Budgetary planning What is budgeting Budgeting is a

Budgetary planning

What is budgeting? • Budgeting is a quantified plan of action for a specific future period. Budget period is commonly the accounting year. (Subdivided in to 12 months or quarterly control period).

Function of organizational budgeting Core functions of budgeting q Ensure the achievement of organization strategic objectives q Annual planning process q Established the foundation of control or performance evaluation system Alternative functions q Co-ordinate activities q Communicate the ideas and plans q Provide a framework for responsibility accounting q Motivate the employees to improve the performance

Corporate planning and Budgeting Vision Mission Corporate goals Corporate plan Annual objectives Annual plan

Performance evaluation • Budget is one of the main financial performance evaluation tool in financial management of the company. It ensures that the organization strategy is executed as planed. • Variance or deviations are identified and get the right action to achieve the pre determined organization objectives.

Dash board reporting/performance reporting Budget Actual Variance % Sales 5, 000. 00 4, 000. 00 1, 000 (A) 80% Operational cost 3, 000. 00 3, 300, 000. 00 300, 000 (A) 110% Profit 2, 000. 00 700, 000. 00 1, 300, 000 (A) 35%

Approaches to budgeting • Conventional incremental approach to budgeting • Zero based budgeting

Conventional incremental approach to budgeting • Incremental budgeting is the traditional budgeting method whereby the budget is prepared by taking the previous period budget allocation or the actual performance as a base, with incremental amounts then being added for the new budget period. • These incremental amounts will include adjustments for things such as inflation, or planned increases in sales prices and costs.

Incremental Budgeting Method 2017/2018 Increment /Growth 2018/2019 Sales 100 million 20% 120 million Operating expenses 40 million 5% 42 Million Budget profit 60 million 78 Million

Zero based budgeting • Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a "zero base, " and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

Steps of budgetary planning process • • • Ø • • Identification of the principle budget factor Preparation of a sales budget Preparation of a Finish good inventory budget Preparation of a production budget Preparation of a resources budget ( Raw material, capital expenditure, labour ) Preparation of overhead budget Production overhead, Marketing, administration overhead, research and development division overhead Co-ordination and review the budget Preparing Master budget Board approval Budget performance review

The Master Budget is a set of interrelated budgets that constitutes a plan of action for a specified time period. 12