PREPARATION OF

BUDGETS
A Budget is a detailed plan of action for
a future period expressed in quantitative and monetary
terms
Budgets are essentially short-term
plans which help to achieve the longer
term aims of the business

BUDGETS
Budgets reflect management policy
relating to all aspects of the business eg
new

and existing markets

products
stockholdings
increased use of technology
workforce
expected price rises etc

BUDGETS
A Budget shows what the results are
likely to be if the plan is put into action,
and so:
reveals

problems that might arise and

enables management to prepare in
advance to offset these problems

Functions of Budgets
Planning
Co-ordination
Control and performance evaluation
Participation/Motivation

Planning
Forward planning forces managers to
consider alternative future courses of
action, evaluate them properly and decide
on the best alternative
It also encourages managers to anticipate
problems before they arise giving them
time to consider alternative ways of
overcoming them when they do arrive.

Co-ordination
Department managers may make decisions about
the future which are incompatible or even in
conflict with other departments eg
Sales may be planning to extend the credit period
in order to stimulate sales to a point beyond the
bank overdraft arrangements
Budgeting helps to avoid such conflicts by
encouraging managers to consider how their
plans affect other departments and how the plans
of other departments affect them
This also leads to better communication between
departments

Control and performance

evaluation
While budget preparation aids planning,
the way budgets are used helps in control
and performance evaluation
The system of calculating deviations from
budget ie variances, after the event fosters
cost-consciousness amongst workers and
managers and highlights areas of over and
under achievement.

Participation/Motivation
By actively involving managers at all stages
of the hierarchy, the process of budgeting
brings the different levels closer together
The junior members feel that they have a
say in the running of the organisation
This leads to increased job satisfaction and
consequently productivity.

Stages in the Preparation of

Budgets
The long-term objectives of the organisation, and
management policies for meeting these, should be
established
Preparation of the budget is the responsibility of
the Cost Accountant or a Budget Committee
A Budget Officer may be appointed, responsible
for all the day-to-day work involved in the
preparation of the subsidiary budgets and for the
preparation of the Master Budget

TYPES OF BUDGETS
Sales Budget
Production Budget
Cash Budget

Sales Budget
This allows an analysis of expected sales by
quantities and revenues (units and s) from
the entire range of products
Management uses this budget as the basis
for other subsidiary budgets ie production,
selling cost, capital acquisition, stockholding
etc
This budget helps in early decision making
relating to sales policies in different sectors
of the market

Sales Budget
It can also be used to compare actual
results with the budget to identify areas
for improvement eg checking sales staff
performance
The Sales Budget provides targets for
motivating staff.

Production Budget
The Production Budget is based on the
Sales Budget
It shows the production of each product
required to meet the Sales Budget and
provides a basis for assessing
production needs in terms of labour,
machine utilisation and materials.

Cash Budget
This should show opening cash/bank
balance and all expected cash/bank inflows
including 'spot cash sales', receipts from
debtors, other receipts, dividends and
sales of fixed assets
It should also show expected cash/bank
outflows including payments to creditors,
purchases of fixed assets and payment of
dividends.

Cash Budget
This budget is used by management to highlight
surpluses or shortfalls of cash/bank and when
they are likely to occur
It allows planning for the use of surpluses or the
arranging of cover for shortfalls eg overdraft
facilities, long term loans or a share issue
As a result of the Cash Budget, other budgets
may require to be revised if cash shortages
forecast in this budget cannot be resolved

CASH BUDGETS
It is no use budgeting for production and for sales
if sometime during the budget period the firm runs
out of cash funds
Cash is therefore also budgeted for, so that any
shortage of cash can be known in advance and
action taken to obtain permission for a loan or a
bank overdraft to be available (or for long term
needs funds may be made available by an issue of
shares or debentures)
A Cash Budget will reveal what funds will be
needed, how much is needed and when it will be
needed

Timing of Cash Receipts and

Payments
When completing the Cash Budget, therefore, we
are interested in when the money is received and
when it is paid out, not when the goods are sold
or purchased
For example, raw materials might be bought in
March, incorporated in the goods being produced
in April, and paid for in May
These raw materials will be shown in the Cash
Budget under May ie when the goods are paid
for.