BUDGET METHODOLOGIES

Types of Budgets For Finance Executives, it is necessary to be familiar with the various types of budgets to understand the whole picture. The types of budgets include master, operating (for income statement items comprised of revenue and expenses), financial (for balance sheet items), cash, static (fixed), flexible, capital expenditure (facilities), and program (appropriations for specific activities such as research and development, and advertising). These budgets are briefly explained below.

TYPES OF BUDGET

Flexible Budget A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity. Static Budget A static budget is a budget that does not change as volume changes. If a companys annual master budget is a static budget, the budget for sales commissions expense will be one amount such as $200,000 for the year Rolling Budget A rolling budget is also known as a continuous budget, a perpetual budget, or a rolling horizon budget. We will use the following example to explain the meaning of a rolling budget.

Master Budget
A master budget is an overall financial and operating plan for a forthcoming calendar or fiscal year. It is usually prepared annually or quarterly. The master budget is really a number of sub budgets tied together to summarize the planned activities of the business. The format of the master budget depends on the size and nature of the business.
Operating and Financial Budgets The operating budget deals with the costs for merchandise or services produced. The financial budget examines the expected assets, liabilities, and stockholders' equity of the business. It is needed to see the company's financial health.

TYPES OF BUDGETING

Zero-Based Budgeting Zero-Based Budgeting is a method in which budgets are built around what is needed for each new budget cycle. All expenses must be justified based on importance and priority. Advantages of Zero-Based Budgeting Financial resources are allocated based on needs and benefits. This process encourages managers to find cost effective ways to improve operations. It ensures that allocations support DHRs mission and objectives. Challenges of Zero-Based Budgeting Managers must have thorough understanding of budgeting process. Every expenditure must be validated with appropriate documentation. The process requires significant time to ensure accuracy and effectiveness.

OVERVIEW OF OPERATING BUDGET PREPARATION

SALES EXPENSES

Sales is the largest and most important source of revenue for any established university press. The sales forecast is normally prepared by the marketing manager with input from the director and chief financial officer. Since many subsequent financial and operating decisions will be made based upon the sales forecast, it is extremely important to prepare this forecast carefully, in detail, to ensure relative accuracy. This means that sales projections should be done on a title-by-title basis for the budget year for at least a press's front list. It may also be desirable to do title-by-title projections for the spillover list (i.e., books published in the current fiscal year that will be recent backlist during the budget year) and for important individual titles from the backlist. For a very small press, it certainly would be possible and appropriate to do title sales projections for the fiscal year for the entire list, both front and back. A larger and established press, however, would probably assume a certain aggregate sales contribution from its backlist and to this add whatever title-by-title projections it feels are needed to come up with an overall sales forecast. It is also important to forecast your returns against sales so that you have both a gross forecast and a net sales forecast. Title sales histories, title budgets, and historical sales reports broken down to show sales contribution by frontlist/backlist, subject category, cloth/paper, trade/text, etc., can all be helpful in sales forecasting. Your press's sales reps can be a source of useful advice about the sales potential of individual titles as well. Sales forecasting is the subject of a separate paper in this handbook.

SALARIES EXPENSES

Salaries are often the most accurate item projected in the operating budget. Once salary levels and staff positions have been set, for the most part they tend to stay the same for the balance of the year. However, final details of salary adjustments are often not known at the time the annual operating budget is prepared. It is therefore not unusual for press department heads, the financial manager, and the director to work within general university guidelines at this stage. The budget may be prepared with an average salary increase built in, with the final detail being provided later once individual adjustments have been decided upon. It is often the case that the financial manager will play a heavier role in the preparation and coordination of salary estimates for the budget than he or she does in the preparation of any other type of departmental expense estimate. In addition to salary adjustments for existing employees, the salary budget must include new positions, part-timers, temporaries, overtime, midyear adjustments, and termination pay.

THE OPERATING BUDGET

Sales Budget

A sales budget is a detailed schedule showing the expected sales for the budget period; typically, it is expressed in both dollars and units of production. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time. Quarter 1 2 3 4 Year Budgeted sales in cases 10,000 30,000 40,000 20,000 100,000 Selling price per case $20.00 $20.00 $20.00 $20.00 $20.00 ------------ ------------ ------------ ----------- ---------Total sales $ 200,000 $600,000 $800,00 $400,00 2,000,000 ====== ====== ====== ====== ====== Percentage of sales collected in the period of the sales 70% Percentage of sales collected in the period after the sales 30% 70% 30%

Production Budget

The production budget is prepared after the sales budget. The production budget lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. Production needs can be determined as follows.

Budgeted sales in units------------------Add desired ending inventory-----------Total need--------------------------------------less beginning inventory-------------------Required production--------------------------

XXXX XXXX -----XXXX XXXX -----XXXX =====

Direct Labor Budget

The direct labor budget is developed from the production budget. Direct labor requirements must be computed so that the company will know whether sufficient labor time is available to meet the budgeted production needs. By knowing in advance how much labor will be needed throughout the budget year, the company can develop plans to adjust the labor force as situation requires. Companies that neglect to budget run the risk of facing labor shortages or having to hire and lay off workers at awkward times. Erratic labor policies lead to insecurity, low morale, and inefficiency.

Nonmanufacturing Budget

Even though nonmanufacturing overhead costs are not product costs according to GAAP, these expenses (along with product costs and profit) must be covered by the selling prices of a companys products. In other words, selling prices must be large enough to cover SG&A expenses, interest expense, manufacturing overhead, direct labor, direct materials, and profit.

Nonmanufacturing Budget

Some of the costs that would typically be included in nonmanufacturing costs include: Salaries and fringe benefits of selling, general and administrative personnel. This would include the company president, vice presidents, managers, and other employees in the nonmanufacturing functions of the company. Rent, property taxes, utilities for the space used by the nonmanufacturing functions of the company. Insurance for areas outside of the factory. Interest on business loans. Marketing and advertising. Depreciation and maintenance of equipment and buildings outside of manufacturing. Supplies for the offices.

THE FINANCIAL BUDGET

Capital Budget

The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.

Cash Budget

An estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities. A cash budget is extremely important, especially for small businesses, because it allows a company to determine how much credit it can extend to customers before it begins to have liquidity problems.

For individuals, creating a cash budget is a good method for determining where their cash is regularly being spent. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities for additional savings by cutting unnecessary costs.
For example, without setting a cash budget, spending a dollar a day on a cup of coffee seems fairly unimpressive. However, upon setting a cash budget to account for regular annual cash expenditures, this seemingly small daily expenditure comes out to an annual total of $365, which may be better spent on other things. If you frequently visit specialty coffee shops, your annual expenditure will be substantially more.