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Session 30

Session 30. Profit Planning: Budgeting May 10, 2002. Functions of Budgets--1. Formally communicates management objectives and priorities in financial terms Represents authorization and approval to undertake activities Guide to action by others both internal and external to the firm.

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Session 30

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  1. Session 30 Profit Planning: Budgeting May 10, 2002 W. F. Bentz

  2. Functions of Budgets--1 • Formally communicates management objectives and priorities in financial terms • Represents authorization and approval to undertake activities • Guide to action by others both internal and external to the firm W. F. Bentz

  3. Functions of Budgets--2 • Establishes expectations in quantitative terms • The planning process forces and facilitates communication among functional and operating groups W. F. Bentz

  4. Functions of Budgets--3 6. Budgets form a basis on which to evaluate both the effectiveness and efficiency of the achievement of agreed upon goals and objectives 7. Forces us to identify potential or likely problem areas and challenges to goals and targets W. F. Bentz

  5. Benefits of Effective Budgets • The benefits of profit planning depend on: • The environment in which the organization operates • The time and effort devoted to the planning process • The extent to which management goals and objectives are reflected in the plans • The extent to which management utilizes the plans W. F. Bentz

  6. Benefits of Effective Budgets • Improved performance relative to goals • Improved performance evaluation processes • Improved coordination & communication • Lower risk and lower cost of capital W. F. Bentz

  7. Perceived Costs of Budgeting • Executive time and effort • Management time and effort away from more valuable activites • Cost of staff time and software • Constraints on management • Reveals problems, weaknesses, etc. W. F. Bentz

  8. Steps in Budgeting Process • Forecast the markets for goods & services • Plan revenues (prices & quantities) • Prepare production budget in units • Prepare materials requirements budget • Prepare materials purchases budget • Prepare labor requirements budget • Prepare labor acquisition budget W. F. Bentz

  9. Steps in Budgeting Process • Prepare cost budgets for other expense categories • Determine billing and cost rates • Prepare more detailed sales and inventory budgets based on matching sales plans with production plans • Prepare cost of goods sold budgets • Prepare budgeted financial statements W. F. Bentz

  10. Risk factors • The predictability of demand is a key factor in the usefulness of financial budgets. Demand drives action. • Stability of suppliers, employees, and facilities influence risk • Financial health is key to the achievement of other objectives W. F. Bentz

  11. Other Considerations • Different budgets of the same areas may exist for different purposes. The revenue budget used for cash flow and financing purposes may be more conservative than the sales buggets (targets) given to the sales force. W. F. Bentz

  12. Misuse of Budgets • Budgets get a bad name because they can be used by management to brow-beat subordinates and justify non-support of projects, etc. • I believe in open communication of budgets and fair, honest treatment of managers. People tend to be more suspicious than selfish! W. F. Bentz

  13. W. F. Bentz

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