Chapter 5 Strategy AND THE Master Budget-f PDF

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Chapter 5 STRATEGY AND THE MASTER BUDGET (10.05)Budget – a financial plan of the resources needed to carry out tasks and meet financial goals. - Also a quantitative expression of the goals the organization wishes to achieve and the cost of attaining these goals. Budgeting – the act of preparing a bu...

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Chapter 5 STRATEGY AND THE MASTER BUDGET (10.05.2020)

Budget – a financial plan of the resources needed to carry out tasks and meet financial goals. - Also a quantitative expression of the goals the organization wishes to achieve and the cost of attaining these goals. Budgeting – the act of preparing a budget Budgetary control – the use of budgets to control a firm’s activities

A firm’s strategy is the path it chooses for attaining its long-term goals and mission. It is the starting point in preparing its plans and budgets. Formulation of Strategy The process of determining a company’s strategy starts with the assessment of external factors that affect operation and evaluating internal factors that can be its strength and weakness. External factors (a careful examination can help the firm identify opportunities, limitations and threats): -Competition -Technical, economic political, regulatory, social and environmental factors Internal factors (include operating characteristics) -Financial strength -Managerial talent and expertise -Functional structure, and -Organizational culture Matching the firm’s strengths with its identified opportunities, resources and threats enables it to form its strategy. Having analysed external factors surrounding the organization and assessed the internal situations it is in, management can match opportunities with strength and competitive advantages of the firm and determine its strategies and long-term opportunities.

-------(adopted from other source)-------Budgeting is the process or act of preparing a financial budget. Budget – refers to a plan which is expressed in a quantitative monetary value. -The final output of the whole budgeting processes -as a mechanism, it presents the ways of achieving the goals and objectives of the business organization in quantitative forms. It sets the expected specifics as well as the total costs involved in meeting the ultimate goal of the business.

Budget simply indicates the amount of money involved to realize the approved strategic and operating plans of the business. And Budgeting can be expressed in this statement: “If this is the strategic plan, then the corresponding amount involved in materializing the plan will be this much”. As a plan, the budget should provide clear directions to the business in attaining the predetermined goals and objectives. Budget serves as a medium to control the financial activities of the business. Through the budget, the different financial activities of the business are identified in their monetary forms. The budget directs the financial activities of the business to achieve its goals and objectives. …The budget embodies simultaneously the planning and controlling functions of the management. It serves as a plan to ensure that goals and objectives are met and at the same time, functions as control mechanism so that financial activities are conducted in accordance with the desired plan. The level of performance can be evaluated by determining the level of expenditures. The performance of every unit as much as possible should be higher or at the very least equal to the cost and expense level.

BENEFITS OF BUDGETING -preparation does not happen overnight and not performed by only one department Budget is the product of the concerted efforts of the different levels of management. That is why budget provides favorable or positive effects on almost all aspects of the business organization. Benefits: 1. 2. 3. 4. 5.

Planning is facilitated Financial coordination is established Resources are properly allocated Morale of employees is improved Control mechanism is enhanced

PERSPECTIVE OF THE BUDGETING PROCESS In preparing the budget, the following questions are addressed: 1. Who are involved in the budget preparation? 2. What period is covered by the budget? 3. What type of budget is prepared? Budget preparation does not simply start from any point. It must have a specific point of reference and the three aforesaid questions must be properly addressed.

Persons involved in the Budget Preparation The business creates a budget committee to oversee the preparation and administration of the budget. The budget committee is represented by the different functional areas of the business a. b. c. d.

Marketing Finance Production Administration or Human Resources

All these committee members assume that the finance officer or head has the required technical skills and expertise on budget preparation. Units involved in Budget Preparation: Budget Committee (Headed by Controller)

Marketing Division (Representative)

Finance Division (Representative)

Production Division (Representative)

Administration Division (Representative)

Through participative budgeting process, each unit in consideration of the requirements and limitations of the other business units, prepares its own budget. The budgetary requirements of the different units are totaled as the organizational budget.

Period Covered by the Budget Time element of budget: a. Short –term budget – provides the financial requirements of all departments for 1 year b. Medium-term budget or intermediate budget – sets the budgetary requirements of the business for the next 3-5 years of operation (anchored on the broad program of each functional area-supported by the short-term budget=reviewed every year) c. Long-term budget or strategic budget– is the financial expression of the vision-mission of the business. It defines the financial direction of the business for the next 5-10 years. (prepared and administered by the highest level of management) As all strategic plans of the different functional areas, depts.., divisions and units should be anchored on the vision and mission of the business.

Plans that have been prepared and implemented—including a financial plan—but are not grounded on the vision and mission of the company may become the root cause of future misunderstandings and troubles. Review: Differentiate vision, mission, goal, objectives in financial planning: Vision – conveys the ultimate goal of the organization. -

Outlines the final map of what the business will be and where the business is going The guiding star for all the plans, policies and strategies of the business

Example: the vision statement of a rural bank: “To be a premier rural bank in Mindanao”. Mission –sets the current business activities and outlines what the business is for. -

Defines the nature of the business It lists relevant undertakings and carries out or implements various projects for the realization of the vision

Example: mission statement of a rural bank: “A rural bank providing complete and low-cost agricultural banking services to farmers across Mindanao”. Goal – states where all the activities and operation of the business are directed. -

It is the refined version of the company’s vision (more specific than vission)

Example: rural bank goals: “To expand the rural banking activities in various parts of Mindanao” “To increase the quality of loan portfolio extended to farmer borrowers” Objective – is specific and short-term -

Is the refined version of the mission statement

Example: rural bank objectives: “To open two branches every year” “To increase loan portfolio of 25% every year”

The financial plan should always jibe with the vision-mission statement or corporate goals and objectives. Sadly however, there are still corporate bigwigs who conduct financial planning without considering the vision-mission or goals and objective of the organization.

Types of Budget or Budgeting a. Fixed Budget – a budget prepared based only on one level of production capacity. Example: normal capacity of the business is to produce and sell 50,000 units of a certain product during the year b. Flexible Budget – a budget prepared showing the projected cost at different levels of production capacity Example: a budgetary cost at 20,000 units, 30,000 units, 40,000 units and 50,000 units c. Continuous or rolling budget – a one-year budget continuously prepared every month by adding another month once the current month has passed. Example: a 12-month budget has been prepared for the period Jan 1 – Dec 31, 2018. After January 2018has elapsed, the January 2019 budget is added thereby coming up with a 12-month budget again. d. Cash budget – reflects the expected cash receipts from cash sales, collection of accounts and notes receivable, sale of other assets proceeds of borrowings, and the expected cash disbursement on payments of operating expenses, interest, taxes, and loans. - Should reflect the project cash balance at the end of every period covered. e. Sales budget – reflects the expected number of units to be sold based on forecast made from the performance of previous years and other marketing variables. f.

Production Budget – shows the cost of producing the product. (DM, DL and FOH)

g. Operating Budget – reflects the sales and production budgets h. Financial budget – usually includes the cash budget and budgeted balance sheet i.

Capital budget – a long-range budget that incorporates the major expenditures for plant and machineries

j.

Master Budget – the overall budget of the business. -

A comprehensive budget for a specific period...