Scarcity=InnovationScarcity=Innovation

BUDGETING & BUDGETING & ForecastingForecasting

The Basic Framework of The Basic Framework of BudgetingBudgeting

A budget is a detailed quantitative plan for acquiring and using financial and other resources

over a specified forthcoming time period.

1. The act of preparing a budget is called budgeting.

2. The use of budgets to control an organization’s activity is known as budgetary control.

Planning and ControlPlanning and Control

PlanningPlanning – – involves developing involves developing objectives and objectives and preparing various preparing various budgets to achieve budgets to achieve these objectives.these objectives.

PlanningPlanning – – involves developing involves developing objectives and objectives and preparing various preparing various budgets to achieve budgets to achieve these objectives.these objectives.

ControlControl – – involves the steps involves the steps taken by management taken by management that attempt to ensure that attempt to ensure the objectives are the objectives are

attainedattained..

ControlControl – – involves the steps involves the steps taken by management taken by management that attempt to ensure that attempt to ensure the objectives are the objectives are

attainedattained..

Advantages of BudgetsAdvantages of Budgets

Goals and Objectives

Budgets

Compels managersto think ahead

Aids managers in coordinating their efforts

Provides definite expectations that are the best framework to evaluate performance

Advantages of BudgetsAdvantages of Budgets

Advantages of BudgetingAdvantages of Budgeting

Advantages

Define goalDefine goaland objectivesand objectives

Uncover potentialUncover potentialbottlenecksbottlenecks

CoordinateCoordinateactivitiesactivities

CommunicateCommunicateplansplans

Think about andThink about andplan for the futureplan for the future

Means of allocatingMeans of allocatingresourcesresources

Human Factors in BudgetingHuman Factors in Budgeting

The success of budgeting depends upon three The success of budgeting depends upon three important factors:important factors:

1.1. Top management must be enthusiastic and committed to Top management must be enthusiastic and committed to the budget process.the budget process.

2.2. Top management must not use the budget to pressure Top management must not use the budget to pressure employees or blame them when something goes wrong.employees or blame them when something goes wrong.

3.3. Highly achievable budget targets are usually preferred Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget when managers are rewarded based on meeting budget targets.targets.

The success of budgeting depends upon three The success of budgeting depends upon three important factors:important factors:

1.1. Top management must be enthusiastic and committed to Top management must be enthusiastic and committed to the budget process.the budget process.

2.2. Top management must not use the budget to pressure Top management must not use the budget to pressure employees or blame them when something goes wrong.employees or blame them when something goes wrong.

3.3. Highly achievable budget targets are usually preferred Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget when managers are rewarded based on meeting budget targets.targets.

Budgeting ExampleBudgeting Example

Royal Company is preparing budgets for the quarter ending Royal Company is preparing budgets for the quarter ending June 30.June 30.

Budgeted sales for the next five months are:Budgeted sales for the next five months are: April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units. 15,000 units.

The selling price is $10 per unitThe selling price is $10 per unit..

Royal Company is preparing budgets for the quarter ending Royal Company is preparing budgets for the quarter ending June 30.June 30.

Budgeted sales for the next five months are:Budgeted sales for the next five months are: April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units. 15,000 units.

The selling price is $10 per unitThe selling price is $10 per unit..

The Sales BudgetThe Sales Budget

The individual months of April, May, and June are summed to obtain the total projected sales in units

and dollars for the quarter ended June 30th

Sales ForecastingSales Forecasting

Step 1: Create the ROLL Out PlanStep 1: Create the ROLL Out Plan

Planning the Number of Doors/outletsPlanning the Number of Doors/outlets

Step 2: Find the Sales for each outletStep 2: Find the Sales for each outlet

A. On the basis of SPF for (EBO/LFRS):A. On the basis of SPF for (EBO/LFRS):

SPF= Sales /Area in square ft. SPF= Sales /Area in square ft.

1)1) Find out the benchmark SPF Find out the benchmark SPF

( Find for atleast two competitors and calculate average SPF)( Find for atleast two competitors and calculate average SPF)

2) Forecast Organization’s SPF in different scenarios.2) Forecast Organization’s SPF in different scenarios.

Sales ForecastingSales Forecasting

Different scenarios can be:Different scenarios can be: Pessimistic Scenario: 10% to 30% of Benchmark Pessimistic Scenario: 10% to 30% of Benchmark

SPFSPF

Normal Scenario: 40% to 70% of Benchmark SPFNormal Scenario: 40% to 70% of Benchmark SPF

Optimistic Scenario: 80% to 100% of Benchmark Optimistic Scenario: 80% to 100% of Benchmark SPFSPF

Sales Forecasting Sales Forecasting

3) Forecast Sales= SPF * Area 3) Forecast Sales= SPF * Area

Step 3:Step 3:

Cumulate the Sales of all the Outlets.Cumulate the Sales of all the Outlets.

Sales ForecastingSales Forecasting

B. On the basis of Quantities for (MBOs)B. On the basis of Quantities for (MBOs)

1)1) Find out the benchmark Quantity sold per Find out the benchmark Quantity sold per monthmonth

( Find for atleast two competitors and calculate ( Find for atleast two competitors and calculate average quantities sold)average quantities sold)

2) Forecast Organization’s Quantity sold in 2) Forecast Organization’s Quantity sold in different scenarios.different scenarios.

Sales ForecastingSales Forecasting

Different scenarios can be:Different scenarios can be: Pessimistic Scenario: 10% to 30% of Quantity Pessimistic Scenario: 10% to 30% of Quantity

soldsold

Normal Scenario: 40% to 70% of Quantity soldNormal Scenario: 40% to 70% of Quantity sold

Optimistic Scenario: 80% to 100% of Quantity Optimistic Scenario: 80% to 100% of Quantity sold. sold.

Sales Forecasting Sales Forecasting

3) Forecast Sales= ASP * Quantity Sold.3) Forecast Sales= ASP * Quantity Sold.

Step 3:Step 3:

Cumulate the Sales of all the Outlets.Cumulate the Sales of all the Outlets.

Computation of ASPComputation of ASP

Step 1Step 1

Identify key product categories Identify key product categories Step 2Step 2

Decide the pricing of each categoryDecide the pricing of each category

( Competitive Benchmarking)( Competitive Benchmarking) Step 3Step 3 Indentify the Weightage of each categoryIndentify the Weightage of each category

Computation of ASPComputation of ASP

Key Product Categories/Business Verticals Weights Price W*P

Q1 ( Say T-Shirts) 20% 10000 2000

Q2 ( Say Gift Items) 40% 15000 6000

Q3 ( Say Accessories) 20% 20000 4000

Q4 ( Say Bags) 20% 5000 1000

ASP= SUM of (W*P)= 13000

Computation of ASP: Year 1

Purchases BudgetPurchases Budget

Budgeted purchases = Desired ending inventory+Sales– Beginning inventory