Provide Leadership across the organisationElement 1 - Plan financial management approaches
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Budget objectives – annual planning, rolling forecasts, strategic review, debt reduction, cost reduction, business expansion and growth
Concept of long term versus short term budgets/plans
Differences between static, flexible and rolling budgets
Negotiation strategies and techniques
Steps in contingency planning
Plan Financial Management approaches
Planning
The organisation’s goals are selected and actions established to meet these goals. Budgeting forces key people in the organisation to plan. Participation by stakeholders in the budgeting process leads to ownership of the budget and a greater awareness of organisational requirements.
Leading
The organisation’s goals are achieved by assisting organisational members to perform their planned tasks through:
communicating the budget’s objectives and how they will be achieved; and
motivating members to focus on their individual budgeted targets.
Organising
The organisation’s goals are efficiently achieved by acquiring resources and allocating those resources in a co-ordinated manner so that all parts of the organisation are efficiently working towards the same objectives.
Controlling
The attainment of the organisation’s goals is measured against set standards. Current performance is measured and compared against those standards and where necessary remedial action is taken.
At this stage the budget may be revised and the process begun again
Aims and objectives of budgets
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As a manager you will become involved in budgeting. Budgeting attempts to predict what is likely to happen in the future.
Workplaces vary in their budgeting requirements.
So, budgets are management plans expressed in financial terms for the operations and resources of an organisation, for some specified period of time.
The information gathered to prepare a budget generally comes from a number of sources including:
Past information or events
Budgets
compelling planning,
controlling any variations or deviations,
improving communication within the workplace,
making certain individuals responsible,
The purpose of Budgets
The purpose of Budgets
static budgets
flexible budgets
zero-based budgets
period budgets
rolling budgets
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As a manager, depending on your workplace, you may be confronted with a number of different types of budgets.
The overall organisation’s budget is known as the master budget which is a combination of all the budgets within the workplace. Directly under the master budget are operational and capital budgets.
Some organisations have a budget for every aspect of business.
Essentially operational budgets cover all those aspects relating to day-to-day activities and capital budgets are the plans to acquire future assets for the workplace.
Types of Budgets
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Many workplaces use sales and revenues budgets terminology interchangeably. They essentially mean the same thing. That is, they show the total revenue expected from the sale of finished goods.
In the service industry where services are sold, workplaces can use fees budgets or professional services budgets. For the purpose of this budget task let’s assume we are in the manufacturing and sales business.
The sales budget can be prepared by product, by a particular period, by a geographic area or a combination of these. It also shows how many units will be sold and at what price.
Sales / Revenue Budget
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John & Gloria’s Coffee shop – sales budget for the month ending March 2005
Example of a completed Sales Budget
Product
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Once the sales figure are known then a production budget can be prepared by the manufacturing area in your workplace to ensure that there are sufficient units to meet forecasted sales.
You must take care to allow for any seasonal fluctuations that may occur, otherwise you may end up with a lot of unsold stock.
The production budget takes into consideration opening and closing stock.
Production Budget
Production budget for the month end 30 June 2005
Tom and Jerry’s furniture shop manufactures and sells four products: chairs, dining tables, buffets and hutches.
The sales budget indicates the following sales levels for June 2005
The desired stock levels are:
Example of a completed Production Budget
Product
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The cash budget is an essential management tool for planning ahead and avoiding dangerous changes in cash position.
Note: Be careful with cash budgets as they deal with predicted cash receipts and payments. These may affect the collection and payment of GST.
Cash Budget
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A cash budget for the month of September 2004 for Leyton Industries can be prepared from the following information:
Leytons Industries – cash budget, September 2004
Note: amounts in ( ) are negative
Example of a completed Cash Budget
$
(217000)
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Remember how the production budget was dependent on the sales budget to forecast the sales? With a purchases budget it is dependent upon the production schedule to ensure that the correct raw materials are on hand to make the products.
Similar to sales budgets, the purchase budget can be prepared by product, or by period or a combination of these. Raw materials for one workplace may be the finished product for another. In the case of Tom and Jerry’s furniture, the timber is the output from the timber mill that is used by Tom and Jerry to turn it into furniture.
Purchase Budget
There are generally three broad categories used:
Marketing
Administration
Financial.
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In compiling a capital budget, information is gathered from across the workplace identifying those expensive items required. For example, a new building may be needed to accommodate business growth, or to relocate closer to your customers. Maybe some equipment needs replacing such as an excavator. Generally a business case is prepared outlining the benefits for these purchases.
Capital Budget
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Generally all the decision makers get involved in budget preparation. However, some of them and those at the lower end of the hierarchy who are involved in meeting budget also need to be informed. These people are called the influencers.
The influenced parties must not only be informed of the budget, but it must be discussed and agreed with them. These parties will need to work within the constraints of the budget.
Budget Process
The following table identifies some of the influencers in workplaces.
Budget Process
Production unit
Production manager
Purchase
Expense
Reducing wastage