STRATEGIC SIGNIFICANCE

OF BUSINESS PLANNING
(FOCUS: BUDGET)

Monique Mahilum
Elmer Libiran
 OBJECTIVES:

 Define budget
 Understand the different purposes of budgeting
 Know the advantages and limitations of budgeting
 Understand the principles of Profit Planning and its Basics
 Activity based budgeting
 Different types of budget
 Budget Administration and Preparation of Master Budget
WHAT IS BUDGET?

 a financial plan of a business resources needed to carry

out the task and meet financial goals

 a quantitative expression of the goals the organization

wishes to achieve and cost of attaining these goals
Budgeting
 the act of preparing a budget

Budgetary Control
 the use of budgets to control a firm’s activities
PURPOSES OF BUDGETING

Planning
 To quantify a plan of action. The process of creating a budget forces
the individuals who make up an organization to plan ahead

Facilitating Communication and Coordination

 For any organization to be effective, each manager throughout the
organization must be aware of the plans made by other managers

Allocating Resources
 An organization’s resources have limited capacity, and budgets
provide one means of allocating resources among competing uses
PURPOSES OF BUDGETING

Controlling Profit and Operations

 A budget is a plan, and plans are subject to changes. Nevertheless, a
budget serves as a useful benchmark with which actual results can be
compared

Evaluating Performance and Providing Incentives

 Comparing actual results with budgeted results also helps managers
evaluate the performance of individuals, departments, divisions, or entire
companies. Since budgets are used to evaluate performance, they also can
be used to provide incentives for people to perform well.
ADVANTAGES AND LIMITATIONS OF BUDGETING

Advantages of Budgeting
• It forces planning and exposes situations in which plans of subcomponents are
inadequate to attain the total organization’s objectives

• It allows a reiterative process to bring the goals of the organization and the
subcomponents into agreement

• It provides a means of communicating organization goals down through the

organization and sub-unit operational limitations up through the organization

• It provides a basis for financial planning, sub-unit coordination, resource

acquisition, inventory policy, scheduling and output distribution

• It provides a basis by which activity can be monitored, with actual results being
compared to the planned results
ADVANTAGES AND LIMITATIONS OF BUDGETING
PROFIT PLANNING

 Is the set of actions taken to achieve a targeted profit level. These actions involve the
development of an interlocking set of budgets that roll up into a master budget.

 The management team adjusts the information in this set of budgets to arrive at the
combination of actions needed to arrive at the targeted profit level.

 The planning process may involve a significant amount of what-if analysis, to see what
happens to projected profits in different scenarios.
PROFIT PLANNING

 Profit planning is a vital part of any business plan structure for a small or medium business.
The goals of small business owners include ensuring that the business makes profits year-
on-year, and that it is sustained over a period of time for growth.

 The business plan includes a forecast that tries to anticipate the business growth and
determine the revenue that could be generated in that particular year.
PROFIT PLANNING
When handled correctly and with an emphasis on making realistic estimates, profit
planning can pinpoint specific actions that must be taken to arrive at a profit goal:

 Increase the investment in new product development in order to increase new

product sales
 Expand the regions within which existing products are sold
 Target areas of declining sales where it can make the most sense to eliminate
products or cut costs
 Take steps to mitigate risks that may otherwise result in unusually large losses
 Target bottleneck operations to increase the productive capacity of the business
THE BASICS OF PROFIT PLANNING
Evaluate your Business Operations

 Profit planning and forecasting enables a comparison between projected costs and
spends, and the actual costs that your business is incurring

 This can help your team decide on improving cost efficiency and closing up the gaps

 It also enables better decision-making like which resources to invest in or cut costs from.
Proper profit planning will ensure that the business does not spend more than is necessary
or end up not investing enough in resources that are required
THE BASICS OF PROFIT PLANNING
THE BASICS OF PROFIT PLANNING
Anticipate Financial Planning

Planning funds to allocate across departments and procedures needs to begin well in advance
Profit planning anticipates the company’s financial ability to make the maximum use of
resources, with efficiency in costs and finally high profit-making potential

Carve out Hiring Requirements

 After the entire financial projection is made and the business plan structure is ready, the
company needs to evaluate if they have enough staff to carry out all the operations
 Profit planning also estimates the number of personnel required, vis-à-vis the work they
generate which has a bearing on the company’s revenue and profits
 Planning costs for hiring requirements is also an important part of this
PROFIT PLANNING : NOTES

Profit planning is a crucial business activity that prepares the company for the coming
year, helps spread out company resources efficiently and motivates the major
stakeholders of the company to strive towards year-on-year growth

Profit planning needs to be an activity that is carried out every year

After the end of the year, there also needs to be an audit that compares the projection
to the actual profits. This can guarantee that the company is prepared and has a well
thought-out strategy to improve every time and maximize profits and performance
PROFIT PLANNING : NOTES

Profit planning is only effective if the management team follows through on the action
items stated in the plan

All too often, profit planning is merely an annual exercise that management engages in,
but does not follow through on

Also, profit planning must be revisited whenever there is a significant change in business
conditions that invalidates the results of the old plan. Otherwise, management will
continue to follow old directives that have no relevance in the new environment
 DIFFERENCE BETWEEN PROFIT PLANNING
AND CONTROL CONCEPT
Profit Planning/Master Budget
• Is a summary of all phases of a
company’s plan and goals for the
future . In short, it represent a
comprehensive expression of the
management’s plan for the future
and how these plan to be
accomplished.
Control Concept
• Control involves the step taken by
management to ensure that the
objectives set down at the planning
stage are attain and to ensure that
all parts of the organization in a
manner consistent with
organizational policies.
 ACTIVITY BASED BUDGETING
• Activity based budgeting uses a two-stage cost-assignment process.
ACTIVITY BASED BUDGETING
 TYPES OF BUDGET
• Operating Budget
refers to the plans for the conduct of business for the planning period
MANUFACTURING MERCHANDISING SERVICE INDUSTRY NON-PROFIT
FIRMS FIRMS FIRMS ORGANIZATIONS

 Direct Materials  Labor / Personnel  Precise nature of  The goods or

 Direct Labor  Overhead budget depends on services to be
 Overhead  Selling the industry provided
 Selling  Administrative  Example: Airline  The revenue to be
 Administrative  Air miles to be flown available (sales or
 Material budget for other funding
spare parts sources)
 Fuel
 In-flight food
 Labor
 Overhead
 TYPES OF BUDGET
• Financing Budget
is a plan that shows how the organization will acquire its financial
resources, such as through the issuance of stock or incurrence of debt
CASH RECEIPTS BUDGET CASH DISBURSEMENTS CASH BUDGET
BUDGET
 Provides information about  Summarizes the various
the cash flow into the  Depends on spending cash inflows and outflows
company based on sales of plans reflected in several from operations
its services or products operational budgets,  It can arrange sources of
making it quite a complex borrowing for times when
budget cash outflows exceed
inflows
 It can plan to pay off
borrowings and make
investments when the cash
flow reverses
 TYPES OF BUDGET

• Capital Budget
Is a plan for the acquisition of capital assets, such as buildings and
equipment
BUDGET ADMINISTRATION
BUDGET DIRECTOR
or CHIEF BUDGET
OFFICER
- specifies the process by
which budget data will be
gathered, collects the
information, and prepares
the master budget
Budget Manual
- states who is responsible
for providing various
types of information, when
the information is
required, and what form
the information is to take
BUDGET BOARD OF SUB-
COMMITTEE DIRECTORS COMMITTEE
- consisting of key senior - Has the authority to - Is tasked to examine
executives, often is give final approval to the proposed budget
appointed to advise the the master budget carefully and
budget director during the recommend approval
preparation of the budget - can wield considerable or any changes
influence on the overall deemed necessary
direction the
organization takes by
exercising its authority
to make changes in the
budget and grant final
approval
WHAT IS A MASTER BUDGET?

• Also known as Profit Plan, it is a comprehensive set of

budgets covering all phases of an organization’s operations
for a specified period of time
STEPS IN DEVELOPING A MASTER BUDGET
• Establish basic goal and long-range for the company

• Prepares sales forecast for the budget period.

• Estimate the cost of goods sold and operating expenses

• Determine the effect of the budget operating result on assets, liabilities and ownership
equity account accounts

• Summarize the estimated data in the form of projected income statement for the budget
period and the projected statement of financial position as of the end of the budget
period
COMPREHENSIVE BUDGET ILLUSTRATION
 SALES BUDGET

• Sales budget showing what production will be sold in what quantities at

what prices, is the foundation on which all other short term budgets are built.
 PRODUCTION BUDGET

• Production budget becomes a key factor in the determination of other budgets,

including the direct material the direct labor budget and manufacturing
overhead budget.
RAW MATERIAL BUDGET
 DIRECT LABOR BUDGET

• This must have been arrived at after considering such factor skills level at workers,
labor rate per hour, time requirements, conditions of union contracts etc.
 OVERHEAD COSTS BUDGET
• Overhead items may be protected on the basis of direct labor hours or on material
costs or on machine hours .
 BUDGETED COST OF SALES

• The budgeted cost of sales statement can now be developed using the data from
the following:
1. Production Budget
2. Raw Material Budget
3. Direct Labor Budget
4. Overhead Budget
5. Budgeted Statement of Cost of Sales
 BUDGETED MARKETING AND
ADMINISTRATIVE EXPENSE BUDGET
• Budgeted Marketing and Administrative Expenses are also make up of fixed and
marketing variable components.
 CASH BUDGET
• Cash receipt – Normally, the bulk of a firm’s cash receipt comes from customer.
• Cash Disbursement – Data converted from individual budgets previously,
illustrated supply the basic information for the cash disbursements budget.
 BUDGETED INCOME STATEMENT

• Budgeted Income statement showing the net income that is to be expected

during budget period.
 BUDGETED STATEMENT OF FINANCIAL
POSITION
• Budgeted Statement of Financial Position is developed by beginning with the
current statement of financial position and adjusting it for the data contain in
other budgets,
 FLEXIBLE BUDGETING
• Flexible Budget – is an alternative to the fixed budget.
Fixed and Flexible Budget Variances Compared
 REFERENCES

• Managerial Accounting 10th Edition by Ronald Hilton and David Platt

• Management Accounting Concepts and Applications by Cabrera, Cabrera
• https://www.accountingtools.com/articles/profit-planning.html
• The Basics of Profit Planning by Payal Sakjuha