Assignment of organizational behavior

January, 2023

ADDIS ABABA, ETHIOPI

 1. THE BASIC ASPECTS OF FINANCIAL PLANNING AND THE ROLE OF
BUDGETING

Financial planning is the process of building a comprehensive financial strategy to complete

long-term financial goals. Financial planning can help you reduce tax liabilities, plan a wedding,
recover from debt, have children, pay for higher education or manage risk, retirement and
estates. The financial plan includes steps of plan to take to achieve financial goals. A good
financial plan often tracks your progress toward goal completion quarterly or semiannually.

When financial planning, some may use a portfolio that outlines your cash flow and assets.
Understanding current financial situation allows predicting financial destination. It also can help
define the financial goals and develop a strategy for meeting them based on preferences.
Financial planning can helps because it allow to set measurable targets can reach, and it guides
on how to use money when make important financial decisions.

Here are the basic aspects of financial planning.

1. Cash flow analysis

One of the most critical aspects of financial planning understands your cash flow and the
connection between your current assets and debts. If you spend more than you make, it will be
impossible to reach the goals you’ve set.

2. Risk management

Another essential part of financial planning is risk management. How you deal with life
situations, for example, what are you going to do if you become medically unable to perform
your work or physically disabled to deal with work obligations should also be included in your
plan.

3. Superannuation planning

Superannuation will likely be or become one of the largest investments you will own so it is
crucial that you are maximizing the opportunities within this structure.   This includes analyzing

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the fees, the investments and asset allocation and taking advantage of any taxation or
contributions strategies.

4. Retirement planning

Retirement planning helps you understand when you want to retire. The plan should include your
lifestyle and income objectives after your retirement.

It is also important to understand how Government Entitlements can fit in to your retirement
strategy and if there are any ways of boosting these further.

5. Investment management

There are many different vehicles or strategies to use to invest any surplus income or funds you
may have and each have different taxation implications or risk and return characteristics which
are why it is important to receive advice.

6. Taxation planning

To protect your investment returns, tax management is essential. There are numerous tax-
reduction methods and strategies for wealth creation options and tax-free income, which can be
achieved thanks to tax planning.

Benefits of a Financial Plan

 A financial plan involves a thorough examination of your income and spending.

 It can improve your understanding of your financial circumstances at all times.
 It establishes important short- and long-term financial goals.
 It clarifies the actions required of you to achieve your various financial goals.
 A financial plan can focus your attention on important immediate steps, such as reducing
debt and building your savings for emergencies.
 It enhances the probability that you'll achieve financial milestones and overall financial
success (however you define it).
 It can guide your efforts over time and provide a means to monitor your progress.
 It can keep you out of financial trouble and reduce the stress and worry you may have
experienced in the past.

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 Budgeting vs. financial planning

Although budgeting and financial planning are methods that help you accomplish financial goals,
they have some important differences, including:

Scope of goals

Budgeting focuses on maintaining or eliminating certain spending habits. This may include
something like spending less money on entertainment or putting more money into savings
account each month. Financial planning focuses on reaching longer-term financial goals, such as
paying off debt or buying a house.

Frequency of progress

Budgeting focuses on spending habits, you may track your progress monthly, weekly or even
daily. This is far more frequent than how often might track your progress toward the goals in
your financial plan. Financial planning focuses on larger financial goals, and because of that,
you're more likely to track progress toward them quarterly, semiannually or every six months.

Level of detail

When budgeting, determining how much plan to spend on each category set can help. It's
important to ensure within the spending limits you set, and may reduce expenses by a few dollars
each month because expenses can add up. Financial planning rarely requires the same level of
detail. The goals are much larger and include more variables, so there's often less benefit to
calculating exact amounts.

The role of budgets

Budgets are only part of the overall 'business plan'. They are result of a
careful look at the business and its future and summaries the planned
activities of selling, producing, distributing and financing.

Budgets coordinate these activities, ensuring consistency in the plans for different
segments of the business: for example, that productive capacity is sufficient to meet sales

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estimates and, if it is not, that suitable plant and machinery is purchased at the appropriate time,
if this proves a sound financial investment. Budgets therefore coordinate many of the decision
making aspects of financial management.

They quantify expectations about the future in three major documents:

Budgeted Income Statement

Budgeted Cash-Flow Statement

Budgeted Balance-Sheet (which highlights estimates of capital expenditure and sources of

finance)

2. THE VARIOUS TYPES OF BUDGET AND PREPARATION OF MASTER

BUDGET

Budgeting is part of any business, and it’s done for control and planning. It allows businesses to
identify and set goals and objectives.

A. Master Budget

A master budget refers to a set of financial and operating budgets for a specific accounting
period. Typically, it is used for the following calendar year or fiscal year. These budgets are
prepared quarterly or annually. The master budget format varies with the business nature in size.
Operating budgets are used in daily operations and serve as the basis for financial budgets.

Operating budgets include sales, production, direct labor, direct materials, overhead,
administrative expenses, selling, cost of goods manufactured, and cost of goods sold. Financial
budgets include a budgeted income statement along with a balance sheet, cash budget, and
capital expenditures budget. Budgeted income statement and budgeted balance sheets are also
known as pro forma financial statements.

Operating Budget

The operating budget refers to the budget for income statement elements including revenue and
expenses. Within this budget, you may have several other smaller budgets, such as:

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 Production Budget: This plans the production from the number of units and cost to the
types of products, plant capacity, operating cycle, make or buy policy, etc. for the budgeting
period. This budget is typically based on the sales budget. It is the responsibility of the
production manager.

Sales Budget: The planned sales in both quantity and value. The sales are forecasted for the
period, which is the sales manager’s responsibility.

Purchase Budget: This plans for each purchased item that each department purchases. The
purchase manager has to make this budget so that each department can make bulk purchases.

Production Cost Budget: Also known as the manufacturing cost or work cost budget, this
includes the cost of raw material, labor, direct expenses, and factory overheads. It shows the
cost of production for the units that are budgeted for production.

Overheads Budget: This includes the factory overheads budget, the administrative
overheads budget, and the selling and distribution budget along with others like the plant
utilization budget and research and development budget. The factory overhead factors in
things such as the indirect labor cost, indirect material cost, and other indirect expenses.

B. Financial Budget

The financial budget refers to the budget for the balance sheet elements.

Understanding the types of budgets and their classifications are crucial to successful operations
and profitability.

Cash Budget

A cash budget is a budget for expected cash inflows and outflows for the budgeted period of
time. It consists of four sections:

Receipts: This area lists the beginning cash balance along with cash collections from
customers and others.

Disbursements: This area shows all of the cash payments as characterized by their purpose.

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 Cash Surplus or Deficit: In this section, the difference between the cash receipts and cash
disbursements is listed either as a surplus or a deficit.

Financing: This takes a look at the detail of expected borrowings and repayments for the
period. It is intended to provide a picture of expected cash flow.

Static Budget

Also known as a fixed budget, this is the budget at the expected capacity level. Because it is
fixed, it is usually used by stable companies. This kind of budget can be used by departments
with operations that are independent of capacity levels. For instance, operations of general
marketing departments and administrative departments don’t usually depend on the level of
production and sales, as procurement would. Instead, they are determined by the department’s
managers and as a result, the static budget can be used by the department.

Flexible Budget

Also known as the expense budget, the flexible budget is the budget at the actual capacity level.
This budget is dynamic so it is commonly used by organizations. Flexible budgets are adjusted to
the actual activity of a company.

These types of budgets can easily be prepared with a computerized spreadsheet like Excel. The
relative relevant activity range is determined for the coming accounting period. Then, costs that
are to be expected as incurred over the relevant range are analyzed. The costs are separated based
on their cost Behavior whether it be mixed, variable, or fixed. Finally, the flexible budget for
variable cost and different points throughout the range is prepared. Flexible budgets match
expenses to specific revenue levels or activity levels. For instance, the utility costs can be
correlated to the number of machines that are in operation.

C. Capital Expenditure Budget

The capital expenditure budget refers to the budget for expected investments in capital assets and
long-term projects. Typically it is prepared for 3 to 10 years. Investments and capital assets
include purchases of fixed assets such as buildings, Machinery, equipment, lands, or plants.
Long-term projects may be designed to develop new products, reduce costs, and expand existing

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product lines. Sometimes a Capital project committee is built to oversee the capital budgeting
process. The committee is usually separated from the budgeting committee.

D. Program Budgets

A program budget is a budget for a specific program or activity such as research and
development, engineering, training, marketing, or public relations. Program budgets are created
for product lines. As program budgets are typically generated for activities across multiple
departments these budgets cannot be used for control purposes.

E. Zero-Based Budgeting

With zero-based budgeting (ZBB), you must determine what outcomes management wants and
develop a package of expenditures to sport that outcome. Combining various outcome
expenditure packages create a budget that should result in a specific set of outcomes for the
entire company. This approach is most useful for service-level entities such as government where
the provision of services is crucial. It does however take a considerable amount of time to
develop compared to a static budget.

How to prepare a master budget

Preparing a master budget will require you to first prepare all of the smaller budgets, starting
with the sales budget, since the numbers in your sales budget will directly affect the others.

Before you begin preparing any budget, you’ll need to decide whether you’ll be preparing master
budget components on a monthly or quarterly basis.

Step 1: Create your sales budget

Your sales budget serves as the foundation for the rest of the budgets you’ll need to create. These
are just a few of the items that are directly affected by your sales budget:

Creating the sales budget first will reduce the amount of work needed for many of the other
budgets.

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 Step 2: Create a production budget

Closely tied to the sales budget, the production budget drills down a bit more into production,
covering details such as the number of items you plan to produce or sell.

Step 3: Create a materials budget

Whether you’re manufacturing products to sell or just buying them for resale, you’ll need to
create a materials budget, which will directly tie to your sales budget. Because you’ve already
estimated your sales totals for the upcoming year, it will be much easier to create your materials
budget.

Step 4: Create a direct labor budget

Creating a direct labor budget is a necessary step for businesses involved in production. If you
purchase goods for resale, you can skip this step.

Step 5: Create an overhead budget

This step will help you account for both fixed and variable costs in production, while excluding
direct materials and direct labor, since each of those has its own budget.

Step 6: Account for cost of goods sold

Using the information from the sales budget, materials budget, and production budget will
simplify the creation of the cost of goods sold budget. You’ll also need to include budgeted
beginning and ending inventory in the cost of goods sold budget.

Step 7: Create an administrative budget

Once the production steps have been completed, you can start on your administrative budget,
which should include all non-manufacturing costs your business will incur, such as supplies,
sales, and shipping or freight costs, as well as front office salaries.

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 Step 8: Create the financial budget

If you’ve been in business for a while, you can use totals from previous years to guide you
through the financial projections needed to create the financial budget. If you’re just starting out,
all the numbers in both your operational and financial budgets will be estimates.

The financial budget consists of a cash budget that displays cash inflow and outflow based on the
operational budgets created earlier; a budgeted balance sheet, also based on operational totals;
and a budget for any capital expenditures expected in the upcoming fiscal year.

Step 9: Create the master budget

The final step in the process is combining the details provided in the smaller budgets to create a
master budget. Remember, your master budget will consist of two parts: the budgeted income
statement, which is a result of your smaller budgets, and your financial budget.

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