Forecasting Short term (operating) Financial Requirements

Financial Planning and control process

Financial planning- involves making projections of sales, income, and assets based on alternative
production and marketing strategies and then deciding how to meet the forecasted financial
requirements

Financial control- moves on to the implementation phase dealing with the feedback and adjustment
process that is required:

a) To ensured the plans are followed

b) To modify existing plan in response to changes in the operating environment

Financial forecasting analysis begins with the projection of sales revenue and production cost.

In standard business terminology, a budget is a plan which sets forth the projected expenditure for a
certain activity and explain where the required funds will come from. Thus, the 1production budget
present a detailed analysis of the required investment in materials, labor and plant necessary you
support the forecasted sales level.

Budgeting

Is the act op preparing a budget. A budget is a financial plan of the resources needed to carry out task
and meet financial goals. it is also a quantities expression of the goals the organization wishes to achieve
ant the cost of attaining these goal. The of budgets to control firm activities is known as budgetary
control.

The purpose of the budget

A budget is description inquantitive usually monetary terms of a desired future result. the process of
preparing the budget requires management at all levels to focus on the future of the business entity.
The benefits that maybe realized from a budgeting program are

1) Defining broad objectives and goals and formulating strategies to achieve such objectives
2) Coordinating the activities of the organization by integrating the plan of the various parts
thereby pulling everyone in the same direction.
3) Allocating resources to those parts of organization where they can be used most effectively;
4) Communicating managements approved plans throughout the organization
5) Uncovering and preparing for potential bottleneck in the operations before they occur.
6) Motivating managers to achieve the desired results; and
7) Setting standard or benchmark for evaluating actual performance.
 ADVANTAGES AND LIMITATIONS OF BUDGETS

The advantages of budgeting include:

1) It forces planning and exposes situations in which plans of subcomponents are inadequate to
attain the total organizations objectives.
2) It allows a reiterative process to bring the goals of the organization and subcomponent into
agreement.
3) It provides a means of communicating organization goals down through the organization and
sub-unit operational limitations up though the organization
4) It provides a basis for financial planning, sub-unit coordination, resource acquisition, inventory
policy, scheduling and output distribution.
5) It provides a basis a by which activity can be monitored, with actual results being compared to
the planned results.

The Limitations of budgeting are:

1) Budgets tend to oversimplify the real situation and fail to allow for variations in external
factors. They do not reflect qualitative variables.
2) It is difficult to prepare a detailed budget for an organization that has never existed or for a
new division, product, or department of an existing firm.
3) There may be lack of higher and lower management commitment because of lack of
understanding of the fundamentals of budgets preparation and utilization.
4) The budget is only a representation of future plans or a to the means goal of profitable
activity and not an end in itself. It may interface with the supervisors style of leadership and
can therefore stifle initiative.
5) Budget reports usually emphasize results, not reasons.
TYPES OF BUDGETS

The types of budgets or the major composition of the master budget are:

1. The Operating budget

2. The Financial budget
3. The Capital budget

The following is a simplified subclassification of the above-mentioned types of budgets for a

manufacturing firm:

A. Operating Budget
1. Budgeted Income Statement
a) Sales budget
b) Production budgets
Materials cost budget
Direct labor cost budget
Factory overhead budget
Inventory levels
2. Cost of Sales budget
3. Selling and Administrative expenses budget
4. Financial expense budget
B. Financial Budget
1. Budgeted Statement of Financial Position
2. Cash budget
3. Budgeted Statement of Sources and Uses of Funds
C. Invested Budget