Business Specialists

Business Consulting


Some questions you need to ask yourself.

What is a budget?

What is a purpose of having a budget?

Does budget helps in running my business?

Do I need to have a budget for my business?

Does budget needs to be realistic?

Who is suppose to make a budget?

Please find some useful tips for budgeting. Use it only to refresh a bit your knowledge. Top of the iceberg.


ABC LTD                Budgets

Budget statement of the Financial Performance for the year ending on 30 June 200X

July $ Aug $
Sales Less cost of Goods
Gross ProfitLess Operating Expenses Expenses-         Admin-         Marketing-         Finance
Net Profit (Loss)(before Tax)

Cost of Goods – Variable Cost


Operating Expenses – Fixed Cost

Merchandising – Purchasing Cost

Manufacturing or

Production Cost– Direct Materials, Direct Labour, Factory o’head



Budgeted Statement of Financial Position as at 30 June 200X

Current Assets–         Cash-         Account Receivable (Debtor Payments)-         Inventory-Pre-payments Non-current Assets–         Plant equipment-         Building-         ….. $ Current Liabilities–         Salaries/wages/ Payable-         Account Payable (Creditor payments)-         …..Non-current Liabilities–         Long term Loans (Mortgage/Debtors)Total Liabilities–         Owners Equity (O.E.)-         Shareholders’ Capital-         Retained earnings $
Total Assets Total Liabilities


ABC LTD Budget Cash Flow for the period ending on ……..200X

July $ Avg $
Opening Cash
Cash Receipts–         Sales-         Ac/Receivable-         Other Income
Total Funds available Less Cash Payments–         Trade Creditors-         Stock Purchases-         Op. expenses
Closing Balance


Managing Budgets and Financial Plans

Operational Budgets

–         Budgets and Budgeting

–         Operational Performance:

–         Variance and Trend Analysis

–         Ratio Analysis

–         Economic Order Quantity (EOQ)

–         Cost – Volume –Profit:

Breakeven Analysis

Capital Budget


–         Capital budget and Budgeting

–         Capital Projects:

Evaluation Techniques


………………………….. etc.


Budgets & Budgeting


A financial plan for the future trading of business of an organisation

A statement of financial performance and position for a definite period of time- based on forecast or estimated demand sand expenditure and proposals for financing them

Budget: Management tool

Monitoring, evaluation and control of financial performance

–         Monitoring

What has (actually) happened? – satisfactory or unsatisfactory performance

–         Evaluation

Why it (unsatisfactory) has happened? – Causes of unsatisfactory performance

–         Control

What should do about it (unsatisfactory)? –  Corrective action

Budgeting Steps


–         Decide budget period

One financial year (1 July – 30 June) –divided into monthly, quarterly etc. periods for monitoring, evaluation and control purposes

–         Forecast or estimate

Demand, costs for production or purchase of the product, and business operational expenses

–         Prepare ‘draft’ budgets

If necessary, revise ‘draft’ budget (revised 1, revised 2 etc.) with changed assumptions, or estimates under optimistic, realistic, and pessimistic scenarios


–         Finalise budget and get approval from top/senior management

Budget Statement of financial Performance(profit and Loss Statement)


Sales or Revenue Budget

–         Starting point in budget preparation

–         Estimates future revenue from sales of products (goods/services) and from other sources.

–         Forms part of profit forecasts for business

Cost of Goods Sold Budget (COGS)

Estimates costs associated with purchase (merchandising) or production (manufacturing) of products to meet estimated demand

Merchandising organisation (wholesalers, retailers)

COGS: Purchase Budget

Estimates purchase requirements for reselling products- looking at both estimated quantity and price of product


COGS: Production Budgets

–         Materials Budget

Estimates materials required directly for manufacturing and selling products – looking at both estimated quantity (kg. lt etc.) and price of materials

–         Labour Budget

Estimates labour required directly for manufacturing products – looking at both estimated quantity (hours) and price (rate)

–         Factory Overheads Budget

Estimates costs directly associated with manufacturing of products – factory rent, electricity, water etc.

Operating Expenses Budget

Estimates costs associated with the administration, marketing and financing of business operations and support functions – not directly involved in the production or purchase of products or services to meet customer demands

Consists of three Budgets

–         Admin Expenses Budget (Overheads Budget)

–         Marketing Expenses Budget

–         Financial Expenses Budget

Expenses (costs):

– Fixed costs or Indirect Costs

Operating Expenses Budgets

–         Admin Expenses Budget (Overheads Budget)

Estimates costs associated with general day-to-day operations and support functions not directly involved in providing products/services

The cost are allocated amongst revenue earning divisions of a business on an agreed basis/


Salaries/wages, rents, water, electricity, stationary etc.

–         Marketing Expenses Budget

Estimates costs associated with advertising and promotional activities for products.

Also includes salespersons’ commissions

–         Financial Expenses Budget

Estimates costs associated with bank loans, and depreciation expenses

Budgeted Statement of Financial Performance (profit and Loss Statement)

A statement or report showing relationship between a business’s estimated sales (revenues) and expenses and amount of net profit or net loss during budget period

Individual operating budgets showing detailed information on sales , expenses, and profit  (loss) – combined into single statement


Budget Statement of Financial Position (balance sheet)

Shows estimated assets, liabilities and owners’ equity of  an organisation at end of a Financial Year (1 July  – 30 June)

Accounting Equation:


A: Assets

L: Liabilities

OE: Owners’ Equity

Budget Statement of Cash Flow

Cash Flow or Cash Budget

Estimated cash balances through forecasting cash receipts (cash-in) and payments (cash-out) from all sources for a particular budget period

Capital Expenditure Budget

Shows the financial details of proposed outlays on long term assets (e.g. equipment, vehicles etc.) used in business.

ABC Limited

Forecast for July

Sales Budget $ Actual $ Variance F/UNF
Sales 1,200,000 1,250,000 50,000 FAV
Less-         COGS Direct Materials-         Direct Labour-         Factory Overhead 600,000 750,000 150,000 UNF

Sales Variance

  1. Evaluate? Calculate difference – between budget & actual
  2. Find cause or reasons for UNF
  3. Rectify or Solution

Sales Value Variance

Budgeted Sales – Actual Sales $ 50,000 UNF

Sales Price Variance (Budget Price – Actual Price)

Sales Value Variance

Sales Volume Variance (B. Volume – A. Volume) x B. Price

Sales Value Variances = Sales Price Variance + Sales Volume Variance

Manufacturing: COGS (cost of goods sold)

–         Direct Materials Variance JULY

July Budgeted Actual Variance F/UNF
Direct Material $ 150,000 $ 175,000 $ 25,000 UNF

Price Variance (Budget Price – Actual Price) x Actual Usage

Direct Material Variance

Materials Usage (budget Volume – Actual Usage) x B. Price

–         Direct Labour

Direct Labour Variance   July

Budgeted Actual Variance F/UNF
Labour Cost(rate x No. hours) $ 75,000 $ 80,000 $ 5,000 UNF

Hour/ Time (Budget Hour – Actual Hour) x Actual Rate

Labour Cost Variance           Labour Efficiency

Rate (Budget Rate – Actual Rate) x Budgeted Hours

–         Factory Overhead

Trend          Notice- Always compares all data with Base 1 Whole or 100%

2001 2002 2003
Sales $ 2,000,000 $ 2,200,000 $ 2,250,000
COGS Base 100% 110% 1112.5%
Profit (loss)


As at Dec 31st 2002 2003 2004 F/ UNF
Account Receivable $ 50,000100% $ 60,000 $ 65,000
Trend 100% 120% 130% UNF

Comment … trend showing UNF – not collecting money fast ….and it has to be done …. corrective action has to be taken  (it showing that our debtors own us more and more money)


No: Absent

No: Present

Operational performance

Evaluation & control

Ratio Analyses

A management tool

Financial performance measurements for operational:

–         Profitability

–         Stability

–         Efficiency


–         To highlight relationship between selected pairs of reported financial data

Ratio – expressed as a ratio or a percentage

–         To identify trends in key areas of business operations

–         To set benchmarks (standards) for satisfactory and unsatisfactory performance

–         To arrest unsatisfactory and / or enhance satisfactory situation