HPI4007 Financial Management
Case 2: Planning and budgeting
Internal budgeting
Budget: A plan that indicates management’s objectives and shows how it expects to obtain
and use resources to achieve those objectives.
Budgeting: A tool for relating planned resource consumption to a period of time.
Budgeting is more the management tool.
The three main features of a budget:
it is a plan that is developed before an event has occurred;
it can include a broad range of resources – not just money;
it relates to a specific period of time.
Budgets enable managers to identify the resources that will be needed to achieve target levels of
activity or desired outcomes. Budgets also serve a number of other purposes. Reasons for producing
budgets:
To aid the planning of annual operations.
To coordinate the activities of the various parts of the organization and to ensure that the
parts are in harmony with each other.
To communicate plans to the various responsibility center managers.
To motivate managers to strive to achieve the organizational goals.
To control activities.
To evaluate the performance of managers.
A budget, once agreed and implemented, is then used to monitor actual activity and expenditure
against the levels set out in the budget and to analyze the differences (known as variances) between
planned and actual activity. So a budget is both a planning and a control tool and is essential to the
management of organizations. It follows from the above that the benefits of budgeting are that it:
facilitates the control of resources (management function)
allows managers to assess performance (management function)
identifies the extent to which individual managers can contribute to achieving the objectives
of the organization (authorization function)
provides early warning of variations from plans (distribution function)
No strict groups some can have also others/overlapping functions.
1
, HPI4007 Financial Management
Element of budgeting
Master budget
Although some budgeting is done on an ad hoc basis, most budgeting is done on a regular basis.
Master budget: incorporates and summarizes all of the budget elements for the coming year.
These elements provide the specific detail to accomplish both the routine ongoing activities
of the organization, as well as the coming year’s portion of the long-range plan. The master
plan becomes the plan for everything the organization will be doing during the coming year.
It is prepared each year.
The main elements of the master budget, sometimes called comprehensive budget, are the
operating budget and the financial budget.
Operation budget: presents a plan for revenues and expenses for the fiscal year.
Financial budget: includes a cash budget and a capital budget.
While the cash budget focuses primarily on the coming year, the capital budget considers
outlays for resources that will provide service for a number of years into the future.
Operating and cash budgets provide estimates for the organization’s various types of
revenues and expenses or expenditures. Capital budgets focus on the acquisition of long-
term resources. Expenses such as salaries, supplies and rent would not appear in a capital
budget.
Als je bijvoorbeeld een ruimte verhuurd dan kan de operation budget bijv. zijn dat je in april
50€ huur krijgt, alleen diegene betaald pas een maand later dus je hebt het pas als cash
budget een jaar later. Dus operation budget en cash budget kan verschillen maar kan ook
gelijk zijn.
The operating budget
The operating budget is a plan for expected revenues and expenses. For profit organizations
generally receive resources, such as money, in exchange for goods and services. Such exchanges
generate revenues for the organization. Not for profit organizations may earn revenues in a similar
fashion and may also receive revenue from contributions or grants. Governments may earn revenues
from the sale of goods and services, but they also are entitled by law to receive text revenues to be
used to provide services. Expenses represent the resources that the organization uses in carrying on
its activities.
Revenues and other support
Revenues can be calculated by predicting the volume of goods or services to be provided and their
unit price. Multiplying the price per unit by the volume of units provides the organization with an
estimate of its revenues. In case of governments, revenues are often calculated by multiplying tax
rates by the tax base.
In preparing the revenue budget, it is extremely important to consider all possible sources of revenue
or support. In addition to taxes or charges for services, these sources might include ancillary activities
such as gift shops or restaurants, endowment income, gifts or grants.
2
Case 2: Planning and budgeting
Internal budgeting
Budget: A plan that indicates management’s objectives and shows how it expects to obtain
and use resources to achieve those objectives.
Budgeting: A tool for relating planned resource consumption to a period of time.
Budgeting is more the management tool.
The three main features of a budget:
it is a plan that is developed before an event has occurred;
it can include a broad range of resources – not just money;
it relates to a specific period of time.
Budgets enable managers to identify the resources that will be needed to achieve target levels of
activity or desired outcomes. Budgets also serve a number of other purposes. Reasons for producing
budgets:
To aid the planning of annual operations.
To coordinate the activities of the various parts of the organization and to ensure that the
parts are in harmony with each other.
To communicate plans to the various responsibility center managers.
To motivate managers to strive to achieve the organizational goals.
To control activities.
To evaluate the performance of managers.
A budget, once agreed and implemented, is then used to monitor actual activity and expenditure
against the levels set out in the budget and to analyze the differences (known as variances) between
planned and actual activity. So a budget is both a planning and a control tool and is essential to the
management of organizations. It follows from the above that the benefits of budgeting are that it:
facilitates the control of resources (management function)
allows managers to assess performance (management function)
identifies the extent to which individual managers can contribute to achieving the objectives
of the organization (authorization function)
provides early warning of variations from plans (distribution function)
No strict groups some can have also others/overlapping functions.
1
, HPI4007 Financial Management
Element of budgeting
Master budget
Although some budgeting is done on an ad hoc basis, most budgeting is done on a regular basis.
Master budget: incorporates and summarizes all of the budget elements for the coming year.
These elements provide the specific detail to accomplish both the routine ongoing activities
of the organization, as well as the coming year’s portion of the long-range plan. The master
plan becomes the plan for everything the organization will be doing during the coming year.
It is prepared each year.
The main elements of the master budget, sometimes called comprehensive budget, are the
operating budget and the financial budget.
Operation budget: presents a plan for revenues and expenses for the fiscal year.
Financial budget: includes a cash budget and a capital budget.
While the cash budget focuses primarily on the coming year, the capital budget considers
outlays for resources that will provide service for a number of years into the future.
Operating and cash budgets provide estimates for the organization’s various types of
revenues and expenses or expenditures. Capital budgets focus on the acquisition of long-
term resources. Expenses such as salaries, supplies and rent would not appear in a capital
budget.
Als je bijvoorbeeld een ruimte verhuurd dan kan de operation budget bijv. zijn dat je in april
50€ huur krijgt, alleen diegene betaald pas een maand later dus je hebt het pas als cash
budget een jaar later. Dus operation budget en cash budget kan verschillen maar kan ook
gelijk zijn.
The operating budget
The operating budget is a plan for expected revenues and expenses. For profit organizations
generally receive resources, such as money, in exchange for goods and services. Such exchanges
generate revenues for the organization. Not for profit organizations may earn revenues in a similar
fashion and may also receive revenue from contributions or grants. Governments may earn revenues
from the sale of goods and services, but they also are entitled by law to receive text revenues to be
used to provide services. Expenses represent the resources that the organization uses in carrying on
its activities.
Revenues and other support
Revenues can be calculated by predicting the volume of goods or services to be provided and their
unit price. Multiplying the price per unit by the volume of units provides the organization with an
estimate of its revenues. In case of governments, revenues are often calculated by multiplying tax
rates by the tax base.
In preparing the revenue budget, it is extremely important to consider all possible sources of revenue
or support. In addition to taxes or charges for services, these sources might include ancillary activities
such as gift shops or restaurants, endowment income, gifts or grants.
2
