Higher Business Management Budgets

What is a Budget? A document showing what the organisation predicts they are going to spend in the future Usually covers a specific period of time e.g. 6 months or a year

Main Uses of Budgets To monitor and control To gain information To set targets To delegate authority

Cash Budget Also called a Cashflow Forecast Produced for internal use within the organisation It is a common type of budget that is used by most businesses to monitor, control, obtain and present information They are often produced using accounting software or a spreadsheet package

Cash Budgets Highlight periods of negative bank balance Forecasts periods of surplus cash available Secure a loan from the bank Avoid liquidity problems Make comparisons between actual and projected figures Commonly used by organisations to:

CASH AT START OF MONTH CASH AT END OF MONTH

Other Budgets Companies can produce production budgets and sales budgets to plan ahead These may provide targets for departments or employees They allow managers to anticipate quantities required of raw materials or finished products They also assist in motivating employees to reach targets which are attainable

Benefits to Management Planning – setting objectives based on projected cash flow Organising – ensuring resources are available where and when needed Command – tell subordinated what their duties are. Co-ordinate – ensuring everyone is working towards the same aims Control – measure, evaluate and compare results against planned outcomes Delegate – give responsibility for spending departmental budgets to a departmental manager or product leader. Motivate – encourage staff to carry out tasks effectively

Questions 1.An organisation overspent its budget. Outline the reasons for preparing budgets. (2006, Case Study, Q6) (4 marks) 2.A Cash Budget (Cashflow Forecast) is an accounting document that the entrepreneur would prepare before implementing his/her idea. Describe it’s contents and how it would be used. (2003, Section 2, Q4c) (7 marks)

Solutions 1.An organisation overspent its budget. Outline the reasons for preparing budgets. (2006, Case Study, Q6) (5 marks) Monitoring and control – comparison of actual performance with the budget Allows the firm to take corrective action, e.g. increase production to meet forecast sales Allows managers to organise resources Sets targets for management and employees to reach Individual managers/departments can be allocated budgets so that control is tighter Cash budgets highlights periods when a negative bank balance is expected so finance can be arranged in advance Forecasting cash surpluses allows a firm to invest money in assets Allows managers to identify problems Offer solutions Allows development Plan for the future Watch for repetition

Solutions 2.A Cash Budget (Cashflow Forecast) is an accounting statement that the entrepreneur would prepare before implementing his/her idea. Describe it’s contents and how it would be used. (2003, Section 2, Q4c) (7 marks) A statement which lists all likely inflows and outflows of cash on a monthly basis A prediction so adjustments can be made to expenditure or income, such as leasing equipment Increasing revenue Can highlight periods suitable for Investing in assets Borrowing arranged More likely to convince lender if it can be shown that the money borrowed could be paid back Applying for bank loan Allows for comparisons to be made

Questions 3.Describe how an organisation could make use of: - a production budget - a sales budget (2007, Case Study, Q5b) (4 marks) 4.Outline the benefits to management of using cash budgets. (7 marks)

Solutions 3.Describe how an organisation could make use of: - a production budget - a sales budget (2007, Case Study, Q5b) (4 marks) To plan ahead for production/sales Provides targets for sales Actual figures can be compared to target figures Allows co-ordination of production quantities to match anticipated sales Budgets have to be adhered to which helps control expenditure May highlight areas of high costs which can be reduced Targets from budgets can be used as motivational tools for sales staff Watch for repetition

Solutions 4.Outline the benefits to management of using cash budgets. (7 marks) Planning – Look ahead and set aims and strategies. Management may base decisions on projected Cash Flow figures. By identifying where cash is being spent and where it is being earned, management can plan to borrow, either to finance short- term cash flow problems or to finance long-term expansion. Organising – Make arrangements for all the resources of the organisation to be in the right place at the right time in the right quantities. Resources have to be financed, and management must be able to ensure that it can afford the resources it requires and takes full advantage of bulk purchase discounts, trade credit and other financial incentives. Command – Tell subordinates what their duties are. It is essential that each department is given a budget for expenditure. Each department must also know its limits when making one off requests for additional finance for specific jobs, projects or capital expenditure. Co-ordinate – Make sure everyone is working towards the same aims and that the activities of individual workers fit in with the work of other parts of the organisation. Financial reports and summaries from each department will allow management to keep a clear overview of the operation as a whole. It may be that surpluses in one department can be used to offset short-falls in another.

Solutions 4.Outline the benefits to management of using cash budgets. (7 marks) Control – Measure, evaluate and compare results with plans, and supervise and check work done. Using Cash Budgets as a measure of performances or progress gives management a tool that records quantifiable data that is the same for each department. Delegate – Make subordinates responsible for tasks and give them the authority to carry them out. This can involve delegating responsibility for holding, recording and spending departmental budgets or project budgets to the departmental manager or project leader. It can even be done simply by giving a cashier full control of, and responsibility for, her/his own cash point or till. Motivate – Encourage others to carry out their tasks effectively, often by introducing team-work, empowerment, worker participation in decision-making and other non-financial methods. This can come from appropriate delegation where the individual feels trusted and empowered because of being responsible for finance within their area of control.