Budgeting
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Chapter 7. Budgeting. The Purpose of Budgets. A budget…. is a blueprint for action for a specific period that is based on sales, cost, and productivity estimates developed in the marketing plan shows the financial impact of an efficient and effective execution of the marketing plan.

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Chapter 7

Budgeting


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The Purpose of Budgets

A budget….

  • is a blueprint for action for a specific period that is based on sales, cost, and productivity estimates developed in the marketing plan

  • shows the financial impact of an efficient and effective execution of the marketing plan


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The Power of Written Goals

  • Keeps management’s attention on the achievement of financial objectives

  • Keeps people focused

  • Increases the chances that financial objectives will be realized


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Three Types of Budgets

  • The Operating Budget

    • Summarizes the expected sales, production activities, and related costs for the budgetary period

    • Estimates the sales and income plus the fixed and variable expenses the firm must incur in order to support the expected sales during a specified time

      Example: figure 7-3, text page 102


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  • The Cash Flow Budget

    • Summarizes the amount and timing of cash that is expected to flow in and out of the business during the budgetary period

    • Shows:

      • when cash will be available to the business (cash receipts), and

      • when cash payments need to be made by the business (cash disbursements).

        Example: figure 7-4, text page 103


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Cash

AccountsPayable

AccountsReceivable

Production

Sales

The Cash Cycle

Inventory


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  • The Capital Expenditure Budget

    • Shows how the money budgeted for capital expenditures is to be allocated among the competing projects

    • Lists major capital expenditures items such as new trucks, computing systems, buildings and so forth along with their estimated cost and expected payment plans

      Example: figure 7-5, text page 104


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Sales Estimates

Operating

Budget

Capital Expenditure Budget

Relationships among theThree Types of Budgets

Cash Flow

Budget


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The Benefits of Budgeting

  • Budgets provide a way to measure business performance

  • Budgets keep managers focused on the financial implications of their business decisions

  • Budgets help managers communicate expectations and quickly spot deviation from expectations


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Budget Limitations

  • Budgets are estimates, not sure things

  • Execution of a budget is not automatic

  • Budgets cannot take the place of good management

  • Good budgeting requires time and patience


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Discussion Topics

  • Explain how financial objectives influence the development of the marketing plan.

  • Do you agree or disagree with the statement that written goals have the power to keep people focused and increase the chances that they will be achieved? Explain your answer.

  • Identify and define the three major types of budgets. How do they relate to each other?

  • Do you agree and disagree that a budget is just a forecast of the future? Explain your answer.


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Some say that the cash flow budget is more important than the operating budget. Do you agree or disagree? Explain your answer.

If you are making a budget for the same period, why are the operating budget and cash flow budget likely to give you different answers? Explain.

Discuss why a budget is a great motivational tool for inspiring better performance by employees.

If business success rests on meeting customer needs, why is there so much concern about meeting the financial objectives?


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