Budgeting control and Reconciliation management.pptx

This is a presentation of Budgetary control principles. It shows how plan and manage budgetary process in organizations,instituting control measures of finances including early detection of budget overruns through frequent reconciliations of spends. This presentation is relevant to finance officers,managment accounts in budget preparations,internal auditors as well.

1. BUDGETING CONTROL AND RECONCILIATION MANAGEMENT WORKSHOP AFTER FORTY HOTEL-NAIROBI BRAINSTORM MANAGEMENT CONSULTANTS LTD 10 TH TO 12 TH APRIL 2024

2. At the end you should be able to: Identify the nature of expenses and incomes and discuss how to prepare and implement a budget Create a proper control tool over financials and prepare an operating budget that is appropriate to your organization Manage cash flow to meet your organization's financial obligations Determine short and long term financial needs to assess current financial situation. How to effectively manage cash and working capital to reduce costs and improve cash flow Preparing and presenting cash flow statement in accordance with the accounting standards Hands-on-approach in the preparation of cash budget and project evaluation Formulate financial plans aligned to overall organizational strategies. Understand how a budget relates to key financial statements: balance sheet, income statement and cash flow statem ent BUDGETING CONTROL AND RECONCILIATION MANAGEMENT

3. INTRODUCTION: For effective running of a business, management must know: where it intends to go i.e. organizational objectives how it intends to accomplish its objective i.e. plans whether individual plans fit in the overall organizational objective. i.e. coordination whether operations conform to the plan of operations relating to that period i.e. control “Budgetary control is the device that a company uses for all these purposes.”

4. Definitions Budget is a detailed plan of operations for some specific future period. According to Gordon, a budget may be defined as “a predetermined detailed plan of action developed and distributed as a guide to current operations and as a partial basis for the subsequent evaluation of performance ”. Budgeting, planning and forecasting (BP&F) is a three-step process for determining and detailing an organization's long- and short-term operational or financial goals .

5. Definitions cont .. Planning - outlines the company's financial direction and expectations for the next three to five years. Budgeting - documents how the overall plan will be executed month to month, specifying expenditures. Forecasting - uses accumulated historical data to predict financial outcomes for future months or years.

6. Budgets Versus Forecasts Budgets Forecasts Create: Annually Annually Update: Quarterly Weekly / Monthly Purpose: Tells you where you want to go Tells you where you are at and where you will likely go given your current heading Best Used: Goal setting, incentives Managing day to day operations Who: Collaborative company / department / t eam effort Limited group to allow for faster turn around times Importance in Decision Making Less More

7. Budget Versus Forecast The “Budget” The “Forecast”

8. Use of Budgets in Planning and Control The entire planning and control process of many companies is built around budgets .

9. Planning Budgets are useful because they enhance: Communication. Coordination. The process of developing a budget forces managers to consider: Goals. Objectives. Specify means of achieving them .

10. Control Budgets are useful because they provide a basis for evaluating performance. Performance evaluation is carried out by comparing actual performance with planned or budgeted performance. Significant deviations from planned performance are associated with three potential causes.

11. Control: Significant Deviations From Planned Performance Are Associated With Poorly conceived budgets. Business conditions may have changed. Managers that have done a particularly good or bad job managing operations .

12. Role of Budgets in Planning and Control Process

13. Purposes of Budgeting The system of budgets serves as the comprehensive financial plan for the organization as a whole .

14. Advantages of budgeting Budgeting forces management to plan for the future—to develop an overall direction for the organization, foresee problems, and develop future policies. Budgeting helps convey significant information about the resource capabilities of an organization, making better decisions possible. Example: A cash budget points out potential shortfalls. Budgeting helps set standards that can control the use of a company’s resources and control and motivate employees. Budgeting improves the communication of the plans of the organization to each employee. Encourage coordination because the various areas and activities of the organization must all work together to achieve the stated objectives

15. Developing the Budget Budgets are prepared for Departments. Divisions. Company as a whole. The Budget Committee is responsible for approval of the budget: Senior managers President CFO Various vice-presidents Controller.

16. Developing the Budget (Continued) Top-down approach is where goals are pushed down from top management. Bottom-up approach is where lower-level managers are the primary source of information used in setting the budget.

17. Budget Time Period Budgets range from months to several years or more. Key point is that there is an inverse relationship between” Length of the budget period. Detail contained within the budget .

18. Zero Base Budgeting Zero Base Budgeting (ZBB) is a method of budget preparation which begins each period with a clean slate. Managers must start from zero and justify budgets every period. Used in government budgeting. Not commonly used in business .

19. The Master Budget Master Budget (comprehensive) Includes: Sales budget. Production budget. Direct materials budget. Direct labor budget. Manufacturing overhead budget. Selling and administrative budget.

20. The Master Budg et Master Budget Includes: Capital acquisitions budget. Cash receipts and disbursements budget. Budgeted income statement. Budgeted balance sheet.

21. The Master Budget: Graphic

22. Sales Budget Sales budget is the first step in the budget process. It comes first because other budgets cannot be prepared without an estimate of sales. Example: production estimates are based on forecast sales.

23. Sales Budget (Continued) Companies use a variety of methods to estimate sales: Econometric models. Previous sales trends. Trade journals and magazines. Sales force estimates.

24. Production Budge t Production forecasts are based on the following relationships : Finished units to be produced = expected sales in units + desired ending inventory of finished units – beginning inventory of finished units

25. Manufacturing Overhead Budget Cost per unit of production of each variable cost item is multiplied by the quantity of units produced. Fixed costs remain relatively constant .

26. Selling and Administrative Expense Budget Selling and administrative expense budgets include: Salaries. Advertising. Office expenses. Other general expenses.

27. Budgeted Income Statement Sales figures come from the sales budget. Cost of goods sold is based on unit cost of production (and the direct materials budget). Labor cost information comes from the direct labor budget. Overhead cost information is provided by the manufacturing overhead budget provides .

28. Capital Acquisitions Budget Acquisitions of capital assets such as: Property. Plant Equipment. Must be carefully planned because they consume substantial cash reserves.

29. Cash Receipts and Disbursements Budget Managers plan for the Amount of cash flows and the Timing of cash flows. VERY important budget because... The timing of cash inflows and outflows may diverge substantially from the income statement.

30. Budgeted Balance Sheet The last component of the master budget. A function of all of the other budgets. Sometimes referred to as a pro-forma balance sheet. Used to assess the effect of planned decisions on future financial position.

31. 31 Chapter 12: Cash Mgt Cash Management Cash management – forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly. Young, growing companies are “cash sponges.” Know your company’s cash flow cycle.

32. The Cash Flow Cycle Order Goods Day 1 Receive Goods 15 Pay Invoice 40 14 25 218 178 Sell Goods* Deliver Goods 221 3 Customer Pays** Send Invoice 230 9 280 50 Cash Flow Cycle = 240 days * Based on Average Inventory Turnover: 365 days = 178 days 2.05 times/year ** Based on Average Collection Period: 365 days = 50 days 7.31 times/year

33. Budgetary Control In addition to: Planning Communicating goals Coordinating activities Budgets also facilitate control of operations.

34. Budgets as A Standard For Evaluation Budgets facilitate control by providing a standard for evaluation. The standard is the budgeted amount against which actual results are compared. Differences between budgeted and actual amounts are called budget variances . Material differences between actual and budgeted should investigated.

35. Static and Flexible Budgets Make sure that the level of activity used in the budget is equal to the actual level of activity. Production budgets are a function of planned sales. If sales suddenly, production must increase to meet demand , thus total variable production costs will rise.

36. Static and Flexible Budgets A static budget is not adjusted for the actual level of production and is not suited for performance measurement. A flexible budget is a set of budget relationships that can be adjusted to various activity levels. It is suited for performance measurement .

37. Investigating Budget Variances Variances may have three causes: May be ill conceived Conditions have changed Job performance Variances should be investigated. Management by exception is an approach that is economical and often used. Only exceptional variances are investigated.

38. Conflict in Planning and Control Uses of Budgets Conflict is inherent in the planning and control uses of budgets. Result is that managers: Pad their budgets. Shift income between accounting periods to increase their compensation.

39. Why Budget-Based Compensation Can Lead To Budget Padding and Income Shifting Hurdle bonuses and variable bonuses are commonly used. Two problems: Managers have an incentive to “pad” their budgets resulting in “slack” budgets that are easy to achieve. Managers have an incentive to shift income from one accounting period to another to achieve “hurdle” targets.

40. Evaluation, Measurement, and Management Behavior M anagers pay close attention to how their performance is measured and evaluated. Budgets are usually measured in dollars and cents. Some types of non-monetary measures of performance are likely to be advantageous. “ You Get What You Measure !”

41. END THANKS A LOT !