Revision Notes

Budgeting and forecasting

  1. Budget is a plan (in money) relating to a defined time period hence a sales budget refers to planned income over one year.
  2. Purpose of a budget: it's a plan. It's a means of control. In creating the budget there has to be some co-ordination between departments. It also consists of a target by which performance may be measured. It therefore aids targeting - and communication.
  3. Budget may be zero based' i.e. no increase in the budget is acceptable unless fully justified. Thus it is a means of controlling expenditure.
  4. There are different types of budget: sales; cash; production' materials are examples.
  5. Cash flow forecast: a forecast as to future net cash flow. Net is cash inflow minus cash outflow. If net is positive then inflow>outflow.
  6. Method: total money in (sales revenue actually received; loans; share issues) minus total cash out (wages, materials, rent, rates) = net receipt/payment of cash.  This added to the opening (beginning) cash and the net result becomes the closing cash…which then becomes the opening cash next month.
  7. Things that can go wrong: debtors (people who owe you money) don't pay - ever; you must make sure in the cash budget you only include money actually paid and actually received; sales may be staggered i.e. 50% now; 25% next month and 25% the month after. The same for purchase. Make sure that you account for that.
  8. Forecasting in general may go wrong owing to external events such as changes in exchange rates (making exports more expensive and imports cheaper) and interest rates (affecting the cost of loans). Equally internal factors may lead to a rise in costs (unexpectedly) e.g. labour efficiency 9too slow) or a rise in wage costs. Scrap/waste may increase also affecting material costs.
  9. If there is a net cashflow and the closing balance is negative (remember it's a forecast) then it might be well advised to organise a loan for that period. Equally a forecast cash surplus could be banked to gain interest. A cash flow forecast is often needed by a bank before it will advance many loans.
  10. The cash flow forecast gives the firm an idea of liquidity.
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