Operational Budgeting and Profit Planning

Topics: Budget, Zero-based budgeting, Budgets Pages: 11 (2586 words) Published: April 25, 2014

Module 21: Operational Budgeting and Profit Planning
MBAAF 610 Paper

Introduction: Why Budget?

While a budget planning is a laborious process it is crucial for the success of any company. The budgeting process forces managers to be proactive in planning for the future while fostering communication and coordination within a company. Different departments must work together in order to develop a proper budget. A properly formulated budget will aid to define a company’s objectives and provides guidelines to avoid wasted actions. Also, risk can be mitigated when objectives and action plans are clarified through the budgeting process.

This article will identify the key components of a budget as well as the methodologies involved in the budgeting process. The influences of management behavior will be discussed followed by a brief example of bad budgeting practices and its consequences.

Master Budget
The master budget is a summary of a company's plans that sets concrete targets for sales, production, distribution and financing activities. Companies prepare cash budget not only for operating activities but also for investing and financial activities. This is because management should be aware in advance of any borrowing needs and when loans can be repaid. Budgets are interdependent because the figures of one budget are conventionally utilized in the preparation of another. Budget estimates are dependent on the nature of the business, its products and services, processes, organization, and management needs. It is a detailed model of the firm’s operating cycle that includes all internal processes which is developed into a cash budget, a budgeted income statement, and a budgeted balance sheet.

The Master Budget defines the organizations objectives and strategies. As well as allowing the company to realistically project future cash flows, it also smoothens the functioning of organizations operating cycle.

Disadvantages of developing a master budget is that it is both time consuming and highly complex. However, it should be noted that the advantages of a proper Master Budget far outweighs the disadvantages.

Components of the Master Budget
The Sales Budget includes the forecast of sales revenue, sale units and sales collection in the future market conditions.

The Purchase budget would include purchase of merchandise for sale and raw material for manufacturing. It is expressed in terms of sales dollars.

The Selling Expense Budget presents expenses the organization plans to incur in connection with sales and distribution.

The General and Administrative Expense Budget presents the expenses the organization plans to incur in connection with general administration such as the accounts department, the IT department, law etc.

The Cash Budget summarizes all cash receipts and disbursements expected to occur during the budgeting period. After a company makes sales predictions, an organization uses information regarding credit terms, collection policy, and prior collection experience to develop a cash collection budget. Other items included are an allowance for bad debt, cash sales, sales discount, allowance for volume discounts, and seasonal changes of sales prices and collections. The cash budget shows cash operations deficiencies and surplus expected to occur at the end of each month, which is used to plan for borrowing and loan payments.

Budgeted Financial Statements are pro forma statements that reflect the “as if” effects of the budgeted activities on the actual financial position of the organization. It reflects the results of operations assuming the budget predictions.

Budget Development in a Manufacturing Organization
Manufacturing organization converts the raw materials into finished goods and sells it to the customer for consumption. It prepares the master budget before production to make the...

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