Presentation on theme: "Financial Analysis LAP 3 Objectives Explain the importance of budgets. Describe the characteristics of an effective budget."— Presentation transcript:
Financial Analysis LAP 3
Objectives Explain the importance of budgets. Describe the characteristics of an effective budget.
Objective A Explain the importance of budgets.
What are your financial goals? A budget can help you get there.
What is a budget? An estimate of income and expense for a specific time period IncomeExpense Fiscal year
Budgets are... about money. There are two broad categories: income and expense.There are two broad categories: income and expense. Income Expense
like maps. They show a route to success.They show a route to success. Budgets are...
management tools. They help managers make informed decisions.They help managers make informed decisions. Budgets are...
Why Budgets Are Important 1.They create physical records. Written records that are accurate, accessible, and meaningfulWritten records that are accurate, accessible, and meaningful Framework for annual financial reportsFramework for annual financial reports
Why Budgets Are Important 2.They organize business activities. Manager must put dreams into reality with everyday details that support the business’s goals.Manager must put dreams into reality with everyday details that support the business’s goals. Salaries and wages Raw materials Transportation Plant Insurance Utilities Manufacturing Budget
Why Budgets Are Important 3.They guide operational decisions. Managers have more information to make routine decisions.Managers have more information to make routine decisions. What to buy? How much to pay? How much inventory? How many employees?
Why Budgets Are Important 4.They help evaluate long- and short-term performance. Past budgets provide benchmarks. Comparing budgeted and actual amounts reveals variances. Short term Long term
Why Budgets Are Important 5.They help protect against financial crisis. Saving for emergencies is encouraged.
Objective B Describe the characteristics of an effective budget.
Budgets as Trees EXPE EEXXPPEENSENSEEEXXPPEENSENSE Phone Cellular Local Long distance
Take a Bite’s owner wants to earn a profit. What Budgets Look Like Here’s how:
Budgets are organized by categories. Income Expense Cash sales Credit sales Wages Rent Insurance Utilities Interest Supplies
How to Allocate $$$ Adjust previous year’s budget based on changesAdjust previous year’s budget based on changes Adjust previous year’s budget with across-the-board increaseAdjust previous year’s budget with across-the-board increase Use zero-based budgetingUse zero-based budgeting
Fiscal year, with quarters and months Budget Timing Rolling, or continuous, budgets Jan. Year 1 Feb. Year 1 March Year 1 April Year 1 May Year 1 June Year 1 July Year 1 Aug. Year 1 Sept. Year 1 Oct. Year 1 Nov. Year 1 Dec. Year 1 Jan. Year 2 Feb. Year 2 March Year 2
Made up of information from specialized budgetsMade up of information from specialized budgets The Master Budget Master Budget Specialized Budgets Specialized budgets are interrelated.Specialized budgets are interrelated. Purchases Sales Selling Expense Cash General and Administrative Expense
Change to meet the manager’s needs Budget Formats Example:
Those responsible for managing people and money Who prepares budgets?
Well plannedWell planned Characteristics of an Effective Budget RealisticRealistic FlexibleFlexible Clearly communicatedClearly communicated EvaluatedEvaluated Compare
Imagine the budget for a public swimming pool. What income and expense categories are there? $ $ $ $ $ $ IncomeExpense 1.Daily sales 2._________ 3._________ 4._________ 1.Towels 2._________ 3._________ 4._________
Georgia has underspent on this year’s travel budget. Should she spend unnecessarily now in order to keep money in next year’s budget?
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