Summary - notes Accounting and Finance for Non-Specialists
→ Define Budgeting briefly:
In the business planning process, long term objectives are determined, options to fulfill these
objectives are considered, then options are evaluated and the most appropriate one is selected,
and finally, long- and short-term plans (budget) are set.
Long-term plans for maybe five years into the future. Short term plans looking at the
following 12 months.
Budget is a short-term plan to achieve the business objectives which is prepared within the
frame of long-term plans.
Long term plans deal with:
♦ Markets that business seeks to serve
♦ Production/service rendering method
♦ What will the business offer to its customers
♦ Target levels of profits and returns to shareholders financial requirements and financing
methods
♦ Personnel requirements
♦ Bought-in goods and services requirements and sources
Budget: is a short-term plan expressed mainly in financial terms and is designed to convert the long-
term plans into an actionable blueprint for the future. The budget defines precise targets for:
Sales revenues and expenses
❖ • Cash receipts and payments
Short term credits to be given or taken
❖ • Inventories (stock) requirements
Personnel requirements
→ Annual budget usually broken down into monthly budgets.
→ A limiting factor is any aspect that stops business achieving its objectives and it's often the
limited ability of a business to sell its product, such as product shortage (shortage in labor or
material). Determining any possible limiting factor is very important when preparing budgets.
Budget is a plan not forecast because it has intention and determination to achieve objectives.
However, reputable forecasts may be important when setting budgets.
Master budget:
consists of budgeted income statement (profit and loss account) and balance sheet. Whereas cash flow
statement may be considered as separate master budget.
The following is an example of a master budget for a manufacturing business:
, Uses of budgets: how budgets help managers
❑ Budgets tend to promote forward thinking and possible identification of short-term problems:
Early identification of the potential problem gives managers time for calm and rational
consideration of the best way of overcoming it. The best solution to the potential problem may
only be feasible if action can be taken well in advance.
❑ Budgets can be used to help in coordination between various sections of a business: it is
crucially important for the activities of different sections of a business to be linked so that they
are complementary for each other's.
❑ Budgets can motivate managers to better performance. Define the required level of
achievement can be more motivating for managers than telling them to do their best, and also
relating their particular role to the business overall objectives. And as budgets are directly
derived from the corporate objectives, they make this possible.
❑ Budgets provide basis for control systems. Senior Managers can use budgets as yardstick to
compare actual performance with the desired or planned performance of more junior staff and
therefore a base for control is formed. Such a base enables the use of management by
exception technique, where senior managers spend most of the times dealing with staff or
activities who failed to achieve the budget.
❑ Budgets can provide a system of authorization for managers to spend up to a particular limit.
→ Define Budgeting briefly:
In the business planning process, long term objectives are determined, options to fulfill these
objectives are considered, then options are evaluated and the most appropriate one is selected,
and finally, long- and short-term plans (budget) are set.
Long-term plans for maybe five years into the future. Short term plans looking at the
following 12 months.
Budget is a short-term plan to achieve the business objectives which is prepared within the
frame of long-term plans.
Long term plans deal with:
♦ Markets that business seeks to serve
♦ Production/service rendering method
♦ What will the business offer to its customers
♦ Target levels of profits and returns to shareholders financial requirements and financing
methods
♦ Personnel requirements
♦ Bought-in goods and services requirements and sources
Budget: is a short-term plan expressed mainly in financial terms and is designed to convert the long-
term plans into an actionable blueprint for the future. The budget defines precise targets for:
Sales revenues and expenses
❖ • Cash receipts and payments
Short term credits to be given or taken
❖ • Inventories (stock) requirements
Personnel requirements
→ Annual budget usually broken down into monthly budgets.
→ A limiting factor is any aspect that stops business achieving its objectives and it's often the
limited ability of a business to sell its product, such as product shortage (shortage in labor or
material). Determining any possible limiting factor is very important when preparing budgets.
Budget is a plan not forecast because it has intention and determination to achieve objectives.
However, reputable forecasts may be important when setting budgets.
Master budget:
consists of budgeted income statement (profit and loss account) and balance sheet. Whereas cash flow
statement may be considered as separate master budget.
The following is an example of a master budget for a manufacturing business:
, Uses of budgets: how budgets help managers
❑ Budgets tend to promote forward thinking and possible identification of short-term problems:
Early identification of the potential problem gives managers time for calm and rational
consideration of the best way of overcoming it. The best solution to the potential problem may
only be feasible if action can be taken well in advance.
❑ Budgets can be used to help in coordination between various sections of a business: it is
crucially important for the activities of different sections of a business to be linked so that they
are complementary for each other's.
❑ Budgets can motivate managers to better performance. Define the required level of
achievement can be more motivating for managers than telling them to do their best, and also
relating their particular role to the business overall objectives. And as budgets are directly
derived from the corporate objectives, they make this possible.
❑ Budgets provide basis for control systems. Senior Managers can use budgets as yardstick to
compare actual performance with the desired or planned performance of more junior staff and
therefore a base for control is formed. Such a base enables the use of management by
exception technique, where senior managers spend most of the times dealing with staff or
activities who failed to achieve the budget.
❑ Budgets can provide a system of authorization for managers to spend up to a particular limit.
