Budgeting concept Budgeting is a process of looking at a business estimated incomes (the money that comes into the business from selling products and services) and expenditures (the money that goes out form paying expenses and bills) over a specific period in the future. It allows a business to see if they will be able to continue operating at their expected level with these projected incomes and expenditures. A budget is often drawn up for a financial year and contains information about anticipated sales and associated business costs within that period. By using this budget, a business can see how well they are expecting to perform within the year and actual performance can be monitored against this original proposed plan. Budgetary control system

budgetary control is a system of procedures used to ensure that an organization's actual revenues and expenditures adhere closely to its financial plan. The system typically involves setting personal goals for managers that are based on the budget, along with a set of rewards that are triggered when the goals are attained. In addition, budget versus actual reports are routinely issued to anyone having responsibility for a line item in the financial statements; they are then expected to take action to correct any unfavorable variances. Further, the results of the business are closely monitored by a budget committee, which provides feedback to managers whenever actual results threaten to fall below expectations. The budget may even be loaded into the purchasing and payables software, so that purchases are immediately flagged if they exceed the budgeted amount. Different types of budgets 1. Master budget A master budget is an aggregation of lower-level budgets created by the different functional areas in an organization. It uses inputs from financial statements, the cash forecast, and the financial plan. Management teams use master budgets to plan the activities they need to achieve their business goals. In larger organizations, the senior management is responsible for creating several iterations of the master budget before it is finalized. Once it has been reviewed for the final time, funds can be allocated for specific business activities. Smaller businesses often use spreadsheets to create their master budgets, but replacing the spreadsheets with efficient budgeting software typically reduces errors. 2. Operating budget An operating budget shows a businesss projected revenue and the expenses associated with it for a period of time. Its very similar to a profit and loss report. It includes fixed cost, variable cost, capital costs, and non-operating expenses. Although this budget is a high-level summary report, each line item is backed up with relevant details. This information is useful for checking whether the business is spending according to its plans. In most organizations, the management prepares this budget at the beginning of each year. The document is updated throughout the year, either monthly or quarterly, and can be used as a forecast for consecutive years. 3. Cash budget A cash flow budget gives you an estimate of the money that comes in or goes out of a business for a specific period in time. Organizations create cash budgets using inferences from sales forecasts and production, and by estimating the payables and receivables. The information in this budget can help you evaluate whether you have enough liquid cash for operating, whether your money is being used productively, and whether there is and whether you are on track to earn a profit. 4. Financial budget Businesses draft this budget to understand how much capital theyll need and at what times for fulfilling short-term and long-term needs. It factors in assets, liabilities, and stakeholders equitythe important components of a balance sheet, which give you an overall idea of your business health. 5. Labor budget For any business that is planning on hiring employees to achieve its goals, a labor budget will be important. It helps you determine the workforce you will require to achieve your goals so you can plan the payroll for all of those employees. In addition to planning regular staffing, it also helps you allocate expenses for seasonal workers. Cash Budget of Angelina and Charlie. Months January February March April May June

INCOME

Capital Invested Bank Loan 50000 50000

Sales - 6500 12500 12500 13500 14000

Total Inflows 100000 6500 12500 12500 13500 14000

EXPENSE

Dividend Angelina - 1500 1500 1500 1500 1500

Staff 1850 1850 1850 1850 1850 1850

Light and heat - - - 140 - -

Premises 21000 21000 21000 21000 - 21000

Motor vehicle 4200 4200 4200 - - -

Computer equipment 250 450 450 450 450 450

Advertising 1500 1500 1500 1500 1250 1250

Motor 250 250 250 250 250 250

General overheads - 400 400 400 400 400

Other costs - 1400 1400 1400 1400 1680

Total Outflows

29050 32550 32550 28490 7100 28380

Net Cash Flow 70950 (26050) (20050) (15,990) 6400 (14380)

Opening Balance

0 70950 44900 24850 8860 15260

Closing Balance 70950 44900 24850 8860 15260 880

Analyze the main purposes of budgets, including forecasting, monitoring, control, planning, coordination, communication and motivation. Also highlight the Benefits and limitations of budgetary control. Do this part urself!! Research and show me your work on this -.-

EVALUATE THE USEFULNESS OF COSTING AND BUDGETARY CONTROL SYSTEMS TO ANGELINAS BUSINESS As mentioned above budgeting is done to prepare a formal plan, stating what is expected to happen in the business over the next budget period. The main purpose of preparing a budget is to achieve the objectives and goals of a business where overall goal is to increase profits and avoid losses however there could be errors as budgets are based on future expectations and revisions are frequently required. The end result of a budgeting process is the creation of three master budgets one of them is the cash budget Another name for a cash budget is a cash flow forecast. It is a forward looking document which shows cash inflows and outflows and the net cash position of a business A cash budget helps a business to identify any shortfalls of cash, so that it has plenty of time to arrange for additional finance. This is important as cash is vital to the survival of the business. A business is in serious trouble if it cannot pay its employees, suppliers, tax, loan repayments or the interest on loans. However business may run out of cash even if it is making accounting profits.

As per given scenario Angelina and Charlie are anxious to know whether they will have sufficient cash to keep them afloat for first six months of trading therefore cash budget is prepared in accordance with their expectations and forecasts of sales and expenditures. This cash budget gives us idea about where and when the cash would be used and will it be sufficient to cover all the costs that A & C will face after commencement of their business. By the analysis of the prepared cash budget we can see that there will be positive cash flow in the first month that is of January due to sufficient amount of capital however first month sales are recorded in the next month after the clients settle their accounts and this adjustment is made in every month. Moving towards the month of February till the month of May we can see that costs are high and income is low, income in these months is due to sales however it is low and insufficient to cover the expense therefore resulting as a loss however due to sufficient cash provided by capital by bank and owners will cover the loss and there will be positive cash outflow. Moving towards month of May where we can see that there is positive net cash flow of 6400, here we can observe that it is mainly because there is no premises cost in this month and this profit will add up with the total cash that the business have. Moving forward to the month of June, here we see that Angelina and Charlie will face loss and the total funds business possess will be insufficient to cover this up, resulting them to sink in the last month of the first six months. Therefore Angelina and Charlie would have to revise their plans in order to gather sufficient funds that would keep them afloat. However loss is minimal and can be covered easily Angelina and Charlie now needs to plan their strategies and revise their plans so that they can avoid negative net cash flows and keep business running until business Starts to make sufficient positive cash flows. This could be done if they increase their sale prices that will increase sales revenue however increasing sale price could cause in loss of their clients or they would switch to their competitors thus causing more problems for the business, Angelina and Charlie could also increase profitability by gaining more customers by offering them low prices and discounts and more services, increase in customers would lead to more revenue and better cash performance. Moreover as we analyze the prepared budget above we can see that if Angelina and Charlie will be able to convince clients to settle their accounts in the month when sales go through will help business keep afloat for the first six months as cash flow would remain positive. Or Angelina could cut off her salary and make it less than 1500 and keep it that way until business starts to generate better cash flows. In last month she can give up 200 that will make cash flow positive and they would not sink. The budget will help them to focus on the areas where they are lacking and work more effectively and efficiently to keep their business in market and it seems like business will start making profit from next month (July) onwards