Professional Documents
Culture Documents
Budgets
Budgets
Batch 13 B Roll No 93
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Budgeting
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INTRODUCTION
TYPES
METHODS
Capital Budgeting
Working Capital Management
INTRODUCTION:
For effective running of a business, management must
know:
overall
WHAT IS A BUDGET?
A plan expressed in money. It is
prepared and approved prior to the
budget period and may show income,
expenditure and the capital to be
employed. May be drawn up showing
incremental effects on former
budgeted or actual figures, or be
compiled by Zero-based budgeting.
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CLASSIFICATION OF BUDGETS
ACCORDING TO
TIME
1.
2.
3.
4.
ACCORDING TO
FUNCTION
ACCORDING TO
FLEXIBILITY
1. Sales budget
2. Production budget
1. Fixed budget
2. Flexible
1. SALES BUDGET:
Sales budget is the most important budget based on which all the
other budgets are built up. This budget is a forecast of quantities
and values of sales to be achieved in a budget period.
2. PRODUCTION BUDGET:
Production budget involves planning the level of production which
in turn involves the answer to the following questions:
a. What is to be produced?
b.
When is it to be produced?
c.
How is it to be produced?
d.
Where is it to be produced?
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4. PURCHASE BUDGET:
This budget provides information about the materials to be
acquired from the market during the budget period.
5. PERSONNEL BUDGET:
direct
9. MASTER BUDGET:
CIMA defines this budget as The summary budget incorporating
its component functional budget and which is finally approved,
adopted and employed.
Thus master budget is a summary of all functional budgets in
capsule form available in one report.
10. FIXED BUDGET:
This is defined as a budget which is designed to remain
unchanged irrespective of the volume of output or turnover
attained.
This budget will, therefore, be useful only when the actual level of
activity corresponds to the budgeted level of activity.
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CONCLUSION:
Preparation of budgets is the first step in the budgetary
control system.
Implementation of budgets is the second phase.
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CAPITAL BUDGETING
Capital budgeting is a decision situation where large funds
are committed (invested) in the initial stages of the project
and the returns are expected over a long period of time.
These decisions are related to allocation of investible funds
to different long-term assets.
decisions
have
long-term
CAPITAL BUDGETING
DECISION INVOLVES
THREE STEPS
1. Estimation of costs and benefits of a proposal or of
each alternative.
2. Estimation of the required rate of return, i.e., the cost
of capital
3. Selection and applying the decision criterion.
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2. DECISION CRITERIA
TECHNIQUES OF EVALUATION
Traditional or
Time-adjusted or
Non-discounting
1. Payback period
2. Accounting Rate of
2. Profitability Index
Return
TRADITIONAL OR NON-DISCOUNTING
TECHNIQUES
I . PAYBACK PERIOD:
# The payback period is defined as the number of
years required for the proposals cumulative cash inflows to be
equal to its cash outflows.
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The payback period is the length of time required
to recover the initial cost of the project.
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The payback period may be suitable if the firm
has limited funds available and has no ability or willingness to
raise additional funds.
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x 100
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OR
TIME
These are based upon the fact that the cash flows occurring at
different point of time are not having same economic worth.
I. NET PRESENT VALUE (NPV) METHOD:
The NPV of an investment proposal may be defined as the sum of the
present values of all the cash inflows less the sum of present values of all
the cash outflows associated with the proposal. The decision rule is
Accept the proposal if its NPV is positive and reject the proposal if the
NPV is negative.
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CONCEPTS:
GROSS WORKING CAPITAL The current assets which
represent the proportion of investment that circulates
from one form to another in the ordinary conduct of
business.
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PURPOSE:
The NWC is necessary because the cash outflows and inflows do not
coincide.
The purpose of NWC is to measure the liquidity of the firm.
APPROACHES TO DETERMINE
FINANCING MIX
1. Hedging approach
2. Conservative approach
3. Trade off between the above
mentioned two approaches.
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HEDGING APPROACH
(MATCHING APPROACH)
This is the process of matching maturities of debt
with the maturities of financial needs.
According to Hedging approach, the permanent
portion of funds required should be financed with
long term funds and the seasonal portion with
short term funds.
Under this approach working capital = 0 since CA
are not financed by long term funds (CA = CL).
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Payment for
resource purchase
Sell product
Receive
on credit
cash
Inventory
conversion
period
Receivable
conversion
period
Payables
period
Cash
Conversion
period
Operating cycle
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The length of the operating cycle is the most
widely used method to determine working capital need.
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