Primary sources of revenue information are those that have the highest probability of success in beingachieved in the revenue budget, and for which the company has a demonstrated ability to provide productsor services.
All of the preceding factors can have a considerable impact on the amount of planned ending inventory. Ifmore than one factor is impacting your business, you may find that you have conflicting issues that makeit more difficult to plan ending inventory levels. For example, a switch to a JIT system would likely reduceinventory, but a management decision to keep more inventory on hand for faster customer order fulfillmentwould have an opposite effect. Consequently, it can be difficult to sort through the differing issuesto arrive at an appropriate level of planned ending inventory.
This budget is comprised of the compensation of the sales and marketing staff, sales travel costs, and expenditures related to various marketing programs. It is closely linked to the revenue budget, since the number of sales staff (in some industries) is the prime determinant of additional sales. Further, marketing campaigns can impact the timing of the sales shown in the revenue budget.
These expenses are primarily comprised of compensation,followed by office expenses. A large proportion of these expenses are fixed, with someheadcount changes driven by total revenues or other types of activity elsewhere in the company.
Though not included in this book, some companies like to separate facilities costs into a separatebudget. It is useful to segregate this information into a separate budget whenthere is a facilities manager,since this person will want to see the expenses for which he isresponsible. Otherwise, facilities expensesare usually entered into either the production budget or the administration budget, or both. The facilitiesbudget is usually one of the last budgets to be constructed, since it depends upon the number of employeesto be housed and the requirements for production and warehousing facilities, all of which are establishedin other parts of the budget.
Constraints: If there are bottlenecks within the company that interfere with its ability to generateadditional sales, does the budget provide sufficient funding to impact these bottlenecks? If not,the company can budget whatever results it wants, but it has virtually no chance of achievingthem. For example, a machine in the production area may be a bottleneck that keeps a companyfrom producing any more products – if you do not deal with the bottleneck, sales will not increase,irrespective of improvements anywhere else in the company.Pacing: If a company intends to expand operations in new geographical areas, or to open new distributionchannels, or to offer entirely new products, it should build into the budget an adequateamount of time to ramp up each operation. This issue of pacing should include consideration ofthe sales cycle of customers, which may be extremely long. For example, expanding the customerbase to include municipal governments may be an excellent idea, but may require a sales cycle ofgreater than a year, given the advance notice needed by governments to budget for purchases.Financing: If a company has a hard cap on the amount of funding that it will have available duringthe budget period, then the requirements of the budget must not exceed that funding limitation.This is one of the more common reasons for budget iterations, especially in small companies,where it may be difficult to obtain new funding.Historical metrics: If a company has been unable to achieve certain performance benchmarks inthe past, what has changed to allow it to do so now? The chances are good that the company willstill have trouble improving beyond its historical ability to do so, which means that the budgetshould be adjusted to meet its historical metrics. For example, if a business has historically beenunable to generate more than $1 million of sales per salesperson, the preliminary budget shouldcontinue to support a similar proportion of sales to salespeople. Similarly, a historical tendencyfor accounts receivable to be an average of 45 days old prior to payment should probably be reflectedin the preliminary budget, rather than a more aggressive collection assumption.
Budget-Building Fundamentals and Dynamics
Preparing The Master Budget Sub-Accounts- Session TWO -
Section PageThe Revenue Budget 3The System of Budgets 12Budgets Set 1 14The Ending Finished Goods Inventory Budget 15The Production Budget 18The Direct Labor Budget 20The Manufacturing Overhead Budget 23The Direct Material Budget 27The Cost of Goods Sold Budget 29Budget Set 2 31Sales and Marketing Budget 32The Administration Budget 35The Research and Development Budget 38Outline
Section PageBudget Set 3 41Intro to the Capital Budget 42Intro to the Financing Budget 43Intro to the Master Budget 44The System of Budgets - Conclusion 46The System of Budgets for a Multi-Division Co. 47Operating Decisions Impacting The System of Budgets 52Reasons for Budget Iterations 59Skewness of Budget Results 60Budget Scenarios 61Outline
The Revenue Budget (8/9)Primarysources ofrevenueinfo.HistoricalsalesContractrestrictionsSalespromotionsSales ofexistingproducts tonew regionsIncrementalproductsales
Budgets Set 1Once the revenue budget is in place, a number of additionalbudgets are derived from it that relate to the productioncapabilities of the company; production-related budgetsinclude:Ending inventorybudgetProduction budgetDirect labor budgetManufacturingoverhead budgetDirect materialsbudgetCost of goods soldbudget
The Ending Finished Goods InventoryBudget (2/4)EndingInventoryAssumptionsCustomerserviceInventoryrecordaccuracyManufacturingplanningProduct lifecycleSeasonal salesSupply chaindurationWorkingcapitalreduction
The Manufacturing Overhead Budget (2/4)Expenses normallyconsidered part ofmanufacturingoverhead include:DepreciationFacilities maintenanceFactory rentFactory utilitiesIndirect materials, such as suppliesInsurance on the factory & inventoryMaterials management staff compensationPersonal property taxes on manufacturing equipmentProduction employee payroll taxes & fringe benefitsProduction supervisor compensationQuality assurance staff compensation
Sales and Marketing Budget (1/3)Sales & Marketing Budget is comprised ofSales & marketingstaffSales travel costsOther variousmarketingprograms’expendituresSales and MarketingBudgetRevenue Budget
The Administration Budget (1/3)Administration Budget includesExecutivesexpensesAccountingexpensesTreasuryexpensesHR expensesAdministrationstaff expenses
Intro to the Master Budget (2/2)(Details in session FOUR)Revenue BudgetProduction BudgetManufacturingOverhead BudgetCost of Goods SoldBudgetBudgeted FinancialStatementsDirect LaborBudgetR&D BudgetCapital BudgetRevenueBudgetDirect MaterialsBudgetRevenueBudgetFinancingBudgetAdministrationBudget
Operating Decisions Impacting The Systemof Budgets (1/7)Operatingdecisions that mayhave multipleimpacts on thebudget include:Add new SalesterritoryIncrease/Decrease inInventoryLevelsRelax CredittermsIncrease/Decrease inPrices
Reasons for Budget IterationsSeveral goodreasons why the1st version of acorporate budgetis sent back foradditional workHistoricalmetricsFinancingPacingConstraints
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