Financial Analysis LAP 3Financial Analysis LAP 3

ObjectivesObjectives

Explain the importance of budgets.Explain the importance of budgets.

Describe the characteristics of an Describe the characteristics of an effective budget.effective budget.

Objective AObjective A

Explain the importanceExplain the importanceof budgets.of budgets.

What are your financial goals?

A budget can help you get there.

What is a budget?What is a budget?

An estimate of income An estimate of income and expense forand expense for

a specific time perioda specific time period

IncomeIncome ExpenseExpense

Fiscal yearFiscal year

Budgets are . . .Budgets are . . . about money.about money.

• There are two broad categories: income There are two broad categories: income and expense.and expense.

IncomeIncome ExpenseExpense

like maps.like maps.

• They show a They show a route to success.route to success.

Budgets are . . .Budgets are . . .

management tools.management tools.

• They help managers They help managers make informed make informed decisions.decisions.

Budgets are . . .Budgets are . . .

Why Budgets Are ImportantWhy Budgets Are Important

1.1. They create physical records.They create physical records.

• Written records that are Written records that are accurate, accessible, accurate, accessible, and meaningfuland meaningful

• Framework for annual Framework for annual financial reportsfinancial reports

Why Budgets Are ImportantWhy Budgets Are Important

2.2. They organize business activities.They organize business activities.

• Manager must put dreams Manager must put dreams into reality with everyday into reality with everyday details that support the details that support the business’s goals. business’s goals.

Salaries and wages

Raw materials

Transportation

Plant

InsuranceUtilities

Manufacturing BudgetManufacturing Budget

Why Budgets Are ImportantWhy Budgets Are Important

3.3. They guide operational decisions.They guide operational decisions.

• Managers have more Managers have more information to make information to make routine decisions.routine decisions.

What to buy?What to buy?

How muchHow muchto pay?to pay?

How much How much inventory?inventory?

How many How many employees?employees?

Why Budgets Are ImportantWhy Budgets Are Important

4. They help evaluate long- and short-term performance.

• Past budgets provide benchmarks.

• Comparing budgeted and actual amounts reveals variances.

Short termShort term

Long termLong term

Why Budgets Are ImportantWhy Budgets Are Important

5. They help protect against financial crisis.

• Saving for emergencies is encouraged.

Objective BObjective B

Describe the characteristics of Describe the characteristics of an effective budget.an effective budget.

Budgets as TreesBudgets as Trees

EEXXPPEENNSSEE

PhonePhone

CellularCellular

LocalLocal

Long distanceLong distance

Take a Bite’s owner Take a Bite’s owner wants to earn a profit.wants to earn a profit.

What Budgets Look LikeWhat Budgets Look Like

Here’s how:Here’s how:

Budgets are organized by categories.Budgets are organized by categories.

IncomeIncome ExpenseExpense

Cash Cash salessales

Credit Credit salessales

WagesWages

RentRent

InsuranceInsurance

UtilitiesUtilities

InterestInterest SuppliesSupplies

How to Allocate $$$How to Allocate $$$

• Adjust previous year’s budget Adjust previous year’s budget based on changesbased on changes

• Adjust previous year’s budget Adjust previous year’s budget with across-the-board increasewith across-the-board increase

• Use zero-based budgetingUse zero-based budgeting

• Fiscal year, with quarters and months

Budget TimingBudget Timing

• Rolling, or continuous, budgets

Jan.Jan.Year 1Year 1

Feb.Feb.Year 1Year 1

MarchMarchYear 1Year 1

AprilAprilYear 1Year 1

MayMayYear 1Year 1

JuneJuneYear 1Year 1

JulyJulyYear 1Year 1

Aug.Aug.Year 1Year 1

Sept.Sept.Year 1Year 1

Oct.Oct.Year 1Year 1

Nov.Nov.Year 1Year 1

Dec.Dec.Year 1Year 1

Jan.Jan.Year 2Year 2

Feb.Feb.Year 2Year 2

MarchMarchYear 2Year 2

• Made up of Made up of information from information from specialized budgetsspecialized budgets

The Master BudgetThe Master Budget

Master BudgetMaster Budget

Specialized BudgetsSpecialized Budgets

• Specialized budgets Specialized budgets are interrelated.are interrelated. PurchasesPurchases

SalesSales Selling Selling ExpenseExpense

CashCash

General and General and Administrative Administrative

ExpenseExpense

Change to meet the manager’s needsChange to meet the manager’s needs

Budget FormatsBudget Formats

Example:Example:

Those responsible for managing people

and money

Who prepares budgets?Who prepares budgets?

• Well plannedWell planned

Characteristics of an Effective BudgetCharacteristics of an Effective Budget

• RealisticRealistic

• FlexibleFlexible

• Clearly communicatedClearly communicated

• EvaluatedEvaluated

CompareCompare

Imagine the budget for a public swimming pool.

What income and expense categories are there?

$$ $$

$$

$$$$

$$

Income Expense

1.Daily sales

2._________

3._________

4._________

1.Towels

2._________

3._________

4._________

• Georgia has underspent on this year’s travel budget.

• Should she spend unnecessarily now in order to keep money in next year’s budget?

MarkED

Acknowledgments

Original DevelopersChristopher C. Burke, MarkED

Jane Wright, MarkED

Version 1.0

Copyright © 2006MarkED Resource Center

Digital-based photography sources:

DIGITAL VISION LTD.Teenagers TodayObj. B: #130271Photos copyright Digital Vision Ltd., all rights reserved. 833 Fourth Ave. SW, Suite 800 Calgary, AB, Canada T2P 3T5

EYEWIRE IMAGESMoney & FinanceObj. A: #MFI_068Photos copyright Eyewire Inc.833 Fourth Ave. SW, Suite 800 Calgary, AB, Canada

PHOTODISC, INC.Business and Transportation Vol 14Obj. A: #225Photos copyright PhotoDisc, Inc. 2013 Fourth Ave., Seattle, WA 98121

Copyright:

All photographic digital images on this CD are owned by the aforementioned photographic resources or their licensors and are protected by the United States copyright laws, international treaty provisions, and applicable laws. No title to or intellectual property rights to the images on this CD are transferred to you. These sources retain all rights and are not to be used, digitally copied, transferred, or manipulated in any way. To do so is a violation of federal copyright laws.