About the company
The budget presentation
Budget and its Importance. Before presenting the different types of budget, it is important to establish first what a budget is and why is it important for the company. A budget is a financial translation of the company’s plan. It includes the annual target for sales and estimated expenses to meet the target. While creating a budget can be tedious, it is a critical management process due to its primary benefits: (1) It serves as a guidance to all employees on what is the financial expectation in each department to achieve overall company objectives; (2) Periodic review of results, against the budget , i.e., monthly or quarterly, provides a means to monitor and control performance, as well as address potential problems in the operations; and (3) Facilitates short and long-range planning for the company to anticipate requirements for future growth and expansion (dineshbakshi.com, nd).
Types of Budgets. There are different types of budgets, but for purposes of ABC Company, the relevant ones are:
- Master Budget- this consolidates the company’s projected income statement, cash flow and balance sheet. This is what top management use to assess the entire business’ overall performance. The income statement represents the total revenue targets of the restaurants, as well as their operating budget. Included in the operating expenses are the management expenses at the head office to oversee the operations.
- Operational budget- is the annual budget of each department. For the restaurant operation, it includes both sales and expenses, while for the head office, it only covers the operating expense budget.
- Cash flow budget- this is mainly undertaken by finance to determine if inflow of cash (ex. sales) is sufficient to cover expected cash out flow (ex. payments to suppliers, loans, etc)
- Capital budget- this is maintained by management with finance support to ascertain if there is additional capital requirement, aside from company generated income, to cover for expansion.
It should be noted that ABC Company has opted to use calendar year as its fiscal year. It provides simplicity for tax reporting purposes. For the annual budgeting process, the requirement from each department is to come up with an operating budget. This will be consolidated into the master budget. Since the company is growing, a capital budget is also required to prioritize uses of capital and ensure that investments contribute to an incremental value to the company.
Budgeting Techniques. There are two main techniques for budgeting (ACCA, 2013). These are:
- Traditional historic budgeting or also known as incremental budgeting. This process entails the use of historical sales trend or increase(s) in operating cost to develop the current year’s budget. It is the easiest method but may not be the most appropriate for a new and growing business like ABC Company.
- Zero-based budgeting- is called as such, because the estimates start from scratch. It requires each department to predict cost based on planned activities, and for the restaurant operation to project sales and operating costs based on prospects in their location. This is more realistic but could be more times-consuming. This is what would be recommendable for ABC Company.
As a financial planning process, there is the option to do a top-down approach or bottom-up approach to budgeting. Top-down means that the management will provide all the target sales and expected operating expenses for each branches and departments in the head office. Although this would be the easiest and fastest way to do the budget, there would be an issue of lack of accountability of the financial plan because it was only handed down to department managers. On the other hand, the bottom-up approach requires the budget to come from restaurant managers and head office department managers. While this approach promotes ownership of the budget, it is also believed to be usually underestimated i.e., sales may be conservative to be achievable. Given this, it is recommended for ABC Company to apply both these approaches. Top management will provide overall sales growth guidance and expense ratios and allow managers to submit their respective budgets aligned to said financial plan metrics.
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