Budgeting. Mr Crosthwaite. Mindarie Senior College

Transcription

1 Budgeting Mr Crosthwaite Mindarie Senior College

2 Budgets A budget is a plan of the future expressed in money terms. It can be earmarked for a particular activity, time-frame or institution. It allows us to coordinate future plans, control expenses by knowing what we can spend and plan for any future activities that the business will want to undertake.

3 Budgets - Advantages Provides a business with a set of objectives to be met Identifies potential problems such as cash flows Helps co-ordinate business activities Motivate employees to achieve the objectives set Helps businesses evaluate their performance Resources and requirements are identified Communicates to managers what is expected from them

4 Budgets - Types Sales - Allows us to see how many sales we expect to make over the given time period Purchasing - Allows us to see how much purchasing we need to make in order to make our sales Production/Manufacturing - Allows us to see how much we have to produce to meet our sales target Expenses - Allows us to budget our expenses budget for each expense over the given time period Capital Budgeting - Allows us to prepare a budget for the purchase of non-current assets within the business

5 Collection from Debtors Table These tables are done when the business sells goods on credit and they receive a percentage of sales each month. They are NOT done when the business has normal cash sales. Let s look at an example to see how its done.

6 The business has the the following debt collection percentages for each month: The month after sale = 40% The 2nd month after sale = 30% The 3rd month after sale = 30% Month Total Actual/Budget January 50,000 Actual February 80,000 Actual March 100,000 Actual April 120,000 Budget May 150,000 Budget June 160,000 Budget

7 Schedule of Collection from Debtors JAN FEB MAR APR MAY Feb - 40% Mar - 40% Apr - 40% May - 40% Jun - 40% Mar - 30% Apr - 30% May - 30% Jun - 30% Jul - 30% Apr - 30% May - 30% Jun - 30% Jul - 30% Aug - 30% Credit Sales per Month April May June January 50,000 15,000 February 80,000 24,000 24,000 March 100,000 40,000 30,000 30,000 April 120,000 48,000 36,000 May 150,000 60,000 TOTAL $79,000 $102,000 $126,000

8 The business has the the following debt collection percentages for each month: The month after sale = 50% The 2nd month after sale = 35% The 3rd month after sale = 10% 50% of the sales each month are on credit 5% of credit sales are considered to be bad debts at the end of 3 months Month Total Actual/Budget January 70,000 Actual February 90,000 Actual March 60,000 Actual April 80,000 Budget May 100,000 Budget June 120,000 Budget

9 Schedule of Collection from Debtors Sol JAN FEB MAR APR MAY Feb - 50% Mar - 50% Apr - 50% May - 50% Jun - 50% Mar - 35% Apr - 35% May - 35% Jun - 35% Jul - 35% Apr - 10% May - 10% Jun - 10% Jul - 10% Aug - 10% Credit Sales per Month April May June January February March April May TOTAL

10 Schedule of Collection from Debtors Sol JAN FEB MAR APR MAY Feb - 50% Mar - 50% Apr - 50% May - 50% Jun - 50% Mar - 35% Apr - 35% May - 35% Jun - 35% Jul - 35% Apr - 10% May - 10% Jun - 10% Jul - 10% Aug - 10% Credit Sales per Month April May June January 35,000 3,500 February 45,000 15,750 4,500 March 30,000 15,000 10,500 3,000 April 40,000 20,000 14,000 May 50,000 25,000 TOTAL 34,250 35,000 42,000

11 Cash Budgets The cash budget will show the opening cash balance, any future inflows and outflow as well as the closing balance for a given period of time. Cash budgets are usually prepared on a monthly, 3 monthly and yearly basis. The key thing you are looking for here is to make sure that you don t include non-cash expenses like depreciation. You only need to do the 3 column budget if you have done the Collection from Debtors table.

12 CASH BUDGETS QUESTION

13 Cash Budgets Question Estimates Fees: Jan 160,000 Fees: Feb 170,000 Fees: March 180,000 Proceeds from Loan: Jan 50,000 Sale of Old Vehicle: Feb 2,000 Wages : Jan 110,000 Feb/March Increase by 10% from Jan Depreciation Jan 4,000 Feb/March Increase by 10% from Jan Office Expenses: Jan 20,000 Feb/March Increase by 10% from Jan Drawings per month 4,000 Capital Purchases: Jan 100,000 Cash Balance 31 Dec Required Cash budget on a monthly basis for Jan - March 8,000 Cr

14 Cash Budget Solution January February March Receipts Fees 160, , ,000 Proceeds from Loan 50,000 Proceeds from Sale of Vehicle 2,000 Total Receipts 210, , ,000 - Payments Wages 110, , ,000 Office Expenses 20,000 22,000 22,000 Drawings 4,000 4,000 4,000 Capital Purchases 100,000 Total Payments 234, , ,000 Net Cash Increase/Decrease -24,000 25,000 33,000 Opening Cash Balance -8,000-32,000-7,000 Closing Cash Balance -32,000-7,000 26,000

15 Budgeted Income Statement The budgeted income statement sets out the income, expenses and profit/loss for a given period of time. Expenses do NOT need to be classified. It is set out the same way as an actual income statement

16 BUDGETED INCOME STATEMENT QUESTION

17 The proprietor of Flippa s Footwear, Philippa Flopp, has asked you to help her with her cash and profit forecasts for the next 3 months. A list of some of her firm s ledger balances at 31 st October 2010 is given below. DR CR Accounts receivable Accounts payable Accrued wages 400 Inventory Vehicle, at cost Accum.deprec. of vehicle Equipment, at cost Accum.deprec. of equipment Government Bonds Her estimates for the next three months are as follows : Sales Purchases Wages (cash) General Expenses $ $ $ $ November December January All purchases will be on credit, paid for in the month following purchase. It is expected that $500 in wages will be owing at the end of November. To raise cash for capital purchases, Philippa is planning to sell, in December, the Government Bonds on which, in view of the fall in interest rates since she bought them, she expects to make a profit of $500.

18 Solution $ $ Sales 111,000 Less: Cost of Sales 60,000 Gross Profit 51,000 Add: Other OPerating Income Gain on Sale of Asset 500 Discount Received 1,080 1,580 Total Income 52,580 Less: Operating Expenses Wages 12,600 General Expenses 19,000 Total Expenses 31,600 Estimated Profit $20,980

19 Cash Budget Performance Report This will compare actual results vs budgeted results. The difference between the 2 results is known as the variance. Can be prepared as often as normal budgets. Always comment on each variance if asked in the theory section.

20 Income Statement Performance Report This will compare actual results vs budgeted results. The difference between the 2 results is known as the variance. Can be prepared as often as normal budgets. Always comment on each variance if asked in the theory section.

21 PERFORMANCE REPORT QUESTION

22 Performance Report Question Actual Budget Variance $ $ Sales Less: Cost of sales Gross Profit Add: Other operating income Gain on sale of asset 500 Discount received 1080 Total income Less: Operating expenses Wages 13,860 General expenses Total expenses Estimated Profit $ The business had 3,000 more sales than expected and their cost of sales was $2,000 less than budgeted. The wages were 10% higher than expected and general expenses were $2,000 more than budgeted. All other figures were as budgeted.

23 Performance Report Solution Actual Budget Variance $ $ Sales ,000 F Less: Cost of sales F Gross Profit Add: Other operating income Gain on sale of asset Discount received Total income Less: Operating expenses Wages 15, U General expenses U Total expenses Estimated Profit $ $ F