Unit 5 Budgeting Flashcards
(43 cards)
3 uses for budgeting
Future Financing Needs - understanding cash flows helps estimate/negotiate financing needs
Corrective Action - knowing changes ahead of time allow time to adjust, improves credibility with lenders
Performance Evaluation - assess targets being met
6 principles to effective budgeting
Know yourself
know key savings, income, expenses
develop savings, income, expense strategies
keep records
use an appropriate method
eliminate consumer debt, minimize long term debt
3 steps to making a cash budget
Determine cash receipts (know income)
Estimate cash disbursements (know expenses)
Create the cash budget
5 steps to make personal budget
Understand goals track savings, income, expenses develop cash budget (set aside money for savings) implement plan compare cash budget to spending
fixed expenditures vs variable expenditures
fixed expense - constant expense don’t have control over
variable expense - expense you have control over and varies from month to month
50/30/20
needs/wants/savings
Items in a cash budget
Cash Receipts (income) Cash Disbursements (expenses) Borrowing (debt)
Why are sales not strictly considered to be the same thing as cash receipts?
Sales include both cash sales and credit sales.
Methods for tracking cash flows
Keeping records of cash flows
Envelope Method
Spreadsheet Method
Computer program
Steps to Monitoring cash flows
Making sure expenses are within budget
identify patterns and changes in cash flows
understand circumstances that need correction
Describe budget revision process.
Make changes to budget to reach goals.
Identify trouble areas.
Implement gradually.
What is Profit forecasting
projected earnings after subtracting costs
balance sheet forecasting
combine profit forecast and sales growth to make ‘pro forma’ balance sheet to understand future implications of financing strategies
2 things growth requires
increase in capital (inventory) and in fixed assets
DFN
discretionary financing needed
aka E(xternal)FN, A(dditonal)FN
How much financing will be needed given expectations in growth.
Budgeting vs Forecasting
Budget - detailed, Forecast broad
Budget - compare to actual, Forecast - no variance analysis
Budget - take action to adjust budget, Forecast - take action within company - credit standards, inventory holdings, etc.
Budget vs Forecast (2)
Budget - outline of direction mgmt wants to go
Forecast - is firm reaching budget goals, show where company is headed
spontaneous accounts
those that vary naturally with sales Cash Accounts Receivable Inventory Accounts Payable Accrued Expenses
discretionary accounts
opposite of spontaneous accounts
bank loans, bonds
Percent of Sales Method
uses sales forecast and historical relationships between sales and other variables to create pro forma statements
pro forma statement
statement that projects an estimate for future periods as if sales grow as predicted
steps in percent of sales method
Project sales revenues and expenses
Forecast change in spontaneous balance sheet accounts
Deal with discretionary accounts
Estimate fixed asset account
Calculate retained earnings (RE)
Determine total financing need (projected total assets)
Calculate DFN
How are spontaneous accounts affected by sales forecasts.
Sales increase leads to proportional change in current assets and current liabilities.
What types of accounts are discretionary? How are they fed into Pct in Sales forecast?
Notes payable
long term financing accounts/debt
common stock
Keep them constant in estimate.
