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Budget-Building Fundamentals and Dynamics
- 1. Preparing The Master Budget Sub-Accounts - Session TWO -
- 2. Section Page The Revenue Budget 3 The System of Budgets 12 Budgets Set 1 14 The Ending Finished Goods Inventory Budget 15 The Production Budget 18 The Direct Labor Budget 20 The Manufacturing Overhead Budget 23 The Direct Material Budget 27 The Cost of Goods Sold Budget 29 Budget Set 2 31 Sales and Marketing Budget 32 The Administration Budget 35 The Research and Development Budget 38 Outline
- 3. Section Page Budget Set 3 41 Intro to the Capital Budget 42 Intro to the Financing Budget 43 Intro to the Master Budget 44 The System of Budgets - Conclusion 46 The System of Budgets for a Multi-Division Co. 47 Operating Decisions Impacting The System of Budgets 52 Reasons for Budget Iterations 59 Skewness of Budget Results 60 Budget Scenarios 61 Outline
- 4. The Revenue Budget (8/9) Primary sources of revenue info. Historical sales Contract restrictions Sales promotions Sales of existing products to new regions Incremental product sales
- 5. Budgets Set 1 Once the revenue budget is in place, a number of additional budgets are derived from it that relate to the production capabilities of the company; production-related budgets include: Ending inventory budget Production budget Direct labor budget Manufacturing overhead budget Direct materials budget Cost of goods sold budget
- 6. The Ending Finished Goods Inventory Budget (2/4) Ending Inventory Assumptions Customer service Inventory record accuracy Manufacturing planning Product life cycle Seasonal sales Supply chain duration Working capital reduction
- 7. The Manufacturing Overhead Budget (2/4) Expenses normally considered part of manufacturing overhead include: Depreciation Facilities maintenance Factory rent Factory utilities Indirect materials, such as supplies Insurance on the factory & inventory Materials management staff compensation Personal property taxes on manufacturing equipment Production employee payroll taxes & fringe benefits Production supervisor compensation Quality assurance staff compensation
- 8. Sales and Marketing Budget (1/3) Sales & Marketing Budget is comprised of Sales & marketing staff Sales travel costs Other various marketing programs’ expenditures Sales and Marketing Budget Revenue Budget
- 9. The Administration Budget (1/3) Administration Budget includes Executives expenses Accounting expenses Treasury expenses HR expenses Administration staff expenses
- 10. Intro to the Master Budget (2/2) (Details in session FOUR) Revenue Budget Production Budget Manufacturing Overhead Budget Cost of Goods Sold Budget Budgeted Financial Statements Direct Labor Budget R&D Budget Capital Budget Revenue Budget Direct Materials Budget Revenue Budget Financing Budget Administration Budget
- 11. Operating Decisions Impacting The System of Budgets (1/7) Operating decisions that may have multiple impacts on the budget include: Add new Sales territory Increase/ Decrease in Inventory Levels Relax Credit terms Increase/ Decrease in Prices
- 12. Reasons for Budget Iterations Several good reasons why the 1st version of a corporate budget is sent back for additional work Historical metrics Financing Pacing Constraints
- 13. Thank You For Coming Today! Tel: +961 1 385 825 / website: www.bsf-lb.com Email: info@bsf-lb.com Facilitator: Antoine Tabbakh /BestSolutionFinance Company/bsf #bsfbeirut
Notas del editor
- Primary sources of revenue information are those that have the highest probability of success in beingachieved in the revenue budget, and for which the company has a demonstrated ability to provide productsor services.
- All of the preceding factors can have a considerable impact on the amount of planned ending inventory. Ifmore than one factor is impacting your business, you may find that you have conflicting issues that makeit more difficult to plan ending inventory levels. For example, a switch to a JIT system would likely reduceinventory, but a management decision to keep more inventory on hand for faster customer order fulfillmentwould have an opposite effect. Consequently, it can be difficult to sort through the differing issuesto arrive at an appropriate level of planned ending inventory.
- This budget is comprised of the compensation of the sales and marketing staff, sales travel costs, and expenditures related to various marketing programs. It is closely linked to the revenue budget, since the number of sales staff (in some industries) is the prime determinant of additional sales. Further, marketing campaigns can impact the timing of the sales shown in the revenue budget.
- These expenses are primarily comprised of compensation,followed by office expenses. A large proportion of these expenses are fixed, with someheadcount changes driven by total revenues or other types of activity elsewhere in the company.
- Though not included in this book, some companies like to separate facilities costs into a separatebudget. It is useful to segregate this information into a separate budget whenthere is a facilities manager,since this person will want to see the expenses for which he isresponsible. Otherwise, facilities expensesare usually entered into either the production budget or the administration budget, or both. The facilitiesbudget is usually one of the last budgets to be constructed, since it depends upon the number of employeesto be housed and the requirements for production and warehousing facilities, all of which are establishedin other parts of the budget.
- Constraints: If there are bottlenecks within the company that interfere with its ability to generateadditional sales, does the budget provide sufficient funding to impact these bottlenecks? If not,the company can budget whatever results it wants, but it has virtually no chance of achievingthem. For example, a machine in the production area may be a bottleneck that keeps a companyfrom producing any more products – if you do not deal with the bottleneck, sales will not increase,irrespective of improvements anywhere else in the company.Pacing: If a company intends to expand operations in new geographical areas, or to open new distributionchannels, or to offer entirely new products, it should build into the budget an adequateamount of time to ramp up each operation. This issue of pacing should include consideration ofthe sales cycle of customers, which may be extremely long. For example, expanding the customerbase to include municipal governments may be an excellent idea, but may require a sales cycle ofgreater than a year, given the advance notice needed by governments to budget for purchases.Financing: If a company has a hard cap on the amount of funding that it will have available duringthe budget period, then the requirements of the budget must not exceed that funding limitation.This is one of the more common reasons for budget iterations, especially in small companies,where it may be difficult to obtain new funding.Historical metrics: If a company has been unable to achieve certain performance benchmarks inthe past, what has changed to allow it to do so now? The chances are good that the company willstill have trouble improving beyond its historical ability to do so, which means that the budgetshould be adjusted to meet its historical metrics. For example, if a business has historically beenunable to generate more than $1 million of sales per salesperson, the preliminary budget shouldcontinue to support a similar proportion of sales to salespeople. Similarly, a historical tendencyfor accounts receivable to be an average of 45 days old prior to payment should probably be reflectedin the preliminary budget, rather than a more aggressive collection assumption.