5.

01 Budget Planning & Control

 Budget Planning

Financial planning is one tool managers use to

improve profitability.

Planning the financial operations of the business is

called budgeting.

A written financial plan expressed in dollars is called a

budget.
 Budget Planning (continued)

A budget is a view into the future – a financial estimate

of future business activities.

Identifying company goals is the first step in budget

preparation. Company goals might be:
 to increase sales
 reduce cost of merchandise sold
 increase net income
 Budget Planning (continued)

Two budgets commonly prepared in businesses are:

 Budgeted income statement – projection of a business’s

sales, costs, expenses and net income for a fiscal period.
Often called an operating budget.

 Cash budget – projection of a business’s cash receipts and

payments for a fiscal period. Used to manage estimated cash
shortages and overages.
 Budget Functions

A budget serves three important functions:

 Planning – managers make projections, plan actions to
meet goals

 Operational control – management compares actual

amounts to budgeted amounts to determine how well a
business is performing

 Department coordination – all management personnel

must help plan and use budget as a guide to manage
sales, costs, and expenses
 Budget Period

 The length of time covered by a budget is usually

one year.
 Annual budget is used to compare current financial
performance with budget plans.
 Annual budget is normally prepared for a company’s
fiscal year.
 Sources of Budget Information

 Budgets are not exact since they show only

projected sales, costs, and expenses.
 Companies use many sources to prepare budgets.
 Company records – accounting and sales records from
prior periods are used to determine trends
 General economic information – changes in the national
economy affect budget decisions
 Company staff and managers – department managers
project budget items for their areas of responsibility of
the business
 Good judgment – final budget decisions must be based
on good judgment
 Comparative Income Statement

 Provides an analysis of previous years’ sales, cost,

and expense amounts

 Income statement containing sales, cost, and expense

information for two or more years

 Highlights items that may be increasing or decreasing

at a higher rate than other items on the statement
Interpreting the Comparative Income Statement

 First column shows actual sales, costs, and

expenses for the current year

 Second column shows actual amounts for the prior

year

 Third column shows the amount of increase or

decrease from the prior year

 Fourth column shows the percentage by which the

current year amount increased or decreased from the
prior year amount
Interpreting the Comparative Income Statement
(continued)

 The percentage change indicates whether the

change is:
 Favorable

 Unfavorable

 Normal
 Favorable

•Percentage increase in expenses or costs

is less than percentage increase in sales

•Percentage decrease in expenses or costs

is more than percentage decrease in sales
 Unfavorable

•Percentage increase in expenses or costs

is greater than percentage increase in
sales

•Percentage decrease in expenses or costs

is less than percentage decrease in sales
 Normal

 Percentage increase in expenses or costs is

equal to percentage increase in sales

 Percentage decrease in expenses or costs

is equal to percentage decrease in sales
 Budgeted Income Statement

 Businesses set goals, develop operational plans, and

project sales, expenses, and costs

 Operational plans provide general guidelines for

achieving the company’s goals.

 Operational plan is converted into a more precise plan

expressed in dollars by preparing a budgeted income
statement.
Budgeted Income Statement (continued)

 Separate schedules are prepared to assist

management in evaluating operations and goals.
 Sales budget schedule
 Purchases budget schedule
 Selling expenses budget schedule
 Administrative expenses budget schedule
 Other revenue and expenses budget schedule

 Budgeted Income Statement shows a company’s

projected sales, costs, expenses, and net income.
 Sales Budget Schedule

 Prepared first because other budget schedules are

affected by the projected net sales

 Projected net sales are used to estimate the amount

of merchandise to purchase and the amount that
may be spent for salaries, advertising, and other
selling and administrative expenses.
 Purchases Budget Schedule

 Shows the projected amount of purchases that will

be required during a budget period

 Factors considered when planning a purchases

budget:
 Projected unit sales
 Quantity of merchandise on hand at the beginning of the
budget period
 Quantity of merchandise needed to fill projected sales
orders without having excessive inventory
 Price trends of merchandise to be purchased
 Selling Expenses Budget Schedule

 Shows projected expenditures directly related to

selling operations
 Some selling expenses are relatively stable and
require little budget planning. Example: Depreciation
Expense
 Other selling expenses increase and decrease in
relation to increases and decreases of sales.
 Most selling expenses are linked closely to net sales.
Administrative Expenses Budget Schedule

 Shows the projected expenses for all operating

expenses not directly related to selling operations
 Most administrative expenses are known and remain
the same each period.
 Sources used to prepare this budget schedule are:
 Past records
 Company plans
 Sales and selling expenses budget schedules
 Discussions with other managers
Other Revenue and Expenses Budget Schedule

 Show projections for revenue and expenses from

activities other than normal operations.

 Typical items in this budget schedule are:

 Interest income

 Interest expense

 Gains or losses on sale of plant assets

 Budgeted Income Statement

 Shows a company’s projected sales, costs,

expenses, and net income

 Prepared from the details of the five budget

schedules

 Allows for budgeting of federal income tax

 Cash Budgets

 Good cash management requires planning and

controlling cash so that it will be available to
meet obligations when they come due.

 Cash budgets help analyze cash inflows and

outflows.
 Cash Budgets (continued)

 Cash receipts budget schedule reports

projected cash receipts for a budget period.

Projectionsare made from the following:

Cash sales

Collections on account from customers

Cash to be received from other sources

 Cash Budgets (continued)

 Cash payments budget schedule reports projected cash

payments for a budget period.
 Projections are made from the following:
 Cash payments for accounts payable or notes payable
to vendors
 Cash payments for each expense item (requires an
analysis of the selling expenses, administrative
expenses, and other revenue and expenses budget
schedules)
 Cash payment for buying equipment and other assets
 Cash payments for dividends
 Cash payments for investments
Cash Budgets & Performance Reports

 Analysis of actual cash balance is used to determine

how actual cash compares to projected cash

 If
actual cash is less than projected cash, management
must determine the reason and take action to correct.
 Decrease could be caused by customers not
paying
 Decrease could be caused by expenses
exceeding budget projections
 If decrease continues, business may have to
borrow money until receipts and expenses are
brought into balance.
 Performance Reports

Compares actual amounts with the budgeted

income statement

Shows variations between actual and projected

items

Management reviews performance reports to

identify areas that need to be reviewed.
 Performance Reports (continued)

 First column shows amounts projected.

 Secondcolumn shows actual sales, costs, and

expenses.

 Thirdcolumn shows the difference between actual and

projected.

 Fourthcolumn shows the percentage of the amount

increased or decreased from the projected amount
 Performance Reports (continued)

Management should determine what

causes unfavorable results and how to
correct those situations.

Management should also determine what

causes favorable results and encourage
continuation of those actions.