UNIT CECONOMIC FOUNDATIONS

AND FINANCING

6.02 Recognize types of budgets and their use in

achieving efficient business operation.

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BUDGETA financial plan usually covering a

period of one year.• Shows revenue and expenses for

the time period• Enables businesses to set financial

goals• Allows managers to control

operations and expenses by comparing actual results with budget goals

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TYPES OF BUDGETS• Sales budget

• Merchandising budget• Advertising budget• Cash flow projection

• Capital budget• Income statement projection

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SALES BUDGETA forecast of the sales revenue a

business expects to earn for a month, a quarter, or a year.

• May be used to develop sales quotas or sales goals for sales representatives and territories

• Sales estimates are based on past experience and future expectations for the business.

• General business conditions play a large role in influencing sales estimates.

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SALES BUDGET (cont.)

Factors to consider in preparing a sales budget

•Previous sales•Economic trends•Changes in competition•Factors such as weather•Population shifts

•Sales force•Availability of merchandise•Buying habits•Season of the year

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MERCHANDISING BUDGET

A prediction of the amount of merchandise a business expects to sell over a specified time period.

• Used to plan and control the supply of merchandise already on hand

• If a business has too little merchandise on hand to meet demand, it will lose money.

• If a business has too much merchandise on hand, cash is tied up in inventory and storage of merchandise becomes an issue.

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MERCHANDISING BUDGET (CONT.)

• Businesses must determine the types of stock to have on hand at all times.

• Managers must set minimum and maximum inventory levels.

• Once purchases are planned, managers can better estimate cash needs.

• All departments must be aware of the merchandise needed, on hand, and ordered.

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ADVERTISING BUDGET

The forecast for the amount of money a business should spend on advertising, based on estimated sales.

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CASH FLOW PROJECTION

An estimate of the flow of cash coming into and going out of a company over a specified time period.

•Cash must be budgeted to ensure that enough cash will be available to meet payments as they come due.

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CASH FLOW PROJECTION (cont.)

• Cash comes into a business from two primary sources– Cash receipts– Borrowing

•Borrowed money is represented in the cash budget as cash flowing into the business.

•Repayments of borrowed money are shown in the cash budget as cash flowing out of the business.

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CAPITAL BUDGETA financial plan used by business for replacing fixed assets or acquiring new ones.

•The acquisition of assets ties up large sums of money for long periods of time, therefore, capital budgeting is crucial to the success of a business.•Managers must plan in advance to make sure money is available when assets are needed.

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INCOME STATEMENT PROJECTION

A financial plan showing projected sales, costs, expenses, and profits for specified periods of time.

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BUDGET ADMINISTRATION

• Budgets are estimates and sometimes cannot be followed exactly.

• Managers must strive to adhere to budgeted amounts.

• Managers must constantly compare actual figures with the budgeted estimates and make adjustments as necessary.

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BUDGET ADMINISTRATION (CONT.)

• Because income and expenses often vary from budgeted amounts, managers of large companies generally prepare three budget estimates.– An estimated budget that assumes that

sales will be less than expected– An estimated budget that considers what

most likely will occur– An estimated budget that assumes that

sales will be more than expected