Currently, budgets are an indispensable tool for the administration of companies, managerial decisions are not made solely on the basis of historical results, on the contrary, they must be made on effective projections that allow us to anticipate correcting negative events that harm the economy of a company.
Therefore, a material is presented on the salient aspects for the preparation of a financial budget and the application of a practical case.
OVERALL OBJECTIVE
Train the participant to understand and analyze the role that budgets play within the strategic planning of companies, as well as their nature, advantages, limitations and mechanisms for their elaboration.
SPECIFIC OBJECTIVES
- Define what a budget is Identify the objectives of budgeting Explain the benefits of budgeting Explain the budget sequence Explain the types of budgets Develop each of the budgets in a practical way
BUDGETS
1.- INTRODUCTION, CONCEPT AND OBJECTIVES
The search for valid instruments to support managerial decision-making has been a constant concern since the beginning of the 20th century. The generalization in the use of predetermined figures according to rational criteria was the first step towards improving the information supports. It has been from 1950 on when this concern has reached its maximum development and in the activity of budgeting, application of predetermined figures and development of a management control are common facts, we would say almost essential, in business life.
The exercise of budget activity is integrated into the information-decision-action process, and is developed through the forecasting, budget and control phases. Therefore, we can define the budget as follows: "forecast of future operations that guarantees the direction and action of activities through information control".
Forecast
It constitutes a voluntary, technical and collective situation, which channels the initial decision-making process and establishes the prior execution guarantees. The establishment of a future business policy must be registered in some statistical, accounting and economic information supports, which by the joint action of all the departments allow the choice of the routes or paths through which the company should direct its efforts.
Budget
It facilitates the balance between income and expenses, and defines through the use of resources the possibility of obtaining specific objectives.
- resource, production expenses, treasury, distribution, etc. objectives, sales, production, etc.
Control
The system used relies on a comparison and analysis between budgeted and actual figures, and allows the appropriate person in charge to be notified, when the amount of the deviation justifies it, the differences detected. The monitoring must be permanent if the basic objectives are to be achieved.
The exercise of budget activity requires a perfect hierarchy of functions and a complete coordination of all business bodies, which means applying the so-called information pyramid, which is described below:
- Address
It will be responsible for setting the general policy to be followed, the reports that it receives periodically must be refined, so that it can deal with only the most significant deviations, thus achieving a significant saving of time within the management function.
- Middle management
Its function is to implement the necessary means so that the objective of the general policy is achieved. Its existence allows, through the delegation of functions, the adoption of rapid solutions to specific problems.
- Performers
They constitute the last link, their activity rests on the use of the instruments received and the fulfillment of the orders received.
CONCEPT
"A budget is an integrating and coordinating plan that is expressed in financial terms with respect to the operations and resources that are part of a company for a given period, in order to achieve the objectives set by senior management."
OBJECTIVES
- Be an action guide It allows you to compare what is real with what is planned Evaluate the company's performance Optimize the economic use of resources Work in advance and prevent the events
2. - THE BUDGETARY PLANNING
The execution and administration of the budget begins with the review of the resources to be used, the respectability and commitment of each member of the management team must be established with respect to the contribution that is expected from the management, basic administrative criteria in general will be reviewed, highlighting the role of planning in achieving the objectives, the strategic planning process will be seen as the basis of the business to reach its purpose in the medium and short term.
The aspects that must be handled by those who have the responsibility of planning in both public and private institutions in general can be:
- The mechanics of budgeting
The operational, numerical and mechanical management of the Budgets cannot and should not fail, since it is the simple collection, process and presentation of the results that are expected in the budgeted period; consisting essentially of:
- Design the formats and reports Determine the necessary data Structure the operational methods to complete and develop the processes
- The techniques of budgeting
They are those methods of information development for administrative use in the decision-making process, related to estimates, and that help us to validate and support projections. Among these we have:
- Methods for forecasting sales Break-even analysis Determination of standard costs Variable budgeting Investigation of operations (sales, production, inventories) Determination of production capacity Zero-based budgeting
- Budgeting basics
They are administrative aspects essential for an optimal execution of a budget system. Participation and commitment allow the viability of strategies and actions that will bring the objectives closer. When figures are received that do not have the backing and support of how and with what resources they will be achieved, they will hardly have the validity that the budget requires.
Among the fundamentals that facilitate the achievement of budgets we have:
- Management commitment Effective communication system Participatory system Defined organizational structure Realistic expectations (objectives and goals) Resource allocation Budget horizons Historical references (trends and behaviors) Budget flexibility Monitoring and control Accountability for responsibilities
3. - ADVANTAGES OF BUDGETS
- As advantages of budgets they can mention the following: It presses the top management to adequately define the basic objectives of the company It promotes the definition of an adequate organizational structure When there is adequate motivation, it increases the participation of the different levels of the organization It forces to maintain an archive of controllable historical data It facilitates the administration the optimal use of the different inputs It facilitates the co-participation and integration of the different areas of the company It forces to carry out a periodic self-analysis It facilitates administrative control It is a challenge that is constantly presented to the executives of an organization to exercise creativity and professional judgment in order to improve the company Helps to achieve greater efficiency in operations
4. - TYPES OF BUDGETS
Depending on the purpose, at least these types of budgets have been created:
- For the term
- Immediate (up to 3 months) Short term (up to 1 year) Medium term (2-4 years) Long term (general)
- Through the universe of information
- Government budget Budget of productive sectors Business budgets Budgets-specific projects
- By the nature of the information
- Sales budget Production budget Purchasing budget Expense budget (Sales, Administration, etc.) Investment budget Cash budget
- Specific financial budgets
Projected financial statements (Balance sheet, income statement, statement of retained earnings, statement of changes in financial position.)
5.- WHO SHOULD PREPARE THE BUDGETS
It is the official who knows and manages at least the aspects mentioned below:
- The business' organization
- Its structure Constitution Mission Objectives
- The market
- Market participation Know the competition Type of demand Geographical distribution of the market Distribution channels Consumer motivation
- Finance
- Financial position of the business Investment capacity Economic aspects of the country Cash flow cycle
- Costs and production
- Installed capacity Productivity levels Cost systems and inventory valuation methods Cost composition
- Economic and administrative policies of the company
Investment policies
Credit policies
Debt policies
Treasury Policies
Personnel policies
6.- THE PERIOD AND ITS BUDGETARY CYCLE
In the planning process, the objectives, purposes and goals to be achieved both in the short and long term are raised. In most cases these expectations will be supported by strategies, action plans and resource allocation; However, it is necessary to specify, in numbers, the progress and achievement of these objectives. The budget allows us, through figures, to make known in a safe language what results we are really going to obtain if we comply with what is planned. In other words, certain qualitative or subjective aspects of the achievements to be achieved are transformed into totally measurable and clear aspects, in such a way that first, a numerical economic vision of them is obtained, and second, the required contribution of each one of them is determined. the members of the organization.
7.- KINDS OF BUDGETS
7.1 SALES BUDGET
The sales forecast is the fulcrum on which all phases of the profit plan depend. The fact of forecasting sales is a task that involves a lot of uncertainty.There are a multitude of factors that affect sales, such as price policies, the degree of inter- and intra-industry competition, disposable income, the attitude of buyers, the appearance of new products, economic conditions, etc.
However, many large companies have developed very refined techniques for forecasting and can consistently achieve 97% or 98% sales realization. The responsibility of establishing the sales budget rests with the sales department.
Both in this and in the other budgets, the analysis must be carried out considering the three fundamental phases: forecast, budget and control.
Sales forecast
It is the first point to establish within the comprehensive budget, since it constitutes the definition of the level of activity in which the company is going to operate. Determining which products are going to be sold, what quantities, and at what prices; are some of the priority objectives.
Its correct calculation facilitates in the long term the elaboration of an investment and financing program; In the short term, it allows the execution of a production budget based on an inventory policy, and obtaining a budget for purchases and commercial expenses, as well as financial expenses.
Sales budget, I presuppose the quantification of the objectives to be achieved, the annual budget is adopted as a basis, although its monitoring requires dividing it monthly. The seasonality of sales influences the distribution made.
The distribution will be made by geographical areas and by vendors, for which it will be necessary to develop a distribution by percentage level of occupation of each area or agent. The final budgeting that is made must be made by products or product lines.
The set of variables analyzed will give a mix of heterogeneous products with different unit margins, which can cause distortions in the total margin even if the forecast is achieved in absolute terms of sales.
Sales control, effective control can be carried out by calculating deviations between budget and actual, by periods, by areas and vendors, and by products.
The sales budget can be summarized like this:
Sales Budget = estimated sales volume x expected unit price
Advantages of the sales budget
- Improve market penetration Increase sales effectiveness Anticipate consumer requests Know the need for new products Learn about competitor strategies Evaluate distribution channels Anticipate subcontractor orders Set the level of business activity Size the sales team
7.2 THE PRODUCTION BUDGET
The production budget determines the number of units for each product to be manufactured to satisfy planned sales through appropriate inventory levels and at the costs that allow obtaining expected benefits.
There must be a balance between sales, inventories and production so that the budget meets the objective of providing the goods or services in optimal conditions of quantities and costs.
The person in charge of production is the Director or Plant Manager, who must know and manage:
- Factory capacity Personnel capacity Availability of materials Technical limitations Investment limitations Costs of production elements
The steps to follow in production planning can be:
- Determine the level of inventory by product according to the sales plan and the inventory turnover needs.
Total production need and by product
Production capacity analysis
Determine the complexity and duration of manufacturing processes
Review factory facility conditions
Prepare the raw material budget
- Prepare the labor budget Prepare the budget for Manufacturing Expenses Prepare the investment budget (machinery purchases, spare parts) The production budget is calculated:
Production budget = Budgeted sales (units)
+ Final inventory of finished items desired
- Initial inventory of finished items
7.3 RAW MATERIAL BUDGET
The raw material is an element that has a higher incidence in the costs of the manufactured products, for this reason the preparation of the raw material budget aims to determine the raw material needs with an adequate level of inventories and a reasonable purchase of the raw material.
When determining the need for raw materials, there are cases in which the qualification of the materials to be used may have difficulties such as:
- Product conformation New products Production batches Waste percentages
The raw material purchasing budget is one of the first cost estimates to prepare, as purchase quantities and delivery plans need to be established quickly so that materials are available when needed.
A specification or formulation sheet is generally available for each product that shows the type and quantity of each direct material per unit of production.
Based on this list, the purchasing department prepares the purchase and delivery schedules, which must be in close combination with the production budget and with the supplier's delivery schedules.
The indirect materials supply budget is included in the manufacturing overhead budget
For the preparation of the purchase budget, the following information is required:
- Production budget in units Final raw material inventory in units Actual initial inventory in units Purchase price per unit
Budget Raw Material requirement = Budgeted Production
x requirement per unit of raw material
Raw material purchase budget = Raw material requirement
+ Final desired inventory of raw material
= Total need for raw material
-Initial inventory of raw material = Total budgeted purchases (units) x unit cost of raw material
= Purchase budget (valued)
7.4 LABOR BUDGET
The labor budget must be in harmony with the planning carried out for the production of units to be manufactured, which is why it is necessary that this budget be made specifying hours and labor cost by time and by product.
Although the impact on the total cost is not significant, its review and future use will be decisive for the management and production performance, for which it is necessary to consider the following aspects:
- Manpower management
- Need for skilled or unskilled workers Hiring and training Bargaining with the union Wages and salaries administration
- Classification in direct or indirect labor Normal and extraordinary costs Methods of payment of wages Determination of the list of labor to be used Availability of standard or predetermined times Review of the record of historical costs
- Study of times and movements Standard costs
Direct estimates from the supervisor
Effectiveness in hiring
Coaching and training
Permission plan and special bonuses for results
Report of effective hours worked
- Determination of labor costs by type of product
Development of the labor budget
In developing the labor budget, the following aspects should be considered:
- The time required to manufacture a unit of product Labor cost which in budgets is called the wage rate
The necessary time is given by the Production Manager through previous experiences, study of times and movements, times estimated by the production supervisors or by hiring an external advisory group.
The salary rate results from the sum of the salaries plus social bonuses, bonuses achieved by collective agreement, all this divided by the hours of the month. It is also necessary to establish an average wage rate classifying workers according to their salary received in each department or process, considering their greater or lesser efficiency.
The labor budget is calculated as follows: Labor budget = Budgeted production
x labor hours per product = Total budgeted labor hours x cost per labor hour
= Labor budget
7.5 MANUFACTURING COST BUDGET
In all activities there are costs and charges that can be identified to which particular product or service they correspond, however, there is a group of costs and expenses (fixed and variable) that are used for production, but that their specific identification regarding which product or good corresponds is difficult to specify. If the administration wishes to eliminate distributions of indirect costs and expenses that cause subsidized goods or services to the detriment of others, it must try to define cost allocation criteria that yield product and / or service valuations more adjusted to reality, since on that basis decisions will be made.
The following are groups of costs that, due to their influence and interpretation in the budgets, need to be analyzed in detail:
- Fixed, variable, semi-variable costs Direct and indirect costs Controllable and uncontrollable costs
The usual problems in the handling of the factory load are in the determination of the distribution bases
- a) Department of services
- Repair and maintenance - hours reported Energy department - kW per hour Purchasing department - orders - Plant management - No. of employees
- b) Productive departments
- Production units Direct labor hours Machine hours Direct labor amount Consumed raw material
To prepare the budget for indirect manufacturing costs, it is necessary to determine the application rate of indirect costs based on the different application bases (direct labor hours, machine hours, raw material cost, labor cost, units to be produced); and its calculation can be defined in the following:
Estimated manufacturing overhead
TA = = rate per hour of labor Total hours of direct labor
Manufacturing overhead budget = direct (product) labor hours
x rate indirect costs per hour of labor
= Budgeted indirect costs (total)
: Production budget (units)
= Budgeted indirect costs (unit)
With the above information it is possible to define the Budgeted Cost of Sales, its structure being the following:
Initial inventory of raw materials
+ Purchase budget
- Final inventory of raw materials
= Cost of raw material used
+ Direct labor budget
+ Budget manufacturing overhead
= Budgeted production cost
+ Initial inventory of finished products
- Final inventory of finished products
= Budgeted Cost of Sales
7.6 OPERATING EXPENSES BUDGETS
7.6.1 ADMINISTRATION EXPENSES BUDGET
The administrative budget includes the function of senior management as well as certain service activities such as financial, legal, and accounting. The functions included in the administrative budget vary according to the size of the companies and their organizational structures. Large companies typically maintain their own legal, internal audit, tax, and insurance departments, while small companies generally rely on outside experts.
In some companies the legal and treasury activities are combined, in others they operate separately, the credit department may be included in the accounting, treasury or sales function.
A large portion of administrative costs tend to be fixed or not clearly related to sales, there is likely to be an excess of office staff at low levels of operation and higher workloads at higher levels. The administrative expenses budget will encompass the general administration, general management and common general expenses sections.
All expenses by nature that are carried out by the described departments are considered as a main or accessory nature. Expenses such as salaries, office supplies, travel, staff allowances, expenses for hiring new staff, etc. are attributable, as well as common general expenses such as lighting, telephone, mail, etc.
The distribution difficulty does not allow creating any unit of measure that collects them, since this should be done through a system supported by the other departments that receive their spending. It is undoubtedly the area that poses the greatest difficulties, only general expenses allow the use of homogeneous distribution units, such as the telephone.
The control of the realizations can only be carried out by means of an analysis of the deviations in absolute terms by nature.
7.6.2 MARKETING EXPENSES BUDGET
This budget will include all the expenses that for promotion, commercial administration, direct sale or costs of the expedition section are produced in the distribution of the products.
It will be essential to separate expenses by nature and on a departmental basis.
- Promotion: advertising and promotional material Sales network: salaries and commissions of the sales network, and other miscellaneous expenses that the sellers produce Business administration: salaries, office expenses, subscriptions, etc., that is, all commercial expenses of a nature administrative and direct sales support Expeditions: salaries, transportation on sales, packaging and other auxiliary material
The four categories of expenses described may or may not be considered to be passed on to products and estimated as costs for the period.
Its division allows each person in charge to be given the necessary means to carry out their activity. The problem arises when the activity of each section wants to be measured, since its determination will make the distribution possible.
- Promotion: based on the cost of the means used, dividing it by the product or product lines that originate it Sales network: sales volume by agent or geographical area Commercial administration: it is not possible to measure its activity by any homogeneous variable, due to the diversification of tasks carried out. Expeditions: the number of units, value or weight of the products invoiced will allow the distribution of expenses.
The exercise of a profitability analysis can be applied in order to determine margins by product, thus facilitating its distribution by clients, distribution channels, orders, geographical areas, vendors and products.
The control of sales expenses involves the calculation of deviations and analysis of the most significant differences, assigning to each person in charge the justification of their expenses.
7.6. 3 BUDGET FOR FINANCIAL EXPENSES
It is of a random nature and always depends on the financial needs raised by the collection terms and the payment terms.
The financial expenses forecast will collect interest on credits and loans, commercial discounts, transfer expenses and item returns.
The budget for financial expenses could be established based on gross sales and thus the distribution based on budgeted sales by products.
It is difficult to exercise proper control of financial expenses, since there are many variables that can cause fluctuations. The deviations will be an indicator of financial management.
7.7 CASH FLOW
The cash budget has much to offer to the management of a company for the development of the task of coordination and driving towards the position where its maximum value is achieved. This budget is normally developed by the company's treasurer, who reports to the finance director, and is in charge of managing the company's liquidity.
The cash budget could be defined as a forecast of cash inflows and outflows that diagnoses future shortages or surpluses and, consequently, requires planning the investment of surpluses and the recovery-obtaining of shortages. For a company it is vital to have timely information about the behavior of its cash flows since it allows optimal management of its liquidity and avoid serious problems due to lack of it, which can even cause bankruptcy and intervention by creditors on all at a time when the scarcest and most expensive resource is cash. It is easier for a company to fail due to lack of liquidity than due to lack of profitability, which shows the importance of good liquidity management, it is necessary, therefore,know the behavior of cash flows, which is done through the cash budget.
The liquidity of an organization is equal to its ability to convert an asset into cash and, in general, to have the appropriate means of payment to meet the commitments made in a timely manner. The liquidity of a company is based on two dimensions: the time needed to convert the asset into cash and the degree of security associated with the price at which the asset will be made.
The objectives that are achieved when developing the cash budget are:
- Diagnose what the behavior of the cash flow will be through the period or periods in question Detect in which periods there will be shortages and surpluses of cash and how much they will amount Determine if the collection and payment policies are optimal Determine if the payment is optimal Amount of resources invested in cash in order to detect if there is an over or under investment Set dividend policies in the company Determine if investment projects are profitable.
7.8 PROJECTED STATEMENT OF INCOME
The master budget is made up of two budgets: the operating budget and the financial one. The first of these refers properly to the activities of producing, selling and managing an organization, which are the typical activities through which a company carries out its mission of offering products or services to society. These activities give rise to budgets for sales, production, purchases, requirements for raw materials, labor, indirect manufacturing costs, cost of sales and operating expenses. These, in turn, need to be summarized in a report that allows management to know where efforts will be directed around the company's operation, which is achieved through the projected income statement.
7.9 PROJECTED BALANCE SHEET
In the design of activities, when it refers to the annual budget, it must be aimed at achieving a convenient situation for the company in said period, which can be achieved through the preparation of budgeted financial statements, which will serve as a guide during the period considered..
The following is the methodology for preparing the budgeted balance sheet or statement of financial position and how to determine each item that makes up the balance sheet.
- Current assets: Cash: the amount is obtained from the cash budget once the final balance has been determined, through rotations or other established policy Accounts receivable: this balance is obtained by adding the initial accounts receivable plus credit sales of the budget period minus the collections carried out during the same period Inventories: the balance of raw materials and finished items is obtained from the inventory budget, which was determined in the development of the operating budget. It can also be done according to the expected rotation of both items Temporary investments: the balance will depend on the existence or not of increases or decreases, adding or subtracting them, respectively, from the balance that existed at the beginning of the budget period. currents:
Depending on the asset in question, the corresponding amount of the new acquisitions is added to the initial balance, and the sales corresponding to said asset are subtracted. The same procedure applies for accumulated depreciation.
- Short-term liabilities: Suppliers: the initial balance is added to the total purchases made during the budget period, and this result is subtracted from the payments made during said period. It is also possible to determine it by means of the expected turnover. Other liabilities: according to the conditions established for each of them Long-term liabilities:
In relation to other liabilities, both short and long term, new liabilities are added to the initial amount if they occurred, or subtracted if they were paid, either all or part of them.
- Stockholders' equity: Capital stock: this amount that appears in the initial balance sheet is only modified if there were new contributions from shareholders. Retained earnings: the initial balance is increased by the profits of the budget period, which is obtained from the budgeted income statement; if there are losses, it is subtracted from the initial balance of retained earnings, just as dividends were decreed.
8. ANALYSIS, INTERPRETATION OF BUDGETS THROUGH FINANCIAL REASONS
FINANCIAL REASONS
Financial ratios can be classified into four large groups:
- REASONS FOR LIQUIDITY; REASONS FOR ACTIVITY; REASONS FOR INDEBTEDNESS OR SOLIDITY; AND, PROFITABILITY REASONS
LIQUIDITY REASONS
These ratios measure the ability of the business to pay off its immediate or short-term obligations.
Depending on the degree of liquidity of the components of current assets, two indices emerge, which are shown in the following table:
CONCEPT OF WORKING CAPITAL
Of great interest to the employer is the concept of working capital as it allows determining the availability of money to pay for business operations in the following months and the ability to meet current liabilities.
Working capital is not a reason. It is the result of subtracting the Total Current Liabilities from the Total Current Assets.
WORKING CAPITAL = TOTAL CURRENT ASSETS - TOTAL CURRENT LIABILITIES Analyzing the value of the Working Capital, it could be stated that the greater the difference between Current Assets and Current Liabilities, the greater the “liquidity”. However, the entrepreneur must understand that the working capital should not be too large, because it can mean having idle resources, nor too small because it can create obstacles to business activity. The value of working capital varies considerably from one company to another depending on the production process, sales policy, and other factors.
REASONS FOR ACTIVITY
Activity ratios measure the efficiency of the business's investment in current assets accounts. This investment can be high and to qualify it is necessary to know the number of times that inventories rotate, for example, during a period of time that can be monthly, semi-annual or annually.
Current asset accounts will have more liquidity the more they rotate, that is, the faster they are converted into cash
Table No. 2 examines each of these reasons in detail.
TABLE No. 2. REASONS FOR ACTIVITY
NOTES: The activity ratios should tend to be as high as possible (a low number of days) since they have a significant impact on the profitability of the company. High turnover ratios imply that the money that the company has invested in current assets works a greater number of times, each time leaving its contribution to profit and thus improving the profitability of the business.
REASONS FOR INDEBTEDNESS OR SOLIDITY
Debt ratios measure the ability of the business to incur short-term or long-term debt with existing resources.
It is important to know the discrimination of the total liability. A company may have high debt, but if most of it is long-term, it may be better off than another company with a lower index but high current debt.
The most important debt ratios are shown in the following table:
TABLE No. 3. REASONS FOR SOLIDITY DEBT
PROFITABILITY REASONS
Profitability ratios measure the ability of the business to generate profits. Given that profits are those that guarantee the development of the company, it can be said that profitability ratios are a measure of the effectiveness of management in managing total costs and expenses, so that sales generate profits.
The most commonly used profitability indicators are related to the level of sales, assets or investment of the owners, being the following:
9. ANALYSIS OF VARIATIONS
When analyzing a projected income statement and comparing it with the actual results of a year, variations in gross profit will generally be observed, this variation is mainly due to variations in volume, price and product mix.
Regarding volume variation, the effect of selling more or less than budgeted on gross profit, assuming there is no variation in the budget price or in the product mix.
The price variation, the effect that the difference between the real prices and the budgeted ones for the real quantity of products sold has on gross profit.
The variation in the product mix, the effect on gross profit of the difference between the actual product mix of products sold, that is, the proportion of each product in the total, and the budgeted mix.
The volume change can be further divided into an industry market change and a share of the market change.
EMPRESA MODELO SA
ANALYSIS OF VARIATION IN THE STATEMENT OF INCOME
PERIOD ………………………………………………….
EXPRESSED IN DOLLARS
10. BUDGETS IN DECISION-MAKING
The profit improvement plan is a studied effort to improve the performance of divisions that are not reaching their profit potential. It addresses the elimination of profit leakage that prevents a division from obtaining the maximum return on investment. The profit improvement is achieved by:
- Increased sales Improved product mix Reduced costs Minimized capital investment
An effective plan to improve profits should have the following characteristics:
- The plan must be made up of specific proposals, the expected effect of each proposal on profits must be clearly indicated, as well as the person responsible for carrying them out. A minimum investment return objective must be established for each division and standards of action for each plant and each function within the plant. The profit improvement plan should be projected sufficiently into the future to allow the achievement of the specified improvements. The profit improvement function should be considered in the structure of the organization. Committees in charge of improving profits should be established at different levels of the company to approve the proposals and to control their implementation.There should be a reporting procedure that reveals the extent to which you are meeting your plan to improve earnings.
The budget preparation stage should be an opportunity to verify how the company is being managed and how it should be done to achieve the established objectives efficiently, effectively and economically. The evaluation of the methods, systems, procedures and structure of the organization allows to consider and include improvements in the budgets, against which their compliance will be reconciled.
Budgets are an excellent tool that facilitates management by objectives, establishing goals to be achieved for management, expressed in monetary terms such as economic value added, rate of return on investment, rate of return on capital, level of indebtedness, certain position of liquidity, etc. This enables efficient evaluation during the budget period. Budgets also collaborate to run a company through management by exception, thus helping to meet the commitments made and channel energy to the most relevant areas that require the attention of senior management.
The operating and financial budgets allow the future of the company to be reflected for a given year, a future that is reflected through the budgeted income statement, the budgeted statement of financial position and the budgeted cash flow.
Bibliography:
- Budgets Modern Approach to Planning and Resource Control (Second Edition) Author: Jorge E. Burbano Ruiz and Alberto Ortíz Gómez Principles of Financial Management (Tenth Edition) by Lawrence J. Witman
CASE STUDY. BUDGET FOR A COMMERCIAL COMPANY
The CIA Discográfica SA is dedicated to the sale of records nationwide. Management has decided that budgets be drawn up as a tool to aid operational and financial decisions. Budgets should be made quarterly to adequately determine the money needed for purchases, payroll, and other operating expenses.
Below is the historical data required to prepare budgets for the year 2005.
Below is the CIA Balance Sheet as of December 31, 2004.
Sales are made 70% in cash and 30% on credit. The payment is made the following quarter.
At the End of the Quarter, the company wants to maintain a base inventory of $ 50,000 + 50% of the cost of sales for the following quarter. Cost of sales represents 60% of sales.
The credit term that the company handles with its suppliers is 90 days. 60% of purchases are paid in the same quarter and the remaining 40% in the following quarter.
Fixed Salaries for $ 30,000 Quarterly and commissions equivalent to 10% of sales. Commissions are paid in two parts, 30% in the Quarter and 70% in the following quarter.
20 new stereos will be purchased for $ 15,000 in July.
Taxes are paid in the third quarter
Other monthly expenses are:
Maintenance Expenses: 10% of sales paid in cash. Rent: $ 5000 per month paid in cash Basic Services: $ 500 per month.
Depreciation: $ 1000 per month included. After the purchase of the new equipment the depreciation increases to $ 1100 per month
The CIA wants to maintain a minimum cash balance of $ 30,000 at the end of each month.
You can borrow money at an interest rate of 15% per year.
Loans are assumed to be taken at the beginning and payments are made at the end of the quarter in question.
They pay us 5% for investments, investments are recovered only if it is necessary for the company.
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