Budgeting control and Reconciliation management.pptx

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

 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 statement
BUDGETING CONTROL AND RECONCILIATION
MANAGEMENT

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.”

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.

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.

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 / team
effort
Limited group to allow for
faster turn around times
Importance in Decision Making Less More

Budget Versus Forecast
The “Budget”
The “Forecast”

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

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

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

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

Role of Budgets in Planning and Control
Process

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

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

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

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

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

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

The Master Budget
Master Budget (comprehensive) Includes:
1. Sales budget.
2. Production budget.
3. Direct materials budget.
4. Direct labor budget.
5. Manufacturing overhead budget.
6. Selling and administrative budget.

The Master Budget
Master Budget Includes:
7. Capital acquisitions budget.
8. Cash receipts and disbursements budget.
9. Budgeted income statement.
10. Budgeted balance sheet.

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

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

Production Budget
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

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

Selling and Administrative Expense Budget
Selling and administrative expense budgets include:
1. Salaries.
2. Advertising.
3. Office expenses.
4. Other general expenses.

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

Capital Acquisitions Budget
1. Acquisitions of capital assets such as:
a. Property.
b. Plant
c. Equipment.
2. Must be carefully planned because they consume
substantial cash reserves.

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

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

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.

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

Budgetary Control
1. In addition to:
a. Planning
b. Communicating goals
c. Coordinating activities
2. Budgets also facilitate control of operations.

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

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

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

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

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

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

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

Budgeting control and Reconciliation management.pptx

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