Business — Banking — Management — Marketing & Sales

How to Perform Budgeting



Category: Financial Control Management

Budgeting is complex comprising inflow and outflow items. As in a market driven economy sales play the determinative role for the survival of a company, budget will also start from sales planning. Accuracy is important because sales are an important base for calculation of other budget components.

Sales Budget (Step # 1)

Sales can be budgeted taking into consideration the following aspects:

— Sales for previous period

— Production capacities

— Customers’ purchasing power

— Marketing research

— Marketing mix

— Competition

— Seasonal fluctuations

— Product life cycle

* The most precise forecasts can be performed for existent products placed on existent markets.

Inflows will directly depend on Sales Budget. It should also be taken into consideration the collection period of receivables.

Commercial Expenses Budget (Step # 2)

— Normally Commercial Expenses Budget should be correlated with Sales Budget

— It would be hardly possible to have a sales increase while promotional expenses are cut down

— Usually Commercial Expenses are budgeted as a percentage of Sales Budget.

— This percentage will depend on the product life cycle

— Do not forget at this stage about cost related to packing, storage

— The variable and fixed part will be reflected separately

Production Budget (Step # 3)

Production Budget will be elaborated on the Sales Budget basis:

Production Budget = Inventory level at the end of period + Sales for the period -Inventory level at the beginning of period

Inventory Budget (Step # 4)

Inventory Budget contains necessary information for elaborating 2 of the 3 final financial statements:

— Income Statement Pro-Forma, where it influences the cost of the goods sold

— Balance Sheet Pro-Forma, where it determines the Inventory part (materials, work in process and finished products)

Materials Budget (Step # 5)

Materials used in production can be related to direct costs and variable costs as well at the same time.

Materials Budget will be elaborated starting from Production Budget and Sales Budget. The payment period to suppliers should also be taken into consideration because it has direct influence on Cash Flow. Purchases will be calculated using the formula:

Purchases = Production Necessities + Inventory at the end of the period — Inventory at the beginning of the period

Labour Budget (Step # 6)

Labour needs are calculated according to Production Budget, taking into consideration Labour productivity and fees.

Labour expenses can be split into Fixed and Variable part.

Production Indirect Expenses Budget (Step # 7)

As in previous case expenses will be split into Fixed and Variable part.

The fixed part of Production Indirect Expenses will be budgeted for a certain operational level.

The variable part will depend on a chosen cost drive (ex. Production Budget, Direct Labour)

Typical components:

— Equipment and production buildings depreciation

— Rent of equipment and production buildings

— Salary of maintenance personnel

— Auxiliary services costs

Overheads Budget (Step # 8)

Overheads Budget includes expenses that a not directly related to productivity level or sales, but are compulsory for a good functionality of business. Main components are:

— Administrative personnel salary

— Costs related to personnel, law, financial departments, etc.

— Representational expenditures, per diems

— Communication expenditures

— Taxes and interest

— Rent of administrative buildings and transportation means

— The main part of Overheads are fixed costs.

Income Statement (Step # 9)

Income Statement Pro-Forma is the first financial statement elaborated. It contains information on total revenues and expenditures of the 3 activities. For planning purposes the Statement can be more detailed The information for it is produced along the Steps # 1 — 8

It is important that the Steps # 5 — 6 — 7are calculated on the basis of the Budgeted Sales!!!

Balance Sheet (Step # 10)

Balance Sheet is the balance between financial sources and their use. The Balance Sheet projections derive from the necessity of Working Capital (Inventory and Receivables) that are estimated at Steps # 1 and 5, as well as from the principle of Positive Cash Balance.

Current liabilities are calculated at Step # 5 and 6.

At the first stage there will be no modifications in Negative Cash Balance.

The difference between assets and liabilities serves for calculation of cash deficit or surplus.

Modifications in Balance Sheet influence the Cash Flow.

Cash Flow Statement (Step # 11)

The Cash Budget calculation is the most important and the most difficult step at the same time.

The staring point is the Sales Budget.

Payments are determined at Steps #2, 5, 6, 7and 8.

Inflows and payments for Investment and Financial Activities are calculated separately. Depreciation is excluded from all categories of expenditures, when using the direct method of Cash Flow calculation.


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