Budgeting Mr Crosthwaite Mindarie Senior College
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.
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
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
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.
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
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
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
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
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
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.
CASH BUDGETS QUESTION
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
Cash Budget Solution January February March Receipts Fees 160,000 170,000 180,000 Proceeds from Loan 50,000 Proceeds from Sale of Vehicle 2,000 Total Receipts 210,000 172,000 180,000 - Payments Wages 110,000 121,000 121,000 Office Expenses 20,000 22,000 22,000 Drawings 4,000 4,000 4,000 Capital Purchases 100,000 Total Payments 234,000 147,000 147,000 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
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
BUDGETED INCOME STATEMENT QUESTION
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 17 000 Accounts payable 14 000 Accrued wages 400 Inventory 21 000 Vehicle, at cost 24 000 Accum.deprec. of vehicle 10 000 Equipment, at cost 18 000 Accum.deprec. of equipment 4 000 Government Bonds 8 000 Her estimates for the next three months are as follows : Sales Purchases Wages (cash) General Expenses $ $ $ $ November 33 000 18 000 4 000 6 000 December 40 000 22 000 4 500 6 000 January 38 000 20 000 4 000 7 000 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.
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
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.
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.
PERFORMANCE REPORT QUESTION
Performance Report Question Actual Budget Variance $ $ Sales 108 000 Less: Cost of sales 62 000 Gross Profit 46 000 Add: Other operating income Gain on sale of asset 500 Discount received 1080 Total income 47580 Less: Operating expenses Wages 13,860 General expenses 19 000 Total expenses 33 000 Estimated Profit $14 580 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.
Performance Report Solution Actual Budget Variance $ $ Sales 111 000 108 000 3,000 F Less: Cost of sales 60 000 62 000 2 000 F Gross Profit 51 000 46 000 Add: Other operating income Gain on sale of asset 500 500 - Discount received 1 080 1080 - Total income 52 580 47580 Less: Operating expenses Wages 15,400 14 000 1 400 U General expenses 21 000 19 000 2 000 U Total expenses 36 400 33 000 Estimated Profit $16 180 $14 580 1 600 F