BUDGETING

  

              Budgeting involves setting financial goals and standards for an enterprise. The prmay objective of the budget is to establish a financial framework for the operations of the business. The accounting period for budget is usually either the calendar year or the fiscal year. As we noted, the fiscal year is any arbitrarily chosen twelve-month period that does not correspond to the calendar year. Many business have provisions for review and change of the budget more frequently, such as semiannually,quarterly, or even monthly.

A generally accepted  budgeting device is a flexible master budget. This budget foresees that management plans to operate the business at various levels of activity and that all the different activities of the enterprise are included in the financial forecast. Budgets for various sections of the company are gathered together into one overall budget . then, as a control device that permits monitoring of the company’s operations.

For our discussion, we will talk about a retail trade business. This type of enterprise purchases merchandise, sells those goods, pays its employees and its suppliers, and employs an administrative staff. It may also move into new headquarters or expand into new retail outlets. It must account for each activity. This is generally accomplished by means of separate budgets which then can be combined into a master budget.

                One of the activity budgets is the sales budget. Information about unit prices, that is, the price of one item of each kind of merchandise sold, and the expected sales volume are the important entries for this budget. If the business sells more than one item, a provision for the ales mix must be added. This, of course, is the mixture of the different kinds and style of goods sold by the retailer. A furniture store sells many different kinds of furniture with many different styles, and each piece of merchandise has its own unit price. In addition the furniture store may sell such goods as rugs, carpeting, or artificial flowers. The not only different kinds of medicines, but also magazines, books, stationery, candy, toacco, and so on.

                Similar item can be grouped to form a sales department. In the furniture store, one department might include dining-room furniture and another department might include badroom furniture. A separate budget is then prepared for each department. Separate budgets may also be related to geographical breakout, that is, different locations of retail outlets. There may also  be special budgets for different seasons; in retailing this might be the Christmas and Easter season, or the back-to-school period, or winter and summer sports seasons, depending on the kind of merchandise that was sold.

                Sales budgets are designed to be both flexible and complete. The sales figures are adjusted for various reasons: some merchandise is returned for credit; a small but significant volume is unusable becasuse of spoilage or damage; and further adjustment is necessary to account for allowances or discount. Allowances are special price adjustments for certain customers; discounts are prices that are generally  reduced, as when a store has a sale. All of these factors must be included in a complete sales budget. During changes in the business cycle, such as inflationary periods or recession, the principle of flexibility becomes extremely important. Prices are changed and allowances or discounts disappear or rise, depending on which change counteracts the adverse factors in the business cycle.

                The “mirror image” of the sales budget is the purchases budget, which is, of course, the budget for the goods that the business will have to buy first in order to sell. The purchases budget is prepared after the sales budget is completed and after the existing inventory of goods for sale has been evaluated. The volume of purchases, the unit prices, and the purchase mix all reflect the estimates included in the sales budget. The estimated prices for purchases are strongly influenced by the profit objective incorporated in the sales plan. The volume of purchases that is budgeted depends on the estimated sales volume. This is derived in turn from external and internal business trends that are expected to influence the enterprise.

                Contracts are important documents in the preparation of budget astimates. A contract with a supplier, either a manufacturer or a wholesaler, may be the basis for estimating unit costs. If the contract lapses, however, it may be that renewed at a higher price level, or a new source of supply may be necessary-again, often at a higher price. Contracts to which the company it self is not a party are often taken into account. If, for example, a railroad labor-management contract is due to expire, any company that obtains its goods by rail transportation must anticipate the effects of a possible strike. Trucking as an alternate form of shipment may lead to higher prices or to other complications, such as reduced or delayed shipments.

                The preparation and competent execution of a purchases budget often means the difference between business succe of failure. Large inventories lying idle in warehouses drain the resources of a retail establishment. All or most of the merchandise must be sold by the close of a certain season. This is particularly true of retailers such as clothing stores, in which fashion plays an important part. The timing of the purchases called for in the budget in such cases in critical. The timing should be coordinated with the sales budget, because buyers need a certain amount of lead time to acquire the merchandise and displaying it for sale.

                After taking care of sales and purchases, the enterprise must calculate the expenses of conducting the business. The budget is commonly referred to as the operating-expenses budget. In the case of a retail establishment, it consists of two parts: one for those expenses which are incurred in selling the merchandise, and one for general and administrative expenses. The estimates of sales and general expenses are usually prepared monthly.

                The preparation of the operating-expenses budget reflects how important it is for budgets to be based on well-defined organizational lines. Only in this manner is it possible to fix responsibility for incurring operating expenses. The sales budget and the purchases budget must be used in formulating the operating-expenses budget because these two major activities provide the justification for the size of the selling and administrative expenses. Companies other than retail business often break down their operating expenses into different categories, such as productions, research, development, sales, and advertising.

                Once the sales budget and the operating-expenses budget are prepared, the accountant is ready to determine the break-event point. The break-event point is the minimum volume of sales the company needs to have, given the estimated operating expenses, in order not to incur a loss. The accuracy of the break-event point depends on the skill with which the operating expenses have been estimated.

                The cash budget, on the other hand, is prepared on cash basis, estimating the accounting periods in which cash must be paid out or when it will be received. When preparing the cash budget, it is important to know what has been estimated in the sales, purchases, and expenses budgets in regard to receipts and disbursements because they will be summarized in the cash budget. Outstanding obligations at the beginning of the budget period are taken into account, and so are expected receipts from investment and collectible receivables that are expected to be received in the new accounting period.

                The cash budget is often prepared each month. It can then be revised each succeeding month, incorporating new factors that affect the cash flow of the business. A company must know how much cash it has on hand to meet its obligations or to enable it to avoid committing it self to obligations that it cannot meet.

                The estimated cost for new additions to plant facilities, or for replacement or improvement projects for the company’s fixed assets, make up the capital-expenditures budget. This budget may reflect a portion of a long-term planning project for this type of expenditure. A company may, for instance, have a five-year plan to improve and expand its plant facilities. The annual budget would then show only the part of the total amount to be spent during that particular year. This budget should therefore state whether changes in the rate of business activity will affect the long-term plan. For the benefit of management, the budget should indicate whether factors such as increased demand would make it desirable to speed up a long-term plan to expand production capacity; or, on the other hand, whether a reduction in business would make it desirable to slow down expansion or even stop it entirely.

                Any significant change from the preceding fiscal year should be discussed when the budget is presented. These differences can be expressed in a percentage of positive or negative change over the previous year or the last few fiscal years.

post by : Rony Sutiyanto