Scarcity=Innovation BUDGETING & Forecasting The Basic Framework of Budgeting A budget is a detailed...
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Transcript of Scarcity=Innovation BUDGETING & Forecasting The Basic Framework of Budgeting A budget is a detailed...
Scarcity=InnovationScarcity=Innovation
BUDGETING & BUDGETING & ForecastingForecasting
The Basic Framework of The Basic Framework of BudgetingBudgeting
A budget is a detailed quantitative plan for acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called budgeting.
2. The use of budgets to control an organization’s activity is known as budgetary control.
Planning and ControlPlanning and Control
PlanningPlanning – – involves developing involves developing objectives and objectives and preparing various preparing various budgets to achieve budgets to achieve these objectives.these objectives.
PlanningPlanning – – involves developing involves developing objectives and objectives and preparing various preparing various budgets to achieve budgets to achieve these objectives.these objectives.
ControlControl – – involves the steps involves the steps taken by management taken by management that attempt to ensure that attempt to ensure the objectives are the objectives are
attainedattained..
ControlControl – – involves the steps involves the steps taken by management taken by management that attempt to ensure that attempt to ensure the objectives are the objectives are
attainedattained..
Advantages of BudgetsAdvantages of Budgets
Goals and Objectives
Budgets
Compels managersto think ahead
Aids managers in coordinating their efforts
Provides definite expectations that are the best framework to evaluate performance
Advantages of BudgetsAdvantages of Budgets
Advantages of BudgetingAdvantages of Budgeting
Advantages
Define goalDefine goaland objectivesand objectives
Uncover potentialUncover potentialbottlenecksbottlenecks
CoordinateCoordinateactivitiesactivities
CommunicateCommunicateplansplans
Think about andThink about andplan for the futureplan for the future
Means of allocatingMeans of allocatingresourcesresources
Human Factors in BudgetingHuman Factors in Budgeting
The success of budgeting depends upon three The success of budgeting depends upon three important factors:important factors:
1.1. Top management must be enthusiastic and committed to Top management must be enthusiastic and committed to the budget process.the budget process.
2.2. Top management must not use the budget to pressure Top management must not use the budget to pressure employees or blame them when something goes wrong.employees or blame them when something goes wrong.
3.3. Highly achievable budget targets are usually preferred Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget when managers are rewarded based on meeting budget targets.targets.
The success of budgeting depends upon three The success of budgeting depends upon three important factors:important factors:
1.1. Top management must be enthusiastic and committed to Top management must be enthusiastic and committed to the budget process.the budget process.
2.2. Top management must not use the budget to pressure Top management must not use the budget to pressure employees or blame them when something goes wrong.employees or blame them when something goes wrong.
3.3. Highly achievable budget targets are usually preferred Highly achievable budget targets are usually preferred when managers are rewarded based on meeting budget when managers are rewarded based on meeting budget targets.targets.
Budgeting ExampleBudgeting Example
Royal Company is preparing budgets for the quarter ending Royal Company is preparing budgets for the quarter ending June 30.June 30.
Budgeted sales for the next five months are:Budgeted sales for the next five months are: April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units. 15,000 units.
The selling price is $10 per unitThe selling price is $10 per unit..
Royal Company is preparing budgets for the quarter ending Royal Company is preparing budgets for the quarter ending June 30.June 30.
Budgeted sales for the next five months are:Budgeted sales for the next five months are: April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units. 15,000 units.
The selling price is $10 per unitThe selling price is $10 per unit..
The Sales BudgetThe Sales Budget
The individual months of April, May, and June are summed to obtain the total projected sales in units
and dollars for the quarter ended June 30th
Sales ForecastingSales Forecasting
Step 1: Create the ROLL Out PlanStep 1: Create the ROLL Out Plan
Planning the Number of Doors/outletsPlanning the Number of Doors/outlets
Step 2: Find the Sales for each outletStep 2: Find the Sales for each outlet
A. On the basis of SPF for (EBO/LFRS):A. On the basis of SPF for (EBO/LFRS):
SPF= Sales /Area in square ft. SPF= Sales /Area in square ft.
1)1) Find out the benchmark SPF Find out the benchmark SPF
( Find for atleast two competitors and calculate average SPF)( Find for atleast two competitors and calculate average SPF)
2) Forecast Organization’s SPF in different scenarios.2) Forecast Organization’s SPF in different scenarios.
Sales ForecastingSales Forecasting
Different scenarios can be:Different scenarios can be: Pessimistic Scenario: 10% to 30% of Benchmark Pessimistic Scenario: 10% to 30% of Benchmark
SPFSPF
Normal Scenario: 40% to 70% of Benchmark SPFNormal Scenario: 40% to 70% of Benchmark SPF
Optimistic Scenario: 80% to 100% of Benchmark Optimistic Scenario: 80% to 100% of Benchmark SPFSPF
Sales Forecasting Sales Forecasting
3) Forecast Sales= SPF * Area 3) Forecast Sales= SPF * Area
Step 3:Step 3:
Cumulate the Sales of all the Outlets.Cumulate the Sales of all the Outlets.
Sales ForecastingSales Forecasting
B. On the basis of Quantities for (MBOs)B. On the basis of Quantities for (MBOs)
1)1) Find out the benchmark Quantity sold per Find out the benchmark Quantity sold per monthmonth
( Find for atleast two competitors and calculate ( Find for atleast two competitors and calculate average quantities sold)average quantities sold)
2) Forecast Organization’s Quantity sold in 2) Forecast Organization’s Quantity sold in different scenarios.different scenarios.
Sales ForecastingSales Forecasting
Different scenarios can be:Different scenarios can be: Pessimistic Scenario: 10% to 30% of Quantity Pessimistic Scenario: 10% to 30% of Quantity
soldsold
Normal Scenario: 40% to 70% of Quantity soldNormal Scenario: 40% to 70% of Quantity sold
Optimistic Scenario: 80% to 100% of Quantity Optimistic Scenario: 80% to 100% of Quantity sold. sold.
Sales Forecasting Sales Forecasting
3) Forecast Sales= ASP * Quantity Sold.3) Forecast Sales= ASP * Quantity Sold.
Step 3:Step 3:
Cumulate the Sales of all the Outlets.Cumulate the Sales of all the Outlets.
Computation of ASPComputation of ASP
Step 1Step 1
Identify key product categories Identify key product categories Step 2Step 2
Decide the pricing of each categoryDecide the pricing of each category
( Competitive Benchmarking)( Competitive Benchmarking) Step 3Step 3 Indentify the Weightage of each categoryIndentify the Weightage of each category
Computation of ASPComputation of ASP
Key Product Categories/Business Verticals Weights Price W*P
Q1 ( Say T-Shirts) 20% 10000 2000
Q2 ( Say Gift Items) 40% 15000 6000
Q3 ( Say Accessories) 20% 20000 4000
Q4 ( Say Bags) 20% 5000 1000
ASP= SUM of (W*P)= 13000
Computation of ASP: Year 1
Purchases BudgetPurchases Budget
Budgeted purchases = Desired ending inventory+Sales– Beginning inventory