Showing posts with label Budgeting for Future Success. Show all posts
Showing posts with label Budgeting for Future Success. Show all posts

Friday 14 April 2017

Budgeting in different types of organization

In very large organizations, hundreds of managers may be involved in the budgeting process, and the complete budget will probably be a very thick document.


Budgeting when done well is time well spent

This involvement takes a lot of management time but, if the budgeting is done well, it is likely to be time well spent.

This is because the budget will probably be a realistic one, and because after approval the managers should feel committed to it.


Budget is approved - What happens next?

  • When the budget has been approved, individual managers are responsible for their section of it.  the responsibility is like a pyramid.
  • At the base of the pyramid are the most junior managers, supervising a comparatively small section, perhaps involving expenditure only.
  • These junior managers should, however, have some knowledge of the overall budget and objectives.
  • In the middle may be more senior managers and divisional directors, each with a wider area of responsibility for achieving the complete budget objectives.  If everyone else meets their targets they will have an easy job.


Budget must be relevant

Budgets should be designed to meet the needs of a particular organization and its managers.

For example, a large school could well have an expenditure budget of about $4 million.

  • There will be little income and the budgeting emphasis will be on capital expenditure and revenue expenditure.  
  • The main aims will be informed choice and value for money.



Main Principles of Budget for the Large and Small Companies


  • The main principles devoted to the budget of a large company can also be used by a small organization.  
  • There will be fewer managers involved, and less paper, but the same procedures should be followed.



After the budget has been approved ... what comes next?

After the budget has been approved, what comes next?  Quite possibly nothing at all.

This is a pity but it does not mean that the budgeting exercise has been a complete waste of time.

  • The participants will have thought logically about the organization, its finances and its future.
  • Some of the detail will remain in their minds and influence their future actions.
  • Nevertheless, the budgets will be much more valuable if they are used in an active way.  

Regular performance reports should be issued by the accountants.

  • These should be in the same format as the budgets.
  • It should give comparable budget and actual figures.
  • Variances should also be given.
  • All levels of management should regularly review these figures and explain the variances.
  • Significant variances will pose the question of whether corrective action needs to be taken.


Budgets do not necessarily have to be done just once a year.

They may be updated, reviewed or even scrapped and redone as circumstances dictate.

Cash Flow Forecast and the Balance Sheet Forecast

Cash-Flow Forecast

When the profit budgets are complete, it is important that a cash budget is prepared.

This is a Cash-Flow Forecast.  (click to understand this)

In practice, the profit budget and cash budget are linked.

  • The profit budget cannot be completed until the interest figure is available.
  • This in turn depends on the cash budget. 
  • The cash budget depends partly on the profit budget.
  • Dilemmas like this are quite common in budgeting.
It is usual to put in an estimated figure for interest and then adjust everything later if necessary.

This can be very time-consuming and budgeting is much simpler if it is computerized.

Several hours' work can be reduced to minutes and management is much freer to test budgets with useful "what if" questions.


Forecast Balance Sheet

Accounting rules stated that every debit has a credit.

It follows that every figure in the budgets has a forecast consequence in a future Balance Sheet.

It is normal to conclude the budgets by preparing a month-by-month forecast Balance Sheet and bankers are likely to ask for this.

It may be that some aspect of the Balance Sheet is unacceptable and a partial re-budget is necessary.

In practice, top management is likely to review and alter some aspects of the budgets several times.






Thursday 13 April 2017

The Capital Expenditure Budget

This is extremely significant in some companies, less so in others.

It will list all the planned capital expenditure showing the date when the expenditure will be made, and the date that the expenditure will be completed and the asset introduced to the business.

Major contracts may be payable in installments and the timing is important to the cash budget.

A sum for miscellaneous items is usually necessary.  For example, major projects might be listed separately and then $15,000 per month added for all projects individually less than $5,000.

Within the capital expenditure budget, timing is very important.

Expenditure affects cash and interest straight away.

Depreciation usually starts only on completion.

Revenue Expenditure Budgets

Revenue expenditure includes cost of sales (direct cost or variable cost) and overhead cost (indirect cost).

The cost of sales will consist of direct wages, items bought for resale, raw materials and others.

The Sales, Finance, and Administration Departments will make up the overhead budget.

In practice, this overhead budget is likely to be divided into three, with a different manager responsible for each section.

As with all the other budgets, each manager should submit a detailed budget for the section for which he or she is responsible.

As with the other budgets (e.g. sales budget), top management should give initial guidance on expected performance and policy assumptions.

For example, a manager might be told to assume a company-wide average pay rise of 5% on 1 January.

The Sales Budget

This should be in sufficient detail for management to know the sources of revenue.

The figures will be broken down into different products and different sales regions.

Each regional sales manager will have responsibility for a part of the sales budget.

Before the sales budget is done it would be normal for top management to issue budget assumptions concerning prices, competition, and other key matters.

The sales budget will be for orders taken.

There will usually be a timing difference before orders become invoiced sales.

The Profit Budget

There are usually several budgets and they all impact on each other.

The profit budget is arguably the most important.

There are two basic approaches to budgeting in a large organization, both having advantages and disadvantages..

1.   The "bottom up" method.  

  • Proposals are taken from the lower management levels.  
  • These are collated into an overall budget that may or may not be acceptable.  
  • If it is not, then top management calls for revisions.
2.  The "top down" method.
  • Top management issues budget targets.
  • Lower levels of management must then submit proposals that achieve these targets.

In practice, there is often less difference between the two methods than might be supposed.

It is important that at some stage there is a full and frank exchange of views.

Everyone should be encouraged to put forward any constructive point of view, and everyone should commit themselves to listening with an open mind.

Top management will and should, have the final decisions.

It is a common mistake for managers to be too insular and to overlook what changes competitors are making.

All the budgets are important but in a commercial organization the overall profit budget is likely to be considered the most important.



Note the following points:

  • Most budgets are for a year but this is not a requirement.  they can be for six months or for any other useful period.
  • Most budget gives monthly figures, which is the most common division, but again this is not fixed.  the divisions can be weekly, quarterly or some other period.
  • A summary budget is useful for a large organization.  The budgets leading up to these summarized figures will be more detailed.
  • Various subsidiary budgets and calculations feed figures through to the summary budget.


Monday 10 April 2017

Prevention is better than cure

It is good to be able to get out of financial difficulties but it is better not to have financial difficulties in the first place.

The intelligent and timely use of financial information can help avoid them.

It is tempting not to plan and budget in the good times, but it is probably a mistake.

Tuesday 12 January 2016

A budget is crucial to managing the business.

"If you fail to plan, plan to fail."  Benjamin Franklin

A company that fails to prepare budgets and then to use those budgets to control the business runs a high risk of failing.

A company that is well run operationally, may not be so well run financially.

As a company grows, the importance of good financial management, alongside operational management, cannot be over-estimated.

Companies use budgets and other similar tools to financially manage their business.

A budget is a financial picture of the future (perhaps on a short, medium or long-term basis).

Others may see a budget as more of a forecast or plan to which you add (or take away) money.

It could just be just a future P&L account; a benchmark or baseline.

A budget is crucial to managing the business.



Thursday 4 October 2012

Is Your Financial Situation Sustainable And Renewable?


Two words that have attracted a lot of attention are "sustainable" and "renewable." These words are generally used in an environmental sense when discussing energy and natural resources, but they should also be applied to your personal financial situation. Using sustainable and renewable sources of energy, for example, can create a secure supply of energy upon which people can rely. Similarly, ensuring that your lifestyle, savings rate and income can be sustained and/or renewed will help you achieve long-term financial security.

Your Lifestyle

Let's start by examining the spending portion of your financial equation. Do you know how much money you spend each month? If you don't, there's no time like the present to take inventory.

Even if you don't know how much you spend, you should certainly know how much you earn. Starting there, do you know what you would do if your next paycheck did not arrive? How long could you continue to support your current lifestyle? Even if you can't bring yourself to create a budget, at the very least you need to stash away some cash in case you find yourself unemployed.
Your Savings Rate

Now let's look at the savings portion of your financial equation. How much do you save each month? Include all sources, from money set aside in your checking or savings account to your 401(k) plan or other employer-sponsored plan. Don't overlook the cash you stash in the cookie jar.

Now figure out how difficult it would be to save that same amount if you were unemployed or were forced to accept a lower-paying job than the one you have today. When you are saving for long-term goals, such as retirement or the cost of a child's education, the amount you end up with is significantly impacted by the amount you put away early on because of the effects of compound interest. Any interruption of the steady stream of savings could significantly reduce the likelihood of achieving your goal.
When you put your savings plan under the microscope, be sure to view it in the context of your income. Are there places where you could cut your spending if times get tough? Is there a way to cut other expenses before you reduce the amount allocated to savings?

Your Income

Now, let's examine your primary income source. If you are counting on a paycheck from your job to finance your expenses, you should put some thought into where your job ranks in terms of sustainability. Are your skills likely to be in demand five years from now? 10? 15? Is your present employer stable? If not, are your skills easily transferable to another employer? Could you earn an equal or greater paycheck if you changed jobs?

If not, are you taking action? Remember, today is the best time to start preparing for tomorrow.

Hope for the Best, Plan for the Worst

Although the future is unknown, taking inventory of your life will certainly let you know where you stand today and take the stress off your tomorrow. If your current level of income would not be easy to replace, spend some time contemplating the merits of living with less.
Simplifying your lifestyle without reducing your income is a great way to free up some cash to build up your emergency fund or give your investment plan a major boost. With a little forethought, you can be prepared for any eventuality. 


The Bottom Line

Of course, if your cash inflows are steady, your savings plan is on track and your source of income is secure, there's nothing wrong with living the good life. Just do so responsibly. Don't buy more than you can afford, keep your debt-to-income ratio low and have a backup plan in the event that life rains on your parade.



Read more: http://www.investopedia.com/articles/pf/08/personal-finance-sustainable-renewable.asp#ixzz28Je6NVlP

Sunday 9 September 2012

The Best Ways to Prevent Money Arguments With Your Spouse

By Daniel Bortz
Fri, Sep 7, 2012

Are you fighting with your spouse over money? If so, you could be doing more damage than you realize.
Twenty-seven percent of Americans say disagreements over finances are most likely to erupt into an argument, ahead of arguments over children, chores, work, and friends, according to a recent survey of married or cohabitating couples by the American Institute of Certified Public Accountants.
Fights with your spouse are never easy, but evidence shows that arguments over money can be particularly distressing. A 2011 study by Jeffrey Dew of Utah State University found that married couples who disagreed about money once a week were twice as likely to divorce as those who differed less than once a month. This is partly because money arguments encompass more than just finances. "Money doesn't just represent money; it represents love, power, control, self-esteem, freedom," says Olivia Mellan, a money coach and author of Money Harmony: Resolving Money Conflicts in Your Life and Relationships.
"Money decisions are such personal decisions, which is why they can lead to nasty fights," says Scott Palmer, who co-authored the book First Comes Love, Then Comes Money: A Couple's Guide to Financial Communication with his wife, Bethany.
When it comes to money, many couples are blinded by their own views on spending and saving, and often can't see or understand their partner's perspective. "We always think our own way of looking at money is the best, and it creates a tug-and-pull inside the relationship," says Bethany Palmer.
Communication is key to resolving money issues, experts say. Gaining a better understanding of your partner's financial habits will enable you to prevent arguments with your spouse over money--or at least quell them before they escalate. U.S. News spoke to experts for their recommendations:
Be financially transparent. Financial transparency is the foundation of good communication, says Bethany Palmer. "If you're not open with your spouse about your finances, it's very hard to have an intimate relationship," she says.
Being honest about your finances from the start--including any debt you carry, for example--will enable you and your spouse to avoid financial infidelity. "If both parties aren't on the same page, it leads to secrets, which can undermine a marriage," says Matt Bell, author of Money & Marriage: A Complete Guide for Engaged and Newly Married Couples.
Exchange information. Jean Dorrell, a certified estate planner in Longboat Key, Fla., who counsels couples about money, recommends that couples share credit reports and tax returns--that way, nothing is kept secret. This ideally occurs before they tie the knot, but it can still be effective if done at the beginning of the marriage. "When you fall in love with somebody, you don't think about going, 'Oh, by the way, how's your credit score?' But it's a conversation you need to have," Dorrell says.
If your partner has significant debt, Dorrell suggests you consider signing a prenuptial agreement so that you're not legally responsible for paying off their debt in the event that you divorce.
Establish a budget. Creating a budget for you and your spouse will take the guesswork out of your money arguments. "A budget gives you factual information," says Bell. "A lot of arguments around money have to do with assumptions and emotions. But if you have a budget, you can take a look strictly at the numbers, which will enable you to have a fact-based discussion about any disagreements."
Even if one spouse doesn't stick exactly to the budget, having one in place creates an expectation of how much each of you should be spending. Just be sure to allow some wiggle room for discretionary purchases, suggests Lynn Mayabb, a certified financial planner with BKD Wealth Advisors in Kansas City. "Everybody is going to have something they want to buy that the other person thinks is frivolous," she says. "Each person needs a certain amount of money that they don't have to explain where they spent it. If you have a budget that's too constricting, people have a hard time sticking to it."
Understand each other's money personality. Scott and Bethany Palmer believe each person has a money personality--a spending style that dictates their money habits. At the most basic level, someone is a saver or a spender, according to the Palmers. If a saver and a spender wind up together, which the Palmers say often happens because opposites attract, the couple's day-to-day lives are in conflict. The saver wants to make dinner at home; the spender wants to eat out. The spender buys himself a nice bathrobe and the saver resents it each morning when she sees it hanging on the hook. "You would think the biggest arguments about money would be over a big subject like a house or a car, but it's over everyday decisions," says Bethany Palmer.
However, if you take the time to evaluate and understand each other's respective money personalities, you'll likely fight about money a lot less. "We find if couples can understand how they look at money and understand their partner's perspective of money, that will start their relationship off on the right foot," Scott Palmer says.
If both parties are aware of the other person's spending style, the lines of communication are open and each person will have a better idea of where the other one is coming from. "Walk half a mile in your partner's moccasins," says Mellan. If you stop and think how your partner feels about the situation, Mellan says you and your spouse become less polarized.
Discuss family history. The way people approach money is, in large part, related to how their parents treated money, says Mayabb. Was money openly discussed in your household growing up? Did Dad make all the decisions or was it a team effort? Did you admire your parents' spending and saving habits or did you vow to do the opposite of what they did? Having a discussion about your families' money habits will help bridge the gap between you and your spouse's outlook on money, Mayabb says.
With the potential for money arguments to lead to serious marital problems, consider setting up weekly chats to tackle money disagreements before they evolve into fights.

Friday 3 February 2012

10 Frugal Living Tips To Happiness On A Tight Budget

10 Frugal Living Tips To Happiness On A Tight Budget
By Matthew CenzonΙ Published September 28, 2011

Whether you're dealing with a mountain of debt or trying to save money for your retirement, there are numerous circumstances that can force someone to change his or her spending habits. Frugal living is typically viewed in a negative light, where the word "sacrifice" becomes synonymous with "suffering." However, this does not have to be the case. Here are 10 frugal living tips to achieve happiness on a tight budget.


1. Keep Track of Your Spending

If you're planning to live on a tight budget, you need to start by keeping track of all your expenses. From car repairs to that cup of coffee you buy every morning, everything must be recorded. It's easy to lose track of how much you spend in any given week. The next thing you know, you are looking at a credit card bill that is well outside your means. So, you pay the minimum payment, which is another no-no, and the cycle of perpetual debt begins. Keeping better track of your spending can help you avoid wasting money on unnecessary expenses.

2. Change Your Spending Habits

Now that you're keeping track of what you're spending your money on, look through your monthly expenses and start trimming the fat. This is where people begin to think that frugal living is a complete downer compared to a lifestyle of superfluous spending. Don't think about limiting yourself on the things you want, start thinking about cutting out the things you don't need or waste money on. Avoiding name brand items, buying in bulk, and buying used or refurbished items are just a few examples to help you save and change your spending habits.

3. Monitor Your Money

Many people are guilty of not knowing how much money they are carrying in their pocket or purse on a daily basis. Even worse, many people are guilty of not knowing how much money they have in their bank account. How are you supposed to follow a budget if you don't even know what you are working with? What if you dropped some cash without even knowing it? Finding random cash in your pocket is the best feeling in the world, but you should be taking better care of your money if you plan on living on a tight budget.

4. Carry a Coin Purse

Want to live happy on a tight budget? Start carrying a coin purse, and stop treating loose change like it's the plague. Most people become annoyed with fishing through their pockets for change, so they just pay with large bills and get more loose change that they don't want. Keep those coins organized with a coin purse. If you still refuse to pay with exact change, just stuff the coins in the coin purse and empty it into a jar when you get home. When the jar is full, take it to a coin counter at your local grocery and exchange it for cash or a gift card.

5. Give Yourself an Allowance

Limit yourself to a set amount of spending cash per week, like $100, and only withdraw that amount from your bank account. Stretch that weekly allowance as far as you can, and if you spend it all, don't withdraw more money until it's time for your weekly withdrawal. Giving yourself an allowance will help you develop better spending habits to help you save money for when it counts.

6. Start Living a Healthier Lifestyle

Yes, your health can play a factor in how much money you're spending. One of the best frugal living tips anyone can follow is to get in better shape. Those who smoke, consume too much alcohol, have poor eating habits, are out of shape or are overweight tend to spend more money than a person who is living a healthy lifestyle. If you are in shape, you will eat less. If you quit smoking and drinking, you aren't wasting money on alcohol or cigarettes. If you jog, walk or run on a regular basis, you are giving yourself an activity that will make you healthier and hardly costs any money.

7. Look for Ways to Earn on the Side

While you don't necessarily have to take up a second job or even a part-time gig, finding ways to earn money on the side is a frugal living tip that will help you reach your retirement goals, or give you more spending money. Earning money on the side will also keep you preoccupied so that you feel less tempted to waste money, and what better way to live happily on a tight budget than to spend time earning money rather than spending it.

8. Stop Impulse Buying

Never walk into a store and purchase something without thinking about it first. Frugal living requires you to consider all purchases with at least a 24-hour timeframe. If you still feel compelled to have the item in question after 24-hours, then it might be worth buying.

9. Never Buy Anything at Full Price

Have you ever purchased something, only to see it go on sale a month later? If you find an item, and followed the suggestion in tip #8, make sure that the item you must have is at least on sale. If it's not, then wait till it goes on sale before you buy it. Hopefully, by the time the item goes on sale, you'll no longer feel compelled to buy it, thus saving even more money in the long run.
Another useful tip would be to only allow yourself to purchase something if you are able to find a coupon for it. Websites likeCoupounMountain.com provide free coupons you can use for online purchases. This is another great way to help you curb your shopping impulses and practice frugal living habits.

10. Change the Way You Eat Out

Giving up on restaurant dining and eating out may be a good tip to save money, but it probably won't make you very happy. Instead of giving up on it completely, try changing the way you eat out. Always keep an eye out for promotions or deals. Restaurants tend to offer discounted meal prices during off hours, so try eating earlier or later than usual to save. Scan the appetizer section and see if you can turn an item into an entrée. Many times, a restaurant will have an appetizer and an entrée that are virtually the same, only the appetizer is a bit smaller and comes at a cheaper price. Also make sure you take advantage of any coupons you receive in the mail, or print your own from online.

http://www.candofinance.com/debt-management/frugal-living-tips/

Monday 10 October 2011

Budget 2012: Highlights

Budget 2012: Highlights
Written by Joseph Chin of theedgemalaysia.com
Friday, 07 October 2011 18:56


Highlights of Budget 2012 proposals announced by Prime Minister Datuk Seri Najib Tun Razak on Friday, Oct 7.
FDIs: Inflows of foreign direct investment have regained momentum. Foreign direct investment increased six-fold to RM29 billion in 2010, the highest growth in Asia. In 1H of 2011, FDI surged further by 75% to RM21.2 billion compared with RM12.1 billion for the same period in 2010. Private investment to expand 15.9% in 2012.
Expenditure: RM232.8 billion to implement all Government development plans, which include the projects and programmes. Of the amount, RM181.6 billion is for operating expenditure and RM51.2 billion for development expenditure.
Federal Government revenue expected to increase 1.9% to RM186.9 billion in 2012 compared with RM183.4 billion in 2011. Ddeficit in 2012 is expected to improve to 4.7% of GDP compared with 5.4% in 2011.
Stimulus package: RM6 billion for Special Stimulus Package through Private Financing Initiative to undertake several public projects. Projects include upgrading and maintenance of schools, including CONSTRUCTION [] of new blocks, upgrading hospitals, flood mitigation programme, upgrading basic rural infrastructure.
RM978 million to accelerate the development in five regional corridors, including building Johor Bahru-Nusa Jaya coastal highway in Iskandar, Johor; heritage tourism development in Taiping in the Northern Corridor; agropolitan scheme in Besut in the East Coast Economic Region; palm oil industrial cluster project in Lahad Datu in Sabah Development Corridor; and Samalaju water supply in the Sarawak Corridor of Renewable Energy.
Kuala Lumpur International Financial District (KLIFD): Income tax exemption of 100% for 10 years and stamp duty exemption on loan and service agreements for KLIFD status companies; Income tax exemption of 70% for 5 years for property developers in KLIFD.
Sukuk: Income tax exemption given for non-ringgit sukuk issuance and transactions is extended for another 3 years until the year of assessment 2014.
ETF: To boost Exchange Traded Funds (ETFs), Valuecap Sdn. Bhd subsidiary, I-VCAP, to provide RM200 million as seed monies for shariah-compliant ETFs. This fund will provide a matching loan subject to a maximum of RM20 million.
FELDA: FELDA Global Ventures Holding to be listed on Bursa Malaysia by mid-2012 to raise funds for the company to be a global conglomerate. Listing will create another blue chip PLANTATION [] company besides attracting international investors to Bursa Malaysia.
Rights and interests of FELDA settlers will continue to be protected by Koperasi Permodalan FELDA as the majority shareholder. FELDA settlers are expected to receive a windfall, with the amount to be announced before listing.
REITS: Govt to extend incentive for concessionary tax rate of 10% on dividends of non-corporate institutional and individual investors in Real Estate Investment Trusts (REITs) for another five years from Jan 1, 2012 to Dec 31, 2016.
SMEs: Government  to provide RM100 million for the SME Revitalisation Fund. This scheme offers soft loans up to a maximum of RM1 million for entrepreneurs to revive their businesses. To help SMEs to commercialise research products, government to set up shariah-compliant Commercialisation Innovation Fund totalling RM500 million with an attractive profit margin.
Hybrid cars: Full exemption of import duty and excise duty on hybrid cars and electric cars will continue to be given to franchise holders. Tax exemption extended until Dec 31, 2013.
Tourism: Langkawi Five Year Tourism Development Master Plan will be launched with an allocation of RM420 million.
Property: Government proposes review of real property gains tax (RPGT) as current rate of 5% not effective in curbing real estate speculative activities. Government proposes RPGT rate be reviewed. For PROPERTIES [] held and disposed within 2 years, the RPGT rate is 10%. For properties held and disposed within a period exceeding 2 years and up to 5 years, the rate is 5%. Properties held and disposed after 5 years are not subject to RPGT.
Schools: RM1 billion for the construction, improvement and maintenance of schools, particularly to cater for the immediate needs of schools.
Civil service, bonus: Government proposes new Civil Service Remuneration Scheme or SBPA which includes an exit policy for underperforming civil servants and for those who opt to leave the service.
Annual increment of civil servants increased between RM80 and RM320 according to the grade. Also civil servants who accept SBPA will receive an annual increment between 7% and 13%.
Compulsory retirement age increased from 58 to 60 years old to optimise civil servants’ contribution.
Additional bonus of half-month salary with a minimum payment of RM500 and an assistance of RM500 to government pensioners to be paid together with the December salary this year.
For 2011, this totals to one month pay with a minimum payment of RM1,000 for civil servants and RM1,000 for Government pensioners. This will benefit 1.3 million civil servants as well as 618,000 Government pensioners. The total bonus and assistance payments for this year accounts for RM4 billion.
Homes: Under My First Home Scheme for those earning below RM3,000, government to increase the limit of house prices from a maximum of RM220,000 to RM400,000.
Government will introduce Skim Amanah Rakyat 1Malaysia for households with income below RM3,000 per month, to benefit 100,000 households. Participants can apply for a RM5,000 loan with a repayment period of 5 years.
Entrepreneurs: Government will allocate RM200 million to develop Bumiputera entrepreneurs and contractors through the Ministry of Rural and Regional Development.
Venture capital: Government will establish MyCreative Venture Capital with an initial fund of RM200 million.
EPF: Tax relief up to RM6,000 for EPF and life insurance to be extended to the Private Pension Fund now known as Private Retirement Scheme. Employers’ contribution be increased from 12% to 13% for contributors who earn RM5,000 and below, benefit 5.3 million EPF contributors.

http://www.theedgemalaysia.com/business/194202-budget-2012-highlights.html

Monday 18 January 2010

Gathering Information to create the budget

Once you have identified your objectives, you need to turn to the important process of gathering key information to enable you to create the budget.


ESTIMATING SALES AND REVENUE

As sales of products and services are the lifeblood of most companies, you will inevitably start with a projection of sales and revenue.  This can be a tricky process because it involves guessing the future, but there are certain actions you can take to make a forecast easier. 
  • USE PAST SALES
  • DISTINGUISH BETWEEN PRODUCTS
  • LOOK AT THE COMPETITION
  • ASK SUPPLIERS
  • READ SECTOR REPORTS
  • STUDY INNOVATIVE PRODUCTS
  • MONITOR CASH FLOW

ESTIMATING EXPENDITURE

The next part of your budget should include all the costs of operation involved in producing and delivering the product or service to customers.  These are factors that need to be considered:
  • DEFINE EXPENDITURE TYPES:  4 main types:-
CAPITAL COSTS
SPECIFIC PRODUCT COSTS
ONGOING COSTS
START-UP COSTS
  • DEFINE EXPENDITURE TIMING
  • ESTIMATE PROFITS/LOSS

CHALLENGING THE FIGURES

At this stage, you may feel confident about stating some figures (more typically expenditure because these are easier to predict) and more nervous about sales and profit figures, mainly because these are subject to
  • a number of variables such as the action of competitors or
  • changes in the economy that you have not foreseen. 

The following approaches may be helpful in allowing you to challenge the figures that you have initially compiled.

  • "WHAT-IF" SCENARIOS:  by working on the assumption that the final result is not as favourable to the company as you had hoped.  To avoid becoming too negative, you could include two sets of figures, underlying which you place your initial set of projected figures.
  • ZERO-BASED BUDGETING:  the process whereby a company decides what target it wants to achieve, how this can be achieved, and what resources it needs to implement the result; also known as bottom-down budgeting.
  • ACTIVITY-BASED COSTING:  costing by activities that define any actions that a company takes regularly as part of its day-to-day operations.

Creating a cash budget

Planning for a final (commonly called master) budget will be incomplete without a cash budget.  This will show how money will be mvoed to and from the business account to make it possible to finance the company's activities.

BENEFITS

1.  PLANNING TOOL
A cash budget shows the cash effect of all plans made in the budget.  If the cash flow is negative, the company knows it either
  • has to put more pressure on debtors or
  • seek further sources of finance. 
For instance, disbursements are lumped together, and you need to spread your payments to creditors more evenly throughout the year.  This will lower bank credit and interest costs. 

2.  WARNING SIGNAL

A cash budget may also give management a sign of the potential problems that could emerge and gives them time to take action to avoid such problems.


An example of a cash budget
http://spreadsheets.google.com/pub?key=thlpxQ9A0KkLx27yOw9nvBQ&output=html

Start-up Budget Objectives

For start-ups, it may be useful to try to answer the following set of questions to help you make some reaonable assumptions about your business and its early days of operating and trading:

  1. How many products/services do you expect to sell in the first year?
  2. Can you predict a rate of sales growth for the next three years?
  3. How will you price your products/services?
  4. What will be the cost of producing your product/service?
  5. What will your operating expenses be?
  6. How many employees do you intend to hire and how much will you pay them?
  7. Have you established whether your business will be a proprietorship, a partnership, or a corporatin?  The tax consequences of each form will vary considerably.
  8. Will you be leasing/renting/buying an office?  What will the costs be?
  9. How much finance will you need to raise?  What is the interest rate on funds that you are borrowing?
  10. Will you sell on credit?  Have you established what payment terms you will get from suppliers and what you will offer customers?

Monitoring the budget

After a budget has been written and approved, the task of monitoring the budget begins.  Inevitably, actual events will produce results that vary from the budget.  These are recommended steps to monitor the results.

1.  SET A TIME PERIOD
With an annual budget, you will have to wait a couple of months after the end of the yar.  However, most budgets allow for quarterly, if not monthly, observations based on monthly projections.

2.  REGISTER ACTUAL RESULTS
The first step is to write down the results achieved by the company and compare them with projections.  Any discrepancies are typically called variances.  When the variances are over 10 percent, it is worth looking into the reasons.

3.  CATEGORISE VARIANCES
It is easier to assess the variances that concern you by categorizing them into price, volume and timing.

4.  ANALYSE VARIANCES
With each variance, ask what could have led to the miscalculation.  The causes are usuallly budget errors, the result of poor preparation, or changes that result from external factors such as economic change.

5.  TAKE CAUTIOUS ACTION
Sometimes it's better not to take swift action.  Blaming staff for not forecasting an event, when in reality they had a few ways of predicting a result, can damage morale.  Be cautious.  If you can make amends, look at the expense and find out if there are ways of reducing overhead.

6.  REVIEW TARGETS
Some variances may be the result of overly optimistic revenue projections.  Were the sales targets unattainable?  Study performance of competitors and analyze whether targets were realistic.

7.  REVIEW PROCESS
You should review the way the budget was put together.  Were the objectives set by top management in a top-down fashion? Were middle and lower ranking directors encouraged to provide their opinions on the company goals?

Defining budget objectives

Budget are made primarily to help meet objectives. 

As a result, the type of budget you devise will vary considerably depending on the ultimate purpose of the plan.  The following steps will help you define your objectives:

1.  UNDERSTAND YOUR COMPANY
Identify your company's Strength, Weaknesses, Opportunities and Threats ( a particular technique known as SWOT) can help you amass valuable facts that will help you identify necessary action to take:
  • STRENGTH:  What advantages does your company have over rivals?
  • WEAKNESSES:  Where is the company underperforming and what are competitors doing better and why?
  • OPPORTUNITIES:  Where are the biggest chances for growth?
  • THREATS:  What are the biggest obstacles facing you:  for example, competition, or shortage of investment capital?

2.  LISTEN TO COMPANY SECTIONS
If you are a small company, it will be easier for you to identify the core strengths, weaknesses, opportunities, and threats but in a larger company, these may vary significantly. 
  • You need to gather information from different deparments to ensure their needs are met by the budget. 
  • For instance, marketing and advertising may be understaffed, and this could negatively affect overall sales, no matter how much time you've put into improving the core product.

3.  SUMMARIZE CORE AIMS
Summaries of the core objectives of the company and the different departments, or mission statements, could include
  • "We are trying to increase revenue."
  • "We want to raise market share by xx."
  • "We need to focus on cutting costs."
  • "We need to research new product lines."

4. SET FINANCIAL TARGETS
Make sure you have taken into account the financial targets of every department, including
  • marketing and advertising
  • purchasing/inventory
  • personnel
  • administration
  • finance department
  • sales
  • customer service

TIMING OF A BUDGET

TIMING OF A BUDGET

1. There are no fixed time periods a budget should cover. The longest range budgets can cover a period of between three and five years, although the most typical period is one year, to coincide with the company's financial year. This is called a fixed budget.

2. Even an annual budget is typically split into quarterly or monthly statements to make the process more manageable and easier to follow. A fixed bduget that is regularly updated to keep up with rapid changes in the company's particular sector is sometimes called a rolling budget.

3. Some businesses budget on a 1-4 week cycle, but these are most effective when they work within a longer time framework.

4. For a one-year cycle, it is best to set the next budget at least three months before the end of the current budget. For a shorter-term budget (one month, for instance), the process should have started at least by the third week of the current budget.

Sunday 17 January 2010

Why budget?

The key to successful financing of daily operations is to budget.

These are some of the key benefits of a well-planned budget:

  1. ANTICIPATE PROBLEMS
  2. PERSUADE BACKERS
  3. MEASURE RESULTS
  4. IDENTIFY PROBLEMS
  5. IMPROVE DECISION MAKING
  6. MOTIVATE STAFF
  7. SAVE TIME
  8. CREATE STRATEGY

1.  ANTICIPATE PROBLEMS
The process of budgeting forces you to anticipate and prevent problems.  It demands that you estimte how much capital you are going to need for your daily operations and how you will meet these financial obligations without facing a cash flow crisis.

2.  PERSUADE BACKERS
With a budget that anticipates potential bottlenecks in your operations and delays in cash flows, you will be in a better position to make a case for a loan from your bank or investment fund.

3.  MEASURE RESULTS
A budget or plan helps you keep score:  effectively you are meeting your objectives because you have a concrete list of landmarks or targets against which you can measure results.

4.  IDENTIFY PROBLEMS
Budgets try to create the most ideal scenario for your business to follow, but they can also throw up any potential challenges or obstacles that you might otherwise have ignored in your pursuit of preferred results.

5.  IMPROVE DECISION MAKING
When you lay out a template of what the company can achieve and how much it will cost, you are in a better position to make some tricky decisions such as dropping a favourite project because the figures won't add up or to pursue a strategy that you had written off initially.

6.  MOTIVATE STAFF
A budget helps staff to understand what direction the company is going and the parameters in which it is working.  Workers can follow targets, such as sales figures or number of new customers recruited, and measure how well they are performing.

7.  SAVE TIME
While many managers feel that the research and paperwork involved in preparing a budget can cause unnecessary delays to the core operations of the business, the opposite is in fact true.  Lack of planning will inevitably lead to stalled projects while directors grapple with problems that could have been anticipated at an earlier stage.

8.  CREATE STRATEGY
You may have a clear idea of what the business needs to achieve in the short term, but you may have overlooked how the company and the sector you are working in may change in 12 months' time.  A budget can help develop a picture of the future and force you to implement relevant strategies to cope with any adverse conditions.