • Budget Planning and Tracking • Budget Coordination and Aggregation for Various Levels • Automatic Compilation of Operations Plans • Analytical Reports Generation • Financial Forecasting • Financial Flows Monitoring • Document Management .
Emerging Issues in Budgeting .
Modern Face of Budgeting .
Software for Budgeting • • • • • • • • • • Excel Fidelio YNAB SAP Win-CASH Budget Maestro PROPHIX CONTROL Management Accounts Costing Suit (MACS) BPM solutions by ‘Power Plan’ .
Accounts – Using Power Plan .
Allocation – Power Plan .
The following shows how it would be distributed using the above allocation setup: .Assume $10K in G&A Expenses for a particular month.
Power Plan – Budget Details .
Capital Expenditure • Create requests for capital expenditure items • Define supporting details for the requests. committed. or expended . and sustaining notes • Approve the requested capital expenditure items • Accommodate asset depreciation • Monitor expenses against approved and budgeted requests • Access capital expenditure information based on multiple levels of security • Provide status reports displaying budgeted. including cost details.
Data Consolidation & Reporting
Data can be consolidated as shown.
Data Consolidation & Reporting
Data can also be consolidated this way or in any other hierarchy desired.
Projective Budgeting – Scenario Building .
Reassessment & Priorities .Other Issues • • • • • • • • • • Budgeting for Human Resource Planning Budgeting for Intellectual Capital Entrepreneurial Budgeting Human Resource Audit Managing Inflation FOREX Issues Capital Investment Decisions – NAV or EPS basis Changing profile of Risk Participatory Budgeting Performance Budgeting.
Other Issues • • • • • • • • • Research & Development Patenting & Intellectual Property Multiple users of DATA & activity ownership Rapidly increasing utilization of data processing Demands for increased services Revenue constraints Environmental Investments Corporate Governance Tax Planning Issues .
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