Planning is primarily the responsibility of management and can be defined as a set of actions to formulate the scope and direction of future activities and operations.
Confirming that the budget objectives are consistent with organisational policies and procedures is an important part of the planning process. Outline the steps that will be taken to ensure that targets and outcomes are met. Discuss how corporate governance will be used to guide decision-making and manage risks associated with the budget.
Ensuring that budget objectives are consistent with organisational policies and procedures is critical for achieving targets and outcomes. The first step is to develop a clear understanding of the organisation's goals, values, and principles. This information should be used to create a budget development framework aligned with corporate governance principles. Risk management processes should also be in place to identify and mitigate any potential risks associated with the budget. Finally, regular monitoring and reporting will help ensure that goals are met, and stakeholders are informed of progress.
Each organisation will have specific organisational policies and procedures that need to be followed when establishing the budget objectives, including any strategic planning factors.
Enhance your understanding of different approaches to budgeting by watching the following 6-minute video.
Strategic planning factors include the following:
- The reason why the business operates
- The type of business
- The processes to develop the business
- Methods to develop the business more effectively and efficiently
- The location of this business
Once the strategic direction is finalised and agreed upon, targets and objectives for each department can be set and quantified in financial terms by implementing budgets.
Below is a cash budget for a small regional retail store for the quarter ended 31 March. The figures include GST and represent anticipated cash received and paid for the business's operations during the quarter.
Cash budget for three (3) months ending 31 March.
| January | February | March | Total | |
|---|---|---|---|---|
| Cash from operations | ||||
| Cash from sales | $150,000 | $165,000 | $170,000 | $485,000 |
| Cash for operations | ||||
| Cash for purchases | $55,000 | $62,000 | $70,000 | $187,000 |
| Wages | $40,000 | $43,000 | $50,000 | $133,000 |
| Services - electricity and telephone expenses | $11,000 | $13,000 | $14,000 | $38,000 |
| Rent | $15,000 | $15,000 | $15,000 | $45,000 |
| Miscellaneous costs | $3,000 | $4,000 | $5,000 | $12,000 |
| Advertising | $5,000 | $5,000 | $5,000 | $15,000 |
| Total cash for operations | $129,000 | $142,000 | $159,000 | $430,000 |
| Net surplus/deficit | $21,000 | $23,000 | $11,000 | $55,000 |
| Opening cash at bank | $25,000 | $46,000 | $69,000 | $25,000 |
| Closing cash at bank | $46,000 | $69,000 | $80,000 | $80,000 |
Table 1: Cash budget for three (3) months
The surplus/deficit total is equal to the sum of the cash received for the operations of the business, less the sum of the cash expended for the operations of the business.1
By using a spreadsheet, figures can be manipulated to reflect changes in circumstances for the quarter.
A column can be added to the budget to include actual figures for the quarter as follows:
| Jan | Feb | Mar | Total | Actual | |
|---|---|---|---|---|---|
| Cash from operations | |||||
| Cash from sales | $150,000 | $165,000 | $170,000 | $485,000 | $480,000 |
| Cash for operations | |||||
| Cash for purchases | $55,000 | $62,000 | $70,000 | $187,000 | $190,000 |
| Wages | $40,000 | $43,000 | $50,000 | $133,000 | $132,000 |
| Services - electricity and telephone expenses | $11,000 | $13,000 | $14,000 | $38,000 | $40,000 |
| Rent | $15,000 | $15,000 | $15,000 | $45,000 | $45,000 |
| Miscellaneous costs | $3,000 | $4,000 | $5,000 | $12,000 | $10,000 |
| Advertising | $5,000 | $5,000 | $5,000 | $15,000 | $16,000 |
| Total cash for operations | $129,000 | $142,000 | $159,000 | $430,000 | $433,000 |
| Net surplus/deficit | $21,000 | $23,000 | $11,000 | $55,000 | $47,000 |
| Opening cash at bank | $25,000 | $46,000 | $69,000 | $25,000 | $25,000 |
| Closing cash at bank | $46,000 | $69,000 | $80,000 | $80,000 | $72,000 |
Table 2: Updating budget with actual figures
A further column can be added to the budget to include variances between budget and actual figures as set out below:
| Jan | Feb | Mar | Total | Actual | Variance | |
|---|---|---|---|---|---|---|
| Cash from operations | ||||||
| Cash from sales | $150,000 | $165,000 | $170,000 | $485,000 | $480,000 | ($5,000) |
| Cash for operations | ||||||
| Cash for purchases | $55,000 | $62,000 | $70,000 | $187,000 | $190,000 | $3,000 |
| Wages | $40,000 | $43,000 | $50,000 | $133,000 | $132,000 | ($1,000) |
| Services - electricity and telephone expenses | $11,000 | $13,000 | $14,000 | $38,000 | $40,000 | $2,000 |
| Rent | $15,000 | $15,000 | $15,000 | $45,000 | $45,000 | $0.00 |
| Miscellaneous costs | $3,000 | $4,000 | $5,000 | $12,000 | $10,000 | ($2,000) |
| Advertising | $5,000 | $5,000 | $5,000 | $15,000 | $16,000 | $1,000 |
| Total cash for operations | $129,000 | $142,000 | $159,000 | $430,000 | $433,000 | $3,000 |
| Net surplus/deficit | $21,000 | $23,000 | $11,000 | $55,000 | $47,000 | ($8,000) |
| Opening cash at bank | $25,000 | $46,000 | $69,000 | $25,000 | $25,000 | |
| Closing cash at bank | $46,000 | $69,000 | $80,000 | $80,000 | $72,000 |
Table 3: Variances between actual and budget
The calculations performed above show a shortfall of $8,000 between the amount budgeted for net profit and the actual figure. The preparation of a budget may vary depending on the size and structure of the firm.
Firms may base figures on historical performance and produce a new budget by adjusting last year’s figures. The budget above is a “static budget” and is developed for one level of activity only. It is also a “period budget” covering a quarter of the year.1
Budgets are created for many different purposes in an organisation and can be classified based on information that needs to be documented and recorded.
Budgets can be classified as:2
| Static | Prepared for one level of activity only. |
|---|---|
| Flexible | Arranged in a manner that shows expected results for various levels of operation. This situation needs to be broken down into categories, e.g. fixed and variable costs. |
| Period | Prepared for a specific period, e.g. daily, monthly, quarterly. |
| Rolling or continuous | Continually updated so that it will always reflect plans for the same length of time, e.g. twelve (12) months. With rolling budgets, a new period, e.g. a month or quarter, is added, and the corresponding period just completed drops off. |
A master budget is a complete set or network of budgets used in an organisation. The master budget is a combination of budgets that reflect the integrated plans and expected financial results for all operations and departments of the organisation.
These budgets include:
- Sales budget
- Cost of goods sold budget
- Purchases budget
- Operating expenses budget, including administration, selling and financial expenses budgets
- Cash budget
- Income statement budget
- Balance sheet budget
The first budget customarily produced is the sales (trading organisation) or a fees budget (service organisation). This budget is an integral part of the process as it contains the estimated number of items sold or the expected revenue for the period. It influences cash flows, the value of purchases and marketing expenses.2
The diagram below sets out an example of a master budget for a service organisation:
Enhance your understanding by watching the following 11- minute video.
