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Accounting for MANAGERS

MBA 533 BUDGETING
 YOUR LECTURER
• Dr Matts Kunaka
• Doctor of Philosophy in Management (Christ India)
• Master of Philosophy in Management (Christ India)
• Masters of Business Administration (Delaware, USA))
• Masters of Science in Strategic Management (Derby, UK)
• Bachelor of Accounting (Hons) (UZ)
• Institute of Chartered Accountants of Zimbabwe (ICAZ)
• Institute of Chartered Accountants of South Africa (SAICA)
• Institute of Internal Auditors of Zimbabwe (ICAZ)
• Institute of People Management of Zimbabwe (IPMZ)
• Institute of Certified Fraud Examiners (ICFE)
• Institute of Management Consultants (UK)
• Registered Public Accountant in Zimbabwe
• Email: mkunaka@cuz.ac.zw mattsk@kres.co.zw
• Tel: 0772102723 / 0719102723 / 0780251111
 BUDGETING
The budgeting process is the process of putting a
budget in place. This process involves planning
and forecasting, implementing, monitoring and
controlling, and finally evaluating the performance
of the budget.
 BUDGETING
• What does it mean to have a budgeting process?
• In other words, budgeting is the process of making financial
goals for a company and creating a plan to achieve those goals.
What Does Budgeting Process Mean? Creating a budget is much
more than management sitting down and coming up with
performance numbers that they want to meet in the next quarter.
 Budgeting Process: Complete Guide

•  Budgeting is a process whereby future income and expenditure are

decided in order to streamline the expenditure process. Budgeting is
done in order to keep track of the expenditures and income. It serves
as a monitoring and controlling method in order to manage the
finances of a business. It begins by deciding upon the financial goals
according to which the budget will be made. Other important
activities in the budgeting process include things such as forecasting,
monitoring, controlling and evaluating the financial goals.
 BUDGETING
• Which is the best way to budget a business?
• Budgeting can be done in a variety of ways, and it is
always a smart choice to be aware of more than just a
single way of budgeting. However, two of the most
important approaches to budgeting process are: In the top-
down budgeting process, the primary input is made by the
top-level executives of the business.
 Top-Down Budgeting

In the top-down budgeting process, the primary input is

made by the top-level executives of the business. The
echelon of a certain organizational hierarchy lays down
all the guidelines according to which budget will be made.
They outline the financial goals that a budget should
maintain. Moreover, guidelines related to sales budget,
 Top-Down Budgeting
•

I
n the top-down budgeting
 Bottom-Up Budget
• The bottom-up approach to Budgeting adopts a more inclusive approach
towards the budgeting process. Although the upper-level management
gives out the general guidelines related for a budget, however, employees
and the lower management formulate these budgets. Each division of the
organization forms its budget in accordance to the general guidelines. In
the end, the budget of the entire organization is formed by combining the
individual budgets of each division. The bottom-up approach for a
budgeting process is highly inclusive in nature. 
Bottom-Up Budget
 COMPONENTS OF BUDGET

• There are many divisions of an organization and

therefore budgeting for each of the division is specific
to its needs. When all the budgets of each division are
combined, it results into the final budget, which is often
referred to as the “Master Budget”. Various
components of the budget are discussed as follows:
 COMPONENTS OF BUDGET
• Sales Budget
• Sales budget outlines the forecasted income stream of the
business. It is usually the first budget to be prepared as the
revenue generated will ultimately determine the level of
expenditure. Under the sales budget, sales of the business are
forecasted. Sales are forecasted in terms of sales volume and the
sales revenue. The forecasting is done on the following basis:
 Sales Budget

• 1) Previous pattern of sales

• 2) Economic conditions e.g. rate of inflation, interest rate,
exchange rate, economic growth rate
• 3) Political conditions
• 4) State of competition in the market
• 5) Other factors that can affect the sales e.g. technology, etc.
 Production Budget
• The production budget is of high importance in the overall
budgeting process. It determines the number of units of a
product that will be produced by the business. It also determines
the cost at which the products have to be produced. Production
budget is made according to the sales budget. Required sales
units, opening inventory and required closing inventory are used
to reach the number of units that have to be produced in a
budgeted period.
 Direct Material Purchases Budget

• Direct materials, like the name suggests, are the ones

that are being used directly in the production of goods.
The budget related to direct material determines the
amount and cost of these resources that will be required
in the production activity.
 A Budget

• Budgets related to labour, overhead and SG&A (selling, general and administrative) are
prepared separately. They are then combined under a single head.
• The direct labour budget is prepared. Labour that participates in the production process forms
the direct labor cost. This budget is prepared according to the number of labour hours and the
cost per hour.
• Overheads are those costs that are not incurred directly in the production of goods, but are
indispensable with regard to the production activity e.g. rent of the factory. The budget of the
overhead cost is prepared in relation to the direct labor hours.
• SG&A costs are incurred in order to conduct the day to day operations of a business. They
consist of fixed and variable costs.
 CASH BUDGET
Cash is known to have a similar importance to a business as blood has to body.
No matter how successful a business is, if it runs out of cash, its survival is
seriously jeopardized. In order to ensure smooth operations of the business,
strong emphasis must be laid upon the development of cash budget. Cash budget
helps to formulate in advance the payment and receipt cycles of the business and
thus it ensures that cash is readily available to a business. By formulating cash
budget, the business can keep track of its accounts receivables and accounts
payable. In order to avoid shortage of cash, the business can arrange its credit
plans related to accounts receivables and accounts payable accordingly.
 Budgeted Financial Statements
• Budgeted financial statements are prepared on the basis of
each budget component. These budgeted financial
statements are called pro forma financial statements.
Through the budgeted financial statements, a business will
be able to forecast its profits. Profit forecasting is important
because it will determine the viability of carrying out the
business.
 STEPS IN THE BUDGETING PROCESS

• Budgeting is a detailed process with several intricate steps leading up to

understanding it at large. A step-by-step guide to the budgeting process is
given as below.
• 1. Update budget assumptions
• Budgets are always prepared on certain assumptions. Those assumptions
could be related to the sales trends, cost trends or environmental conditions.
Before embarking on preparing the budget, these assumptions must be
thoroughly reviewed according to the recent environmental conditions.
STEPS IN THE BUDGETING PROCESS

• 2. Note Available funding

• Limited funding can greatly hinder the growth projects of the business. Therefore, in the
preparation of budgets adequate attention has to be given to the available funding as the
availability of investable funds will determine the initiation of viable projects.
• 3. Step costing points
• The business environment is subject to dynamism. Every day it is posed with challenges
that can completely change its cost structure. Therefore, in the budgeting process certain
factors that can affect the costing for the business should be closely considered. These
factors should be identified beforehand in order to make the budget realistic.
 STEPS IN THE BUDGETING PROCESS
• 4. Create budget package
• In budget package, previous standards related to the budgeting process are taken in order to
formulate a budget for the current period. Previous standards are updated according to the
recent environmental conditions. Budget package is a kind of outline according to which
budget has to be prepared.
• 5. Obtain revenue forecast
• There is no denying the fact that sales budget is the most crucial budget of all. All the budgets
are based on the sales budget. Furthermore, sales budget determines whether the business is
generating enough revenue necessary for its survival. Therefore, adequate attention must be
given to the preparation of sales budget by forecasting demand accurately.
 STEPS IN THE BUDGETING PROCESS
• 6. Obtain department budgets
• The department budgets will help to reach a budgeted expenditure for the budgeted
period. Each department will prepare its own budget and then all of them will be
combined to become a part of the master budget.
• 7. Validate compensation
• Compensation plans are a significant component of the budgeting process. As
compensation is subject to an annual increase, therefore, it should be prepared with
great care. The approval for compensation increase should first be taken from the top
management, and then it should be augmented in the budgeted compensation plans.
STEPS IN THE BUDGETING PROCESS

• 8. Validate bonus plans

• In order to maintain the morale of the employees, bonuses are frequently
given to out motivated workers. Bonuses act as an appraisal method.
Bonus announcements that are not considered in the budgeting process
can create havoc in the profits of the business. Therefore, any bonus plans
should be taken into consideration beforehand. The top management
should be consulted for any bonus plans.
STEPS IN THE BUDGETING PROCESS
• 9. Obtain capital budget requests
• Capital expenditure ensures expansion of the business. It helps the business to
avail the opportunities necessary for business growth. Any capital expenditure
plans should be taken in advance, and they should be included in the budgeting
process accordingly.
• 10. Update the budget model
• Any changes in the assumptions of the budget model should be updated, and
final budget should be prepared accordingly. A delay in this may lead to
glitches later on that could cause confusion.
STEPS IN THE BUDGETING PROCESS

• 11. Review the budget

• The budget should be reviewed thoroughly once it is prepared in order to
correct any flaws. A little decimal placed wrongly can create quite an
unbalance in the budget sheet.
• 12. Obtain approval
• The budget should be presented to the top management. They will evaluate
whether it has been prepared according to their requirements and finally l
approve it if it does not need any changes
STEPS IN THE BUDGETING PROCESS

• 13. Issue the budget

• The budget should be formally issued after its approval.
All the operations there and then will take place
according to it.
 IMPORTANCE OF BUDGETS

• Budgets Set Targets

• Budgets serve as a great tool for 
controlling and monitoring. They provide a coherent
guideline according to which the business operations
should be run. The budgets set targets for costs and
revenues, targets that can then be achieved through a
variety of ways
 Strategy Requires Funding

• Budgets help to formulate the capital expenditure plans of the business.

The available funding is always the first thing that is sought for in budget
preparation. The available funding determines the kind of capital
expenditure plans that a business can opt for. Furthermore, by knowing
this in advance the business can decide upon the strategies that it can
follow. Thus, budgeting greatly facilitates the formulation of strategies by
outlining the available funding in advance.
 Budgets Communicate Priorities
• Budgets are a great way to communicate priorities. The allocation of
budget to different divisions of the business says a lot about the priorities
of the business. For example, if the business allocates huge amount of
funding to sales department, it means that the business is laying strong
emphasis on the sales and distribution of the project. While if a large
amount of funding is given to research and development division, and
then it implies that business wants to focus on the development of new
products and excel in the market accordingly.
 Control Spending

• By accurately outlining the expenditures, the budgeting

process helps to control the spending. Without a budget, a
business will never be able to keep track of its expenditures
and can ultimately face considerable loss. However, a budget
provides them with vivid expectations through which they
can always predict which way the business is headed.
 Eliminate Turf Wars
• By prioritizing the spending beforehand, the budgets help to
eliminate the turf wars while deciding what projects to invest
in. This helps particularly when Business divisions indulge in
strong opinions about the allocation of funds. Otherwise, these
arguments can distort the working environment to a great
extent. Instead of working in collaboration, the business
divisions start to work in opposite directions, which will
ultimately harm the accomplishment of business goals.
 Provides a Profit Margin
•
The budgeting process helps to form the pro forma financial statements. By developing
these forecasted financial statements, a business can track its profit margins. This will
determine whether it is profitable to run the business operations in future. If the business is
not generating profit, the business will have sufficient time to adjust its revenue and costs
beforehand. Profit generation is the most important factor due to which a business is
running. Without generating profit, a business cannot hope to survive for long in the future.
• Therefore, budget may seem like an added hassle but is an essential and core aspect of a
business. It is through setting oneself a budget that the profit, income and savings can be
categorically understood, saved and planned ahead.