Sub-Budget

Sales budget

Sales budget is an itemization of a company's sales expectations for the budgeted period, in both units and value. If a company has a huge product line than it usually aggregates its expected sales into a smaller number of product categories or geographic regions; otherwise, it becomes too difficult to generate sales estimates for sales budget.

Forecasted unit sales	15,000
x Price per unit	$100
Total gross sales	$1,500,000
- Sales discounts & allowances	$50,000
-Sales returns	$50,000
= Total net sales	$1,400,000

It is extremely important to prepare the sales budget more accurately, as most of the sub budget uses the forecasting of the sales. Therefore, if the sales budget is inaccurate, then same will be with other budgets that use sales budget as source material.

Production budget

Production budget something which is being prepared to calculate the number of unit that should be manufactured. It is combination of sales forecast and closing inventory of finished goods. We take closing inventory to cope with the unexpected demand increase. Production budget is typically presented monthly, quarterly format.

Product to be manufactured= Forecasted sales + Closing Inventory – Opening Inventory

Forecasted unit sales	15,000
Closing Inventory	5,000
Total unit required	20,000
- Opening Inventory	2,000
=Product to be manufactured	18,000

Capital Budget - Choose better investment option.

Capital budgeting or investment appraisal, in contrast with normal budgeting techniques, capital budgeting is something which has nothing to do with vast calculation, though, it is very important tool of financial planning and analysis. It is a planning process to determine whether the long term investment such as setup a new project, Buying / replacement machinery and new plant is worth the funding through the company’s capital.

Capital budgeting is the process of allocating resources for major capital investment or capital expenditures.

Capital budgeting is a decision making tool which helps investors for long term investment such as land, building, machinery and other equipment. The process evaluates the strategic viability of investments in terms of costs and benefits to be achieved.

There are many techniques that can be use used in capital budgeting, including,

ü  Internal rate of return, 

ü  Payback period, 

ü  Discounted payback period,

ü  Net present value,

ü  Accounting rate of return,

ü  Profitability index,

Internal rate of return

IRR is the discount rate at which net present value of the project becomes zero. It is used to compare the profitability of capital investment against other kinds of investment. It is also known as discounted cash flow rate of return or Effective interest rate.  Higher IRR should be preferred.

0= (-Investment)+CF₁/(1+IRR)¹ + CF₂/(1+IRR)² + CF_n/(1+IRR)ⁿ

IRR= Project's internal rate of return

Payback period

Payback period here refer to the period of time required to recover the fund an investor has invested. According to this method investment can be reject or accept on the basis of payback time. Minimum is better.

Payback period= Investment /Net annual cash inflow

(OR)

Years full recovery+ (non-recovered cost at beginning of last year/ cash flow in last year)

Discounted payback period

In discounted payback period Analyst has to calculate the present value of each cash inflow right from the start of the first period.

For this purpose the Analyst has to be care full while setting up discount rate.

The process to calculate discounted payback period is quite similarly to simple payback period except that it required to discount the cash flow instead of using actual cash flow.

(Number of years with a negative discounted cumulative cash flow) + ((Last negative value of discounted cumulative cash flow)/ (Absolute value of Discounted cash flow for the very next year of Last negative value of discounted cumulative cash flow))

= A + B/C

Decision Rule

Accept the project, If the discounted payback period < the target period.

Discounted Cash Inflow = Actual Cash Inflow / (1 + r)ⁿ

Where,

r is the discount rate,

n is the period to which the cash inflow relates.

Net present value

Net present value represent the cash inflow or cash outflow over the period of time. It describes the time value of money as time has an impact on the value of cash flow.

The Net present value (NPV) of an investment is determined by calculating the present value (PV) of the total benefits and costs which is achieved by discounting the future value of each cash flow. NPV>0 is better as this will add value to the company.

PV = FV / (1+r)ⁿ

NPV= (-Initial Investment) + FV₁/ (1+r)¹ + FV₂/ (1+r)²+ FV_n/ (1+r)ⁿ

Accounting rate of return

Accounting rate of return (ARR) is the amount of profit which an investor expect based on his investment. It is the simplest form of profit percentage calculation over the initial investment.

For Single period of time:-

ARR=Return/ Investment

For Multiple period of time:-

ARR= Average Return / Average Investment

Profitability index

It is an index to identify the relationship between the cost and benefits of a proposed project. Some time it is also called Benefits-cost ratio.

Decision Based on PI:-

Always remember the thumb rule i.e. Greater is better.

Profitability index > 1, Accept a project.

= Present Value of Future Cash Flows / Initial Investment Required

For Any detail contact me.

Reference:-

http://en.wikipedia.org/wiki/Capital_budgeting

http://accountingexplained.com/managerial/capital-budgeting/

Operating Budget…An Important tool for Path Creator

As the name clears all the doubt and speaks itself, it generally consist of several sub budget. Mainly sales budget, which should be prepared first. It is a detailed projection of all the future income and expenses. Sales budget should be prepared first because all the projection are based on sales. It’s a short term budget usually for one year. Analyst prepare Operating budget to estimate the future income and expenses related to a particular operating activity.

Operating Budget is an important tool to estimate the future income and expenses. it helps managers to create the base for any business for the given time mostly annually. 

The first and crucial factor of the operating budget is the sales and collections budget. This is followed by the projected cost of goods sold budget, the inventory and purchasing budget, Marketing budget, and the budget for other operating expenses.

Operating budget are generally based on quarterly projections. Challenging part of it is to learn from historical performance and match up with the probable additional cost or market variables. An analyst may prepare more than one operating budget for the same operation one for best case or another with the negative scenario.

An operating budget lists the costs of running business, including salaries, equipment, services, interest payments, and rent, utilities, loans, advertising, and travel expenses. Most businesses create an annual operating budget to predict recurring, regular expenditures, and some businesses go back and record actual expenditures in the operating budget to compare the predictions with actual costs.

	Revenue	Year-1	Year-2	Year-3
Core Service
	Service-1	85442	199325	227766
	Service-2	97188	226772	259168
	Service-3	97360	227160	259600
	Service-4	63720	148560	169800
	Service-5	131100	305820	349500
	Service-6	66000	306600	525600
Optional Service
	Service-7	57750	134730	153990
	Total	598560	1548967	1945424
Cost Model
A.      Operating exp.
Direct Labor and Benefits		391,765.00	658,098.08	749,523.12
Supplies-1		1,500.00	3,696.00	4,460.54
Supplies-2		1,500.00	3,696.00	4,460.54
Factory Waste		900.00	2,217.60	2,676.33
Maintenance/Parts		3,600.00	3,801.60	4,014.49
Supplies-3		28875	67365	76995
Cost of goods sold		428,140.00	$738,874	$842,130
B.     Administrative Expenses
Rent		78,000.00	80,340.00	82,750.20
Salary		84800	94764.8	102553.53
Utilities and phone		6,000.00	6,180.00	6,365.40
Office Expenses		6,000.00	6,180.00	6,365.40
Insurance		3,600.00	3,708.00	3,819.24
Other Operating Expenses		3,600.00	3,708.00	3,819.24
		182000.00	194,880.80	205,675.01
C.     Advertising and marketing Expenses
Advertising and marketing		50,000.00	24,000.00	24,720.00
Total Expenses (B+C)		232,000.00	218,880.80	230,395.01

Steps:-

Sales/ Revenue:-

Most of the operating budget revolve around cost and expenses but once you are done with these number they all will be compared to the total sales. These number may be for monthly, quarterly, half yearly or annually. Be attentive to all the events which can affect your numbers. For an instance, for seasonal business assume that there will similar growth rate in sales for the next year at the period of time.

Cost of Goods:-

One can use a similar prediction method to forecast what your goods will cost for future. Match with expected fluctuation in sales, as this will affect your purchasing decision.

Sales - Cost of goods sold = gross profit

Other cost:-

Depending upon your business size, you may encounter N numbers of operating cost. It may be Salary, rent, Electricity/telephone Bill, travel expenses, R&D Expenses. Use proper labeling to your expenses which will help you to facilitate analysis and predict the expenses over the course of the next year.

Gross profit - other cost = operating income

Taxes:-

When you are done with the calculation of operating Income, you can estimate your annual taxes.

Operating income – Tax = Net Income / Net losses

This is the last step of your operating budget. When you progress to next year compare your estimated budget to actual. This will tell you how your estimation worked. If you have not used your fund to the allocated areas as expected, moved that money to some other area. And if you have used some extra money to some area it means you may need to cutoff or consider layoff.

Operating Budget	Year 1	Year 2	Year 3
Revenue	598,560	1,548,967	1,945,424
Cost of goods sold	428140	738874	842130
Gross profit	85620	715328	1000738
Administrative Exp	182000	194881	205675
Marketing & advertising Exp	50000	24000	24720
	147200	124116	127839
EBITDA	(61580)	591212	872899
D & A	8,150.00	8150	8150
EBIT	(69730)	583062	864749
Interest	19188	18260	17285
EBT/ Operating Profit	(88918)	564802	847464
TAX	0	0	0
Earning after Tax/ NET Profit	(88918)	564802	847464

Operating budget can be prepared by using any of the budgeting method i.e. Zero based or traditional.it means it can be for new start-up or for existing Business. Remember, if using historical data, consider market variables to allocate future cost with historical changes.


Budgeting                                                                                                                         Capital Budget