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
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
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
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
Cash AccountsPayable AccountsReceivable Production Sales The Cash Cycle Inventory
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
Sales Estimates Operating Budget Capital Expenditure Budget Relationships among theThree Types of Budgets Cash Flow Budget
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
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
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.
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?
Evaluate the statement that once a budget is set for the year, it should followed to the letter. • Evaluate the statement that good budgeting procedures are powerful business tools that are quickly learned.