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Note 12: Budgeting

Terms in this set (15)

Budget
A detailed plan that specifies inflows and outflows of resources during a period. A good budget requires forecasting skills, knowledge of cost behavior, and an ability to see how an organization fits together.
Uses of Budgets
Planning
- Formulation of strategy and business plan
- Allocation of scarce resources
- Coordination of resources

Control
- Guide for worker behavior
- Basis of ex post performance evaluation

Feedback Loop for Performance Evaluation
- Budget variance
Budget Variance
Actual Results vs. Budgeted Results
Critical Questions to Ask When Preparing a Budget
- Who should provide input? Participatory or non-participatory?
- How attainable should budget amounts be? Should there be slack?
- Start with last year's numbers, a minimum level approach, or zero-based budgeting?
- What is the overriding criterion? Profit, sales, or some other metric?
- Should the budget for planning and resource allocation be used for control, or should two budgets be created?
- Should spending budgets lapse?
- If budget is used for spending authority, should it be by line item or overall amount?
Spending Budget Lapse
Spending authority for any surplus ends at period end
Typical Components of a Master Budget (Retail)
- Sales forecast
- Operating schedules
- Capital expenditure budget
- Financing dividend budget
- Cash budget
- Pro forma financials
Hotel Budget Timeline (Hypothetical - Calendar Year End)
- August: Prepare a sales forecast for rooms, then F&B
- September: Prepare departmental resources budgets, such as rooms and F&B
- October: "Roll up" or combine departmental budgets and prepare pro formas
- November: Board of Directors meet to approve or modify budgets
- December: Modifications made and budgets distributed
Components of a Hotel Sales Forecast
- Current bookings for upcoming budget year
- Prior period performance
- Economic forecast
- Special events/holidays
- Strategy and business initiative changes
- Changes in competitive environment
- Changes in regulations
Sequence for Operating Budgets and Pro-forma Financials (Retail)
1. Create a sales forecast
2. Forecast purchases in units
3. Forecast income
4. Forecast cash from operations, then adjust for capital expenditures, debt, and dividends
5. Forecast balance sheet
6. Test if goals and covenants are met
Growth in Sales of Existing Stores
- Inflation
- Product mix
- Economy
- Holidays/events
- Days in period
- Local demand
Sales Increase Due to New Stores
- Growth in units
- J Curve effects
- Location effects
- Items mentioned for same store sales growth
Forecasting Sales for Retailers that have Multiple Units
Period's Sales Forecast = Last Year's Period Sales + Growth in Sales of Existing Stores + Sales Increase due to New Stores
Understanding the Timing of Operating Cycle Cash Flows
For every item that is sold by seller there may be four transaction dates:
1. Date raw material/merchandise is purchased by seller (payable)
2. Date the raw material/merchandise is paid for by seller (cash disbursement)
3. Date item is sold to buyer (revenue and expense)
4. Date buyer pays (cash receipt)
Economic Order Quantity
Determining the optimal inventory to purchase at one time requires balancing the costs of holding inventory against the cost of ordering inventory. Holding costs may include items such as storage, insurance, security, and obsolescence. Ordering costs include clerical costs, transportation, and receiving.
Just-in-Time (JIT)
An inventory strategy firms use to increase efficiency and decrease waste by acquiring inventory only as it is needed for production. JIT is called a pull system, as inventory is only ordered when there is a demand and then is quickly moved through the production process. Benefits include reduced inventory holding costs and a less complex production environment, but to succeed you need a competent supplier.
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