The document discusses how to budget for capital expenditure, profit and loss, cash flow, and balance sheet. It outlines 6 steps to the budgeting process: 1) choosing a methodology, 2) setting assumptions and objectives, 3) budgeting capital expenditure, 4) budgeting profit and loss, 5) forecasting cash flow, and 6) budgeting the balance sheet. The right budget process depends on the size of the business, ranging from startups to small to medium to large businesses.

1. The Art of Budgeting
How to easily and efficiently Budget
your Capital Expenditure, Profit & Loss,
Cash Flow and Balance Sheet.
Eric de Diesbach
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2. Table of Contents
• Relevance
• Budgeting Steps
– Assumptions & Objectives
– Capital Expenditure
– Profit & Loss
– Cash Flow
– Balance Sheet
• The Right Budget Process
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3. Relevance
• RBA, Business Failure in Australia:
– 30% in the first year
– 73% in the first five years
• Dun & Bradstreet:
– 2,898 businesses collapsed in the June 2011 Quarter,
up 25% over 2010;
– Firms between 1 and 49 employees were hit hardest.
• Every commercial enterprise needs to budget:
– Any legal structure (ST, P, T, Pty Ltd, Ltd)
– Any Industry Sector
– Wherever located in the country
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4. The Budgeting Steps
• Step 1: Budget Methodology
• Step 2: Assumptions & Objectives
• Step 3: Capital Expenditure
• Step 4: Profit & Loss
• Step 5: Cash Flow
• Step 6: Balance Sheet
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5. Step 1: Budget Methodology
• Traditional budgeting, Top/Down approach:
Using the last known figures and adjusting for
changes/objectives starting with Revenues);
• Traditional budgeting, Bottom/Up approach:
Using the last known figures and adjusting for
changes/objectives starting with Profits all the
way up to Revenues);
• ‘Zero based Budgeting’: Starting with a blank
sheet of paper and determining what
Revenues and Expenses/Overheads should be.
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6. Step 1: Budget Methodology
• Traditional budgeting:
– Quicker, Easier
– But business may overpay for services
(Telecommunications, IT providers, etc.)
– Can result in increased inefficiencies and ineffective
processes
• ‘Zero based Budgeting’:
– Longer process
– More efficient at reducing expenses
– Better to allocate resources to functions and processes
that have the best outputs
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7. Step 2: Assumptions & Objectives
• Begin with the assumptions you have taken
and the objectives you have set:
– Marketing & Sales Objectives (Market share,
Marketing campaign, New products, Customer
Satisfaction Level)
– Production Improvements (Defects reduction,
Quality control)
– Financial Objectives (Profitability, Stock
Turnover, Creditors’ Days)
– Expenses Up or Down (Wages, Advertising,…)
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8. Step 3: Capital Expenditure Budget
• Purchase of a Fixed Asset or addition to the
value of an existing Fixed Asset
• Capitalisation (in the Balance Sheet) as the
asset has a value over $1,000 and a useful life
beyond the end of the financial year
• Not a Tax Deduction in the year of acquisition,
but depreciated over several years
• Full cash flow effect, but limited tax deduction
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9. Step 3: Capital Expenditure Budget
• You need to decide/budget:
– Which item?
– When?
– Leasing? (P&L  Impact spread over several
Years )
– Outright Purchase? (Cash Flow + B/S  Full
impact in one hit?
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10. Step 4: Profit & Loss Budget
Cost of Sales
Sales
&
Revenues Overheads
Gross
Profit
Non Operating Inc./(Exp.)
Operating Profit Taxes
Profit Before
Tax NPAT
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11. Step 4: Profit & Loss Budget
• Either using the last known P&L and adjusting
for changes starting with Revenues
(Traditional budgeting);
• Or using the last known P&L and setting the
objectives starting with of Profits, all the way
up to Revenues (Traditional budgeting with
emphasis on Profits);
• Or starting with a blank sheet and determining
Revenues and Expenses/Overheads (Known as
‘Zero based Budgeting’).
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12. Step 5 = Cash Flow Forecast
P1 P2 Etc.
Proceeds from Sales
Other Cash In (Sales of PP&E, Funding)
Total Cash In
Purchased of Goods
Rent, Telecom.
Wages
BAS Payment
Total Cash Out
Net Cash Movement
Opening Balance
Closing Balance
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13. Step 5: Cash Flow Forecast
Cash Flow
250
200
150
100
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Cash In Cash Out Closing Balance
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14. Step 6: Balance Sheet Budget
Current Liabilities
Current Assets Overdraft
Cash Creditors
Debtors GST & Tax Liabilities
Inventories
Other Current Assets
Long Term Liabilities
Long Term Borrowings
Long Term Provisions
Fixed Assets
Property Plant & Equip.
Equity
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15. The Right Budget Process
Start Up Small Medium Large
Business Size Business
Methodology
Objectives
Capex
Profit & Loss
Cash Flow
Balance
Sheet
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16. About the Presenter:
Eric de Diesbach
• Financial Management
• Capital Management
eric.dediesbach@informgroup.com.au
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