FINANCIAL MANAGEMENT 332
Luschke Labuschagne
25100572
Component 1
Budgets as financial management tool
Nature of budgets
•
• Budget: summary of a business’s plan on what they intend to sell and obtain
• Requirements in terms of information:
- Objective, consistent, reliable, realistic
- Key words: planning, future, quantitative money (monetary) terms, comparative measures,
control
• Purpose:
- Higher profitability
Limit waste (capacity of PPE)
Improve management decisions
- Ensure optimal liquidity
Identify best means of financing
Advanced knowledge of future cash requirements
• Function of budgets:
- Task assignment, authorization to act
- Means of communication
- Forecasting function (looking at future sales and size of market)
- Means of co-ordination (between different divisions)
- Means of control (ito issues)
- Educate managers
Attitude towards budgets
• Most important obstacles:
- Conflict as a result of conflicting interest
- Excessive expectations of subordinates (communication between upper and lower levels of
staff/ management)
- Excessive emphasis of control function
- No room for own discretion
Management planning and control
• Planning:
- Development of future- orientated objectives
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, - Drawing up plans quantified in monetary terms to achieve objectives
• Three types of projections:
- Reference projection (as if nothing changed, as it is in the present)
- Desired projection (aspirations to be better)
- Planned projection (compromise between reference and desired)
• Control:
- Observation of differences between financial norms & actual figures
- Combined with critical evaluation & reporting
- Steps of control:
Setting of standards (norms and ratios) (specific to industry)
Collection of information; comparing actual performance with standard
Analysis and evaluation of performance
Corrective action
Top down- order of creating a budget
Integrated budget system:
• Income statement- Balance sheet
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,Cash budget
• Preview of:
- Expected cash receipts and payments
- Future cash requirements
- Periods where financing is required for cash shortages; investment of surplus cash
• Cash management:
- Delay payments; speeding up recoveries
- Synchronizing inflow and outflow of cash
- Inventory model applied for cash management
• Differences between profit and cash:
- Income statement show profit/loss (gain/loss disposal of PPE) – converted to corresponding
cash values
- Contains non-cash items (depreciation, amortization) – excluded, but impact on tax
calculations is NB
- Cash budget must show all cash tax payments – income tax, tax on gain/loss disposal of PPE
• Other transactions:
- Capital investment: - cash purchases of assets, repayment of instalments
- Capital structure:
o Shares issued/ repurchased; dividends paid
o Loans obtained/ redeemed; finance cost
• Cash receipts:
- Sales revenue:
o Cash sales: cash received immediately
o Cash discount: discount sometimes offered on cash sales
o Credit sales: repayment by debtors over time
o Bad debt: credit sales not collected
- Other cash receipts:
o Disposal of assets (PPE, Investments)
o Investment income (interest/ dividends received)
• Cash payments:
- Purchases
o Cash purchases: cash paid immediately
o Credit purchases: repayment to creditors over time
o Cash discount: discount sometimes received on cash purchases
- Calculating of purchases
o Opening inventory+ purchases – cost of sales= closing inventory
- Operating expenses
o Salaries, wages, electricity, rent
- Tax
- Other cash payments
o Purchases of assets (PPE, Investments)
o Finance cost (interest/ dividends paid)
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, Cash management
• Negative cash balance
- Short-term solutions:
o Apply for Bank overdraft, short term debt
o Sell marketable securities
- Long-term solutions
o May require adjustment to capital structure
o Additions LT K(v), equity
• Positive cash balance
- Short-term utilization:
o Redeem short term debt or bank overdraft
o Purchase marketable securities
- Long-term utilization
o Investment in non-current assets
o Replace or expand your PPE
Class exercise: Cash budgeting: Problem 1
Copy right: Luschke Labuschagne
Luschke Labuschagne
25100572
Component 1
Budgets as financial management tool
Nature of budgets
•
• Budget: summary of a business’s plan on what they intend to sell and obtain
• Requirements in terms of information:
- Objective, consistent, reliable, realistic
- Key words: planning, future, quantitative money (monetary) terms, comparative measures,
control
• Purpose:
- Higher profitability
Limit waste (capacity of PPE)
Improve management decisions
- Ensure optimal liquidity
Identify best means of financing
Advanced knowledge of future cash requirements
• Function of budgets:
- Task assignment, authorization to act
- Means of communication
- Forecasting function (looking at future sales and size of market)
- Means of co-ordination (between different divisions)
- Means of control (ito issues)
- Educate managers
Attitude towards budgets
• Most important obstacles:
- Conflict as a result of conflicting interest
- Excessive expectations of subordinates (communication between upper and lower levels of
staff/ management)
- Excessive emphasis of control function
- No room for own discretion
Management planning and control
• Planning:
- Development of future- orientated objectives
Copy right: Luschke Labuschagne
, - Drawing up plans quantified in monetary terms to achieve objectives
• Three types of projections:
- Reference projection (as if nothing changed, as it is in the present)
- Desired projection (aspirations to be better)
- Planned projection (compromise between reference and desired)
• Control:
- Observation of differences between financial norms & actual figures
- Combined with critical evaluation & reporting
- Steps of control:
Setting of standards (norms and ratios) (specific to industry)
Collection of information; comparing actual performance with standard
Analysis and evaluation of performance
Corrective action
Top down- order of creating a budget
Integrated budget system:
• Income statement- Balance sheet
Copy right: Luschke Labuschagne
,Cash budget
• Preview of:
- Expected cash receipts and payments
- Future cash requirements
- Periods where financing is required for cash shortages; investment of surplus cash
• Cash management:
- Delay payments; speeding up recoveries
- Synchronizing inflow and outflow of cash
- Inventory model applied for cash management
• Differences between profit and cash:
- Income statement show profit/loss (gain/loss disposal of PPE) – converted to corresponding
cash values
- Contains non-cash items (depreciation, amortization) – excluded, but impact on tax
calculations is NB
- Cash budget must show all cash tax payments – income tax, tax on gain/loss disposal of PPE
• Other transactions:
- Capital investment: - cash purchases of assets, repayment of instalments
- Capital structure:
o Shares issued/ repurchased; dividends paid
o Loans obtained/ redeemed; finance cost
• Cash receipts:
- Sales revenue:
o Cash sales: cash received immediately
o Cash discount: discount sometimes offered on cash sales
o Credit sales: repayment by debtors over time
o Bad debt: credit sales not collected
- Other cash receipts:
o Disposal of assets (PPE, Investments)
o Investment income (interest/ dividends received)
• Cash payments:
- Purchases
o Cash purchases: cash paid immediately
o Credit purchases: repayment to creditors over time
o Cash discount: discount sometimes received on cash purchases
- Calculating of purchases
o Opening inventory+ purchases – cost of sales= closing inventory
- Operating expenses
o Salaries, wages, electricity, rent
- Tax
- Other cash payments
o Purchases of assets (PPE, Investments)
o Finance cost (interest/ dividends paid)
Copy right: Luschke Labuschagne
, Cash management
• Negative cash balance
- Short-term solutions:
o Apply for Bank overdraft, short term debt
o Sell marketable securities
- Long-term solutions
o May require adjustment to capital structure
o Additions LT K(v), equity
• Positive cash balance
- Short-term utilization:
o Redeem short term debt or bank overdraft
o Purchase marketable securities
- Long-term utilization
o Investment in non-current assets
o Replace or expand your PPE
Class exercise: Cash budgeting: Problem 1
Copy right: Luschke Labuschagne
