Federation of Andhra Pradesh Chambers of Commerce &Industry

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

By Prof. J R Kumar B. com .FICWA

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

Budgets are generally understood as Action plans. Planning occupies a special place in the management activities. Planning involves visualizing and foreseeing. Planning alone will enable an enterprise to move from where it is to where it wants to go. Importance of planning is known to all persons engaged in the managing affairs of business enterprises. It is the basic function of management. A plan is a future course of actions. It is an exercise in problem solving & decision making.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

It is all pervasive, it is an intellectual activity and it also helps in avoiding confusion, uncertainties, risks, wastages etc.
FUNCTIONAL PLANS

A functional plan describes the activity of a given functional area for a given project.
Financial Plan

Financial Plan is a part of Functional Plans. In business, a financial plan can refer to Creation of the three primary financial statements Balance Sheet, Income statement, and Cash Flow Statement With in a business plan

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

Financial Plan can also be known as financial forecast .It refers to an annual projection of income and expenses for a company, division or department. Financing Plan While a financial plan refers to estimating future income, expenses and assets, a Financing plan usually refers to the means by which cash will be acquired to cover future expenses, for instance through earning, borrowing or using saved cash.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

BUDGET A Budget on the other hand is generally referred to a plan that outlines an organization's financial and operational goals. So a budget may be thought of as an action plan; Planning a budget helps a business allocate resources, evaluate performance, and formulate plans. Budget is different from Financial Plan in respect of: 1.Purpose 2.Process 3.Focus 4.People Involved.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS 5.Information. 6.Timeframe. 7.Accountability. 8.Issues addressed. Successful Budget Features of Successful Budget : Realistic Goals. Actuals are the base. Complete in all respects. Accurate in mathematical portions. Should be for a definite period. Should be based on Fixed and Variable nature of expenses. Importance to Cash Generation. Regularly review.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

Major benefit provided by Budgets to business include: -Allocate appropriate resources to projects. -Monitor performance. -Manage the money in business effectively. -Improve decision-making. -Meet the business objectives. -Identify problems before they occur. Preparation of a budget is an annual task, where the past year's budget is reviewed and projections are made for the next year.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

Master Budget It is an overall Budget. It consists of the following: Profit and Loss Account Budget or Profitability Budget. Balance Sheet Budget Cash Flow Budget.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

I . Profit and Loss Account Budget This Budget cannot be prepared unless we are ready with the following Budgets Sales Budget, Production Budget, Purchase Budget, Overhead Expenses Budget, Manpower Budget, Capital Expenditure Budget. Discussion on Annexure -1

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

Notes: This Budget is the only statement that Management (in most of the enterprises) is interested in. The First Year Budget can be based on the project report plans for first year. This budget is the summary of all other functional budgets. Generally Current Year Actuals up to first nine months are worked out and Based expected amounts to be spent during last three months the estimated working results for the year will be consolidated.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS These estimated results will form the basis on which the action plans for next year will be drawn and, the budgets will be prepared accordingly. Many other activities like purchase/sale of assets, obtaining /repaying loans will be considered in making this master Budget. II. Balance Sheet Budget: Main assumptions required here will be : Expected Capital Structure. Changes in the Borrowings. Changes in Fixed Assets. Changes in Current Assets. Changes in Current liabilities. Discussion on Annexure -2.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS III. Capital Expenditure Budget. This is also popularly known as CAPEX Budget. Justification for each proposed addition will have to be indicated in terms of Income Generation or Expense/ Cost reduction or to meet a statutory requirement. Approximate cost of each addition will have to be indicated. In case of heavy purchases, the proposed source of finance also is normally indicated. The proposed additions are shown group wise and item wise under each group. Discussion on Annexure -3.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

IV. Cash Flow Budget.

This is a crucial Budget for any organisation. This will consist of expected cash inflows and outflows. Its very important that we prepare this budget to plan in advance the organisations credit policies in case of both purchases and sales. This Budget will highlight the need for seeking higher working capital borrowings from banks. Discussion on Annexure-4. Functional Budgets. a. Production Budget. In this Budget, details of Products and the production quantity of each product, capacity utilisation, and need for Sub contracting etc, will be covered. This Budget has to be coordinated with Sales Budget, and Capital Expenditure budget.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS b. Sales Budget. Sales of new products, product wise/customer wise, Area wise quantity and the related selling prices will be covered here. In case of Selling prices, the existing selling prices and new prices being fixed based on marketing strategies should be given for easy comparison. Sales Value in the budget is the product of Quantity and the selling prices. Sales quantities should be based the pending orders likely to be on hand at the beginning and orders expected from customers based on their purchase budgets/ plans for the next year and our share in such quantity. Like other budgets, this budget also is worked out on monthly / quarterly basis, to facilitate preparation of detailed Production Budget. Discussion on Annexure -5.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS c. Procurement Budget. This budget deals with different materials required to be procured or purchased for carrying out the Production. Expected opening inventories, Proposed inventory levels, the planned procurement rates, new inputs and vendor development plans, will be covered here. Standard wastage rates will also be taken into consideration . All elements of procurement expenses and credits for VAT and Cenvat should also be covered here. d. Manpower Budget This Budget will display the exiting and the proposed Manpower strength and the associated cost.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS The requirements for manpower based should be on the activity as projected in Production and Sales Budget and new machines planned in capital Budget. Annual increases in pay, amounts becoming payable on signing of agreement with workers union etc, will have to be considered here. Production incentives, performance bonuses should also be related to the planned activity levels. e. Expenditure Budget This is a Crucial budget in terms of controlling expenses. Normally this is replica of P&L Account. Actual expenditure incurred and projections for remaining period of current year and the estimated expenditure likely to be incurred for budget year is projected account head wise.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS Identify the expenses into Fixed and Variable, so that projections can become more scientific. Regular increases in expenses based on trend should be provided. Principle of Conservatism should be followed in preparing this budget. Various expenses should cross match with other budgets. e. g. Salaries &wages with Manpower budget , Power & fuel with activity planned in Production Budget. Etc., Discussion on Annexure -6 f. Repairs and Maintenance Budget. This budget is required to plan for Repair works, both for preventive and breakdown. Care should taken to ensure that there is no duplication of expenditurewages for indirect labour covered in wages etc.,

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS g. Research and Development Budget R&D Budget becomes important, if an organisation is involved in Inhouse R&D work. Specific purchases and specific expenses for R7D work should be included here. 5. Budgetary Control System & MIS Reports. Budgetary Control system envisages controlling the operations by constantly comparing the Actuals with budgeted figures to check and find out the reasons for the variations from budgets. Even correction of budgets also is envisaged, if actual performances are better than Budgeted figures. Revised Budgets These Budgets reflect the changes which have become regular and get incorporated in the budgets.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS MIS reports should display actual working results and corresponding Budgets regularly on a periodical basis. These reports will also analyse the variations between Actuals and Budget figures. Such MIS reports will give more information about actual working results and generate confidence in the reporting system, when such a comparison and variance analysis is presented. Discussion on Annexure-7 6. Zero Based Budgets. This is relatively new concept in Budgeting. Zero-based budgeting starts from a "zero base". Every function within an organization is analyzed for its needs and costs. No previous expenditure is accepted as a base for the future expense.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS Here Budgets are built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one. Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period's budget. Zero Based Budgeting is an improvement over Incremental Budgeting. ZBB makes managers to find cost effective ways to improve operations. It is easy to detect inflated budgets under ZBB. The only draw back with ZBB is that it is a time-consuming process and takes much more time than traditional, cost-based budgeting. The greatest Advantage of ZBB is that It is able to Identify and eliminate wasteful and obsolete operations, which other wise may remain undetected.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS 7. Activity Based Budgets. Here importance is given to activities that incur costs in every functional area. Such operations are judged their usefulness with reference to the cost at which they are performed. Such useful activities needed are used along with their costs are used to create the budget. ABB provides opportunities to align activities with objectives, streamline costs and improve business practices, by concentrating only on such activities which will help in achieving the strategic goals. Cost efficiencies can be found by comparing activities performed in different areas of the organization and consolidating or rerouting certain functions. Cost efficiencies can be found by comparing activities performed in different areas of the organization and consolidating or rerouting certain functions.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS 8. BUSINESS PLANS Business plan also helps you to plan in detail all of the steps you will take now and in the near future. You gain the upper hand on competing businesses when you set up a business plan monitoring process from the start. A business plan is an adhoc plan prepared as and when required, unlike Budgets, which are prepared more like an annual feature. Need for Business Plans 1.Need to grow.-To plan for business growth and to set targets for growth. 2.Need to apply for Bank Loan 3.Seek investment for start up plans 4.For starting a new business

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS Selling the business. Seeking new Technology. Developing new business alliances. To guide management Team. To hire new personnel. To develop new strategy . Steps in preparation of Business Plan. 1. Review of current year as a basis for deciding about future. 2. Objectives to be followed and strategy to be used. 3. Action plan based on strategy selected and selecting best practices as benchmarks for measuring performances. 4.Resources needed to achieve the objectives selected. 5.Results anticipated.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS Some exercises helpful in planning. 1.SWOT Analysis. 2. PEST Analysis. 3. Balanced scorecard and 4. Brainstorming etc., Objectives of Business Plan. 1 To develop and communicate a plan of action to achieve company's strategic objective. 2. To provide a means of monitoring progress towards that objective and also to have contingency plans ready if this objective is unlikely to be met by original plan.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS

plan should focus on: revenue - income, direct costs and overheads. capital - expenditure, depreciation. Business plan is a tool for decision making and depending up on the purpose, contents of plan should be prepared. Business plan will normally have the following Executive summary. Description of the business. Analysis of the competition. Description of the management team. Marketing strategy. Common business plan mistakes.

CERTIFICATE COURSE IN BUDGETS AND BUSINESS PLANS 9. Corporate Plans. Corporate plans are prepared to cover following; 1. Corporate Vision 2. Corporate Mission 3. Corporate Goals-both short term and long term. 4. Corporate Strategies. These Plans will become guidelines for preparation of Annual Budgets.