FINANCIAL PLANNING AND CONTROL PROCESS 

Financial planning involves making projections of sales, income, and assets based on
alternative production and marketing strategies and then deciding how to meet the
forecasted financial requirement. 

Financial control moves on to the implementation phase dealing with the feedback and
adjustment process that is required (a) to ensure that plans are followed and (b) to modify
existing plans in response to changes in the operating environment.

BUDGETING 
A budget is (a) the quantitative expression of a proposed plan of action by management for
a period and (b) an aid to coordinate what needs to be done to implement that plan. 

Budget implies a formal quantitative statement of income and expenditure for a certain
future period of time. It is a plan for the entity's resources allocated for the completion of
the activities that requires to be followed, to achieve the desired end. 

Purposes of the Budget 

Budgets are usually prepared for areas within an organization (departments, plants,
divisions, and so on) and activities (sales, production, research, and so on). 
1. Defining broad objectives and goals and formulating strategies to achieve such
objectives
2. Coordinating the activities of the organization by integration of plans of various parts
thereby pulling one in the same direction 
3. Allocating resources of the organization for effective utility 
4. Communicating management's approved plans throughout the organization 
5. Uncovering and preparing for potential bottleneck in the operations before they occur
6. Motivating managers to achieve the desired 
7. Setting a standard or benchmark for evaluation actual performance 

Advantages of Budgeting 
1. It compels periodic planning. 
2. It enhances cooperation and communication. 
3. It forces quantification of plans and proposals. 
4. It provides a framework for performance evaluation. 
5. It enables members of the organization to be aware of business costs. 
6. It satisfies some legal contractual requirements. 
7. It directs the firm’s activities toward the achievement of organizational goals.

Limitations of Budgeting 
1. It tends to oversimplify the real situation and fail to allow for variations in external
factors.
2. It is difficult to prepare a detailed budget for an organization that has never existed or
for a new division, product, or department of an existing firm. 
3. There may be lack of higher and lower management commitment because of lack of
understanding of fundamentals of budget preparation and utilization. 
4. The budget is only a representation of future plans or a means to the goal of profitable
activity and not an end itself. 
5. Budget reports usually emphasize results, not reasons.

TYPES OF BUDGETS 
The master budget is comprehensive financial plan for the year made up of various
individual departmental and activity budgets. A master budget can be divided into
operating, financial, and capital investment budget.

Operating budgets are concerned with the income generating activities of a firm: sales,
production, and finished goods inventories. The ultimate outcome of the operating budget is
a pro forma or budgeted income statement. 

Financial budgets are concerned with the inflows and outflows of cash and financial position.
Planned cash inflows and are detailed in a cash budget, and expected financial position at
the end of the budget period is shown in a budgeted, or pro forma, balance sheet.

The master budget usually prepared for a 1-year period corresponding to the company's
fiscal year. The yearly budgets are broken down into quarterly and monthly budgets. The use
of shorter time periods allows managers to compare actual data with budgeted data as the
year unfolds and to make timely corrections. 

Some organizations have developed a continuous budgeting philosophy. A continuous (or

rolling) budget is a 12-months budget. As a month expires in the budget, an additional
month in the future is so that the company always has a 12-month plan on hand.
Proponents of continuous budgeting maintain that it forces managers to plan ahead
constantly.

Other Types of Budget 

 Fixed budget is a budget based on only one level of activity. 
 Flexible budget is a series of budgets prepared for many levels of activity. It makes
possible the adjustment of budget to the actual level of activity before comparing the
budget figures with actual results. 
 Zero-based budgeting is a budget prepared every period from a base of zero. All
expenditures must  be justified regardless of variances from periods.  
 Imposed budgeting is a top-down process where executives adhere to a goal that they
set for the  company. Managers follow the goals and impose budget targets for
activities and costs. 
 Participative budgeting is a roll-up approach where employees work from the bottom
up to recommend targets to the executives. The executives may provide some input,
but they more or less take the recommendations as given by department managers and
other employees. 
 A life-cycle budget is an estimate of the total amount of sales and profits to be garnered
from a  product over its estimated life span. 
 Activity-based budgeting is a method of budgeting where activities that incur costs are
recorded,  analyzed and researched. 
 Kaizen budgeting is defined as a budgeting technique focusing on continuous
improvement from a  service or product perspective.

STEPS IN DEVELOPING A MASTER BUDGET 

1. Establishing basic goals and long-range plans for the company. These will serve as
guidelines in budget estimates. 
2. Prepare a sales forecast for the budget period. 
3. Estimate the cost of goods sold and operating expenses. 
4. Determine the budgeted operating results on assets, liabilities, and owners' equity
accounts. The cash budget is the largest part of this step, since changes in many asset
and liability accounts will depend upon the cash flow forecast. 
5. Summarize the estimated data in the form of a projected income statement for the
budget period and the projected statement of financial position. 

SALES BUDGET
The sales budget, showing what products will be sold in what quantities at what prices, is
the foundation on which all other short-term budgets are built. The sales budget triggers a
chain reaction that leads to the development of many other budget figures in an
organization. 

The accuracy and reasonableness of the sales data will affect the whole budget. The sales
forecast is made after consideration of the following factors: past sales volume; general
economic and industry conditions; relationship of sales to economic indicators; relative
product profitability; market research studies and competition; pricing, advertising and
other promotion policies; production capacity; quality of sales force seasonal variations; and
long-term sales trends for various products 

PRODUCTION BUDGET
The production budget becomes a key factor in the determination of other budgets,
including direct materials budget, the direct labor budget, and manufacturing overhead
budget. These budgets in turn are needed to assist in formulating a cash budget. After
production quantity budget, the budgets for the manufacturing cost elements — materials,
labor and factory overhead can be prepared. Preparation of direct materials budget involves
determination of three items: 
1. quantity of raw materials required for production 
2. desired raw materials inventory levels 
3. raw materials purchases budget in quantity and in pesos