1. Managing Finance and Budgets
Lecture 10
Budgets (1)

2. Session 10 – Budgets (1) LEARNING OUTCOMES
To understand the importance and role of budgets in organisations
To know the different types of budgets that might be set in order to Manage Working Capital
To understand some of the issues and processes involved in the setting and monitoring of budgets

3. Budgets - definitions
A budget is defined as a financial plan for the future.
“A plan, qualified in money terms, prepared and approved prior to a defined period of time, usually showing planned income to be generated and/or expenditure to be incurred during that period, and the capital to be employed to attain given objectives”
(CIMA definition)

4. Budgets - intentions
Clearly, in planning for the future, a budget will contain an element of forecasting, but a budget is not simply a forecast.
A budget will contain financial and other numerical predictions. These are targets, and are ‘statements of intention’ that events will occur as planned in the budget.
This implies an element of control; this in turn means that a budget targets need to be monitored closely and managed effectively.

5. What exactly is a Budget?
Predicts the contribution to income which will be expected to be generated by each department and each project.
Allocates to each department, project or activity an appropriate share of the of funding in order to enable that income to be generated.

6. What exactly is Budget for?
A budget:
enables a business to plan appropriately for the future
Important tool for management agenda-setting and control
sets targets in monetary terms for departments and projects
provides a way of sharing out resources to departments and projects so that they can have continued existence.

7. How are Budgets created?
The budget-setting process is quite complex, and often very time-consuming.
It involves a number of stages, some of which ask the business to question precisely what it is doing, and where it is going – almost at a ‘philosophical' level
Other stages involve detailed calculations of amounts of money and negotiations about who gets what.
A complex budget may take six months to one year to produce.

8. Budget Setting
This is often an annual process linked to a review of long-term plans – Planning & Control
It is an iterative process. Tentative plans are created, which are thrown open to discussion. These discussions then lead to modifications and further discussion, and so on until the budget is set.
Should be participative – all interested parties involved, with the process ‘transparent’.
A combination of top-down(i.e. agenda-setting) and bottom-up (i.e. recognition of needs) approaches is required.

9. The Planning & Control Process
1.Identify business objectives
2. Identify available options
3. Evaluate and select options
4. Prepare detailed plans or budgets
5a.Collect information on performance
5b. Identify and respond to variances
5c. Revise Plans if necessary

10. The Planning & Control Process – a summary
Mission, Aims, Objectives
Market, Products, Services
Sales, Costs, Profits, Returns
1. Identify key objectives
Limiting factors: External & internal
Environment - market size, production
capability, competition
2. Identify available options
3. Evaluate and select options
Markets, products, financing,
physical resources, human resources
4. Prepare detailed plans or budgets
Short-term plans: Sales, Cash, Stock,
Labour, Production à Master budget
5.Collect information and control
Identify variances and respond
as appropriate

11. Types of budget Cash budget Stock budget Debtors budget
Here are some examples of the different types of budgets that might be employed in a business:
Cash budget
Stock budget
Debtors budget
Creditors budget
Income & Expenditure Budget
Master budget
Please note that the examples are illustrative only, and may not be ‘consistent with one another.

12. Overall Format for a Budget
You may have noticed that in the previous examples, almost all the budgets were designed more or less to the same format
Budget X Jan Feb Mar Apr May Jun
Opening Balance
ADD Some Stuff
LESS Other Stuff
Closing Balance
We might break down the ‘stuff’ into sub-headings, and have separate targets for these, but essentially that is all there is to a budget.

13. What budgets are actually used in practice?
The actual budgets that will be used by different businesses will clearly depend on the business.
High street retailers will normally have little use for a ‘Trade Debtors’ budget, but will be very concerned with a Stock Budget and Trade Creditors, especially (as is generally the case) their business is seasonal.
A manufacturing company such as Jaguar will have a production budget, where the number of vehicles produced will be planned; however this type of budget would be completely pointless for the Cats Protection League, who might a ‘donations and endowments’ budget, which would be equally irrelevant to Jaguar.

14. The Interrelationship of Budgets
Trade Debtors budget
Cash budget
Trade Creditors budget
Overheads
budget
Capital Expenditure budget
Direct Labour budget
Raw Materials purchases budget
Sales budget
Trade Creditors budget
Production Budget
Raw materials Stock Budget

15. Setting Complex Multiple Budgets
Often departments are asked to create ‘spending plans’ (speculative, often optimistic documents, bidding for money and suggesting targets)
Managers will be called to interview to justify these plans, and to negotiate realistic targets.
Out of this process, draft budgets will be created, which will be reviewed and co-ordinated.
Finally the master budget will be created and communicated.
Next week we will examine more closely the budget-setting process, and what is done, and in which order.

16. The uses of budgets Five areas of usefulness: Forward planning
Co-ordination
Motivation
Control
Authorisation

17. Budgets - Purpose
Encouraging forward planning and identifying any possible future problems to enable solutions to be implemented in advance
Ensuring co-ordination across the organisation so that all departments are able to fulfil organisational objectives
Motivating managers to improved performance against set benchmarks
Providing a basis for control systems
Providing a basis for a system of authorisation, so that managers know exactly what are the limits to their authority, manage within them.

18. Follow-Up to Lecture 9 - Activities
M & A Chapter 12 pp , pp , pp
You should ensure that you attempt both the MCQs and the ‘fill in the blanks’ questions on the M & A website. Questions like these will be part of the exam.
The Seminar this week will not concern budgets, but will be Test 3 on Ratios & Working Capital, together with a short introduction to the Sample Case Study.