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Chapter 22: Business and Financial planning - Coggle Diagram
Chapter 22: Business and Financial planning
Principles of budgeting
Management involvement:
top mngmt responsible for the strategic mngmt of the firm.
top management should provide guidelines to middle and lower levels of management that could be used in drawing up budgets
Middle and lower management execute these plans
inputs of middle and lower mngmt must be taken into account by top mngmnt before plans and budgeting are finalized
Adaptability:
Circumstances can and will change as the budgets are implemented during a fin year
Budgets should not be so rigid that no changes can be made during the course of a year(with in reason)
Accountability according to responsibility:
Managers must be made accountable for their actions, but should also be given responsibility and be empowered to achieve the goals that been set.
Effective communication:
must succeed in getting realistic plans and budgets in place which will serve to motivate managers and employees
if not done, non-co-operation, mistrust and negativity will occur
Realistic expectations:
Realistic expectations have an important influence on the motivation of the managers who have been given the responsibility for their budgets
if budgets are unrealistic, the chances are the managers will not make serious attempts at meeting their budgets
Acknowledgement: Acknowledgement of performance is the key to successful budgeting. the closure management gets to matching budgeted figures the greater the acknowledgement
Follow-up and feedback: involve regular reports, the budgeted vs actual figures are compared and any deviations are investigated.
Formulating strategies, objectives and goal
Vision and Mission
The mission statement
must capture the reason for the existence of the firm of organization and serve as a guide for all its future activities by emphasizing its core business
Vision needs to indicate what dream of firms future is
Porters strategy Corporate strategy:
Cost leadership; firm manufactures or buys and sells standard products to the broad market at the lowest possible cost
Differentiation means firm makes a unique product from the standard product, charges higher price than other suppliers( Roll Royce)
Focus strategy, can be either cost focus or differentiation focus but will be targeted a specific markets.
Risk identification, management reviewing the firms objective to identify the risks the face,
Risks can either be an internal or external cause
Internal risks are caused by people, processes or systems
Externally the risk may be: PESTLE
Once risks are id'd, they then get assessed in terms of its probability and severity, Risk is now measured by probability X severity
The risk is scaled 1-5, Management keeps it that way by keeping their critical risks to a max of 5, then management makes a visual representation of the risks(risk matrix)
Operational planning starts with an estimate of the expected sales of the firm next year:
Profit planning and control is a short term aspect in fin management and the org carries it out through a budget
ProfPandC can be done by using pervious years expected sales and their actual sales on continuous basis
Variable costs increase as the number increase as the number of units manufactured and /or sold increases, i.e. Packaging cost for 1 pdt is R4, then 1000 pdts boosts up to R4000
Semi-variable cost has an element of both fixed and variable cost i.e. maintenance cost, some costs are scheduled others have incurred once equipment, machinery or systems fail and need to be replaced or fixed
Fixed cost don't increase with the amount of units produced
Budgeting process:
normally stars with the projection of the expected sales during the planning period:
Firms forecast is influenced by the GDP
Firm estimates its market share and the extent which a change in then GDP will benefit or harm sales in the industry
Economic variable such as intra movement, infla movement, exchange rate between countries, employment and governments budget deficit
An integrated budgeting system for a manufacturing business consists of two main types of budgets: operating and financial budgets.
Operating Budgets:
Cost budgets, 2 costs; mft cost budgets and discretionary cost budgets
Income budgets, are developed to measure marketing and sales effectiveness; Expected sales Quantity x Expected unit selling price of each pdt
Profit plan or profit budget; combines both costs and income budgets used by managers who have responsibilities for both expenses and income of their units
Financial Budgets;
perpared from info contained in the operating budgets integrate the fin planning of biz with op planning
Fin budget serves 3 major purposes:
Verifying the operating budget
reveal the financial actions that the business must take to make execution of its operating budgets possible
The indicate how the operating plans of the business will affect its future fin performance and position
Budgeted statement of financial performance;
has to be developed to evaluate the budgeted income relative to expenses in the short term and to evaluate plans which could improve profitability
Basic Steps required to prepare the budget statement:
estimate expected sales
estimate the expected CoS(cost of sales)
id the op expenses to achieve firms objectives
determine the payable intra during the next fin year
confirm tax rate of the firm
Compile the budgeted statement of fin performance
5 considerations of performing ratio analysis:
the dates of financial statements being compared have to correspond
best to use audited financial statements
data being compared must be developed in the same way
use of different accounting treatments may distort the results of the ration analysis, regardless of the method applied
notes in the fin stmnt usually explain some of the accounting policy decisions that mgmt. mad during the compilation of the stmnts, and may have a significant impact on the financial stmnt
