Financial and management decisions
Week 1 – Introduction lecture – Budgets and Organization
A budget is quantitative expression of a plan of action that imposes the formal structure of an
organization. Managers use budgeting as an effective cost-management tool. Budgets facilitate
planning and coordination.
Benefits of budgets:
Compel managers to think ahead
Provide an opportunity to re-evaluate existing activities and evaluate new ones
Aid managers in communicating objectives and coordinating actions across the organization
Provide benchmarks to evaluate subsequent performance
Possible human relations problems:
Low level of participation in the budget process
Lack of acceptance of responsibility for the final budget
Incentives to lie and cheat in the budget process
Difficulties in obtaining accurate sales forecasts
An environment where there is a two-way flow of information reduces negative attitudes.
Participative budgets are formulated with the active participation of all affected employees.
Dysfunctional incentives lead managers to make poor decisions – lying if the budget process creates
incentives to bias budget information. Budgetary slack (budget padding) – an overstatement or
understatement of budgeted revenue to create an easier goal to achieve, and one more complication-
managerial bonuses based on making budget.
, Sales forecasting
A sales forecast is a predication of sales under a given set or conditions. Sales forecasts are usually
prepared under the direction of the top sales executive. The sales budget is the result of decisions to
create conditions that will generate a desired level of sales. To create a master budget a sale forecast
is needed. This can be neutral, negative or positive scenario analysis. The master budget is a
detailed and comprehensive analysis of the first year of the long-rage planning. It summarises the
planned activities or all subunits of an organization.
Sales
Purchases
Production
Distribution
EFR External Financing Required (= gap missing between the total assets and total liabilities and
stockholders’ equity).
Continuous budget/ Rolling budgets are
common form of master budgets that add a
month in the future as the moth just ended is
dropped.
Cash collections it is easier to prepare
budgeted cash collections at the same time as the
sales budget. Cash collections include the
current month’s cash sales plus the previous
moth’s credit sale. Budget cost of goods sold by
multiplying the cost of merchandise sold
percentage by budgeted sales. The total
merchandise need is the sum of budgeted cost of
goods sold plus the desired ending inventory. Finally, compute the required purchases by subtracting
the beginning inventory from total merchandise needed: budgeted purchases = desired ending
inventory + COGS – beginning inventory.
Financial budget
The second major part of the master budget is the financial budget, which consist of the capital
budget, cash budget and ending balance sheet. The cash budget is a statement of planned cash
receipts and disbursements that contains these major sections: available cash balance, net cash
receipts, and disbursement financing. Cash budget available cash = beginning cash balance –
minimum cash balance desired.
Cash receipts depend on the collections from: customers’ accounts receivable, cash sales, and other
operating income sources. Cash disbursement for purchases depend on the credit terms extended by
suppliers and the bill-paying habits of the buyer. Payroll depends on wage, salary and commission
terms and on payroll dates. Ending cash balance = beginning cash balance + receipts – disbursements
+ cash from financing.
The cash from financing can be either positive (borrowing) or negative (repayment). The master
budget is an important management tool for evaluating and revising strategy. The first draft of a
master budget is rarely the final draft. As managers revise strategy, the budgeting process becomes an
integral part of the management process itself – budgeting is planning and communicating.
Week 1 – Introduction lecture – Budgets and Organization
A budget is quantitative expression of a plan of action that imposes the formal structure of an
organization. Managers use budgeting as an effective cost-management tool. Budgets facilitate
planning and coordination.
Benefits of budgets:
Compel managers to think ahead
Provide an opportunity to re-evaluate existing activities and evaluate new ones
Aid managers in communicating objectives and coordinating actions across the organization
Provide benchmarks to evaluate subsequent performance
Possible human relations problems:
Low level of participation in the budget process
Lack of acceptance of responsibility for the final budget
Incentives to lie and cheat in the budget process
Difficulties in obtaining accurate sales forecasts
An environment where there is a two-way flow of information reduces negative attitudes.
Participative budgets are formulated with the active participation of all affected employees.
Dysfunctional incentives lead managers to make poor decisions – lying if the budget process creates
incentives to bias budget information. Budgetary slack (budget padding) – an overstatement or
understatement of budgeted revenue to create an easier goal to achieve, and one more complication-
managerial bonuses based on making budget.
, Sales forecasting
A sales forecast is a predication of sales under a given set or conditions. Sales forecasts are usually
prepared under the direction of the top sales executive. The sales budget is the result of decisions to
create conditions that will generate a desired level of sales. To create a master budget a sale forecast
is needed. This can be neutral, negative or positive scenario analysis. The master budget is a
detailed and comprehensive analysis of the first year of the long-rage planning. It summarises the
planned activities or all subunits of an organization.
Sales
Purchases
Production
Distribution
EFR External Financing Required (= gap missing between the total assets and total liabilities and
stockholders’ equity).
Continuous budget/ Rolling budgets are
common form of master budgets that add a
month in the future as the moth just ended is
dropped.
Cash collections it is easier to prepare
budgeted cash collections at the same time as the
sales budget. Cash collections include the
current month’s cash sales plus the previous
moth’s credit sale. Budget cost of goods sold by
multiplying the cost of merchandise sold
percentage by budgeted sales. The total
merchandise need is the sum of budgeted cost of
goods sold plus the desired ending inventory. Finally, compute the required purchases by subtracting
the beginning inventory from total merchandise needed: budgeted purchases = desired ending
inventory + COGS – beginning inventory.
Financial budget
The second major part of the master budget is the financial budget, which consist of the capital
budget, cash budget and ending balance sheet. The cash budget is a statement of planned cash
receipts and disbursements that contains these major sections: available cash balance, net cash
receipts, and disbursement financing. Cash budget available cash = beginning cash balance –
minimum cash balance desired.
Cash receipts depend on the collections from: customers’ accounts receivable, cash sales, and other
operating income sources. Cash disbursement for purchases depend on the credit terms extended by
suppliers and the bill-paying habits of the buyer. Payroll depends on wage, salary and commission
terms and on payroll dates. Ending cash balance = beginning cash balance + receipts – disbursements
+ cash from financing.
The cash from financing can be either positive (borrowing) or negative (repayment). The master
budget is an important management tool for evaluating and revising strategy. The first draft of a
master budget is rarely the final draft. As managers revise strategy, the budgeting process becomes an
integral part of the management process itself – budgeting is planning and communicating.
