GSBS6200 Financial and Management Accounting
Week 8
Budgeting
(chapter 9)
Week 8 Budgeting
Learning outcome 6 – Construct and analyse
budgets
Learning Objectives
The Basics
Strategic Planning
- Planning for 3-5 years ahead
- Strategic plan -> strategic goals -> KPIs to track progress (not a set
and forget process)
TROG Cancer Research Strategic Plan 2020-23
The Basics
Budget
- With the strategic plan as the guiding light, the budget sets out
the proposed financial performance and position for the next 12
months through to 2 or 3 years – the further ahead in time, the less
accurate budget estimates will be due to uncertainty
- Operationalises the strategic plan
- Shows how all parts of the business contribute to the
achievement of the strategic plan
- Used as a check during the year to monitor progress towards
profit goals and cost controls
- Is a management reporting tool
The Basics
Budget TROG Cancer Research Budget 2022
The Basics
Budget
1 Set strategic plan
2
ACT BUD Reporting
Variance analysis
The outcome of variance analysis may result in
a re-forecast (budget itself unchanged)
The Basics
Budget Accountability
- Key Performance Indicators (KPIs) are vital metrics used to
measure an entity’s success in meeting strategic goals/objectives
- Can be financial and non-financial
- Are critical to performance management
- Provide objective evidence of progress towards goals
- Help focus attention on what matters most
TROG Cancer Research KPI Tracking Update July 2021
Budget Process
Step by Step
1. Consideration of past performance
2. Assessment of expected trading and operating conditions
3. Preparation of initial budget estimates
4. Adjustment to estimates based on communication with, and
feedback from, managers (division/segment/business unit)
5. Preparation of budget reports (& perhaps sub-budgets)
6. Monitoring of actual performance against the budget over the
budget (reporting) period
7. Making any necessary adjustments to the budget during the
budget period (via a re-forecast)
Master Budget
• A master budget is a set of interrelated budgets for a future
period which provide a framework for viewing relevant budgets
of an entity
– Operating (sales, operating expenses)
– and financial (profit or loss, balance sheet, cash and capital
budgets)
– Mirrors the chart of accounts
Master Budget
Master budget at a glance
The assumptions
underpinning the
budget are very
important in
interpreting what
the budget means
for the entity and its
business units/
divisions/ segments
Master Budget
Variances between actual outcomes and budget occur where reality differs
from the assumptions underpinning the budget and are therefore inevitable;
they may be positive (favourable) or negative (unfavourable).
Budget Assumptions
Types of Budget
• Sales (or fee) budget – expected level of activity
• Operating expenses budget
• Production & inventory budget (manufacturing)
• Manufacturing overhead budget
• Purchases budget (manufacturing & retail)
• Budgeted profit or loss
• Budgeted balance sheet
• Cash flow forecast (cash budget)
• Capital budget
• Program budget (often seen in govt and For Purpose sector)
Types of Budget
• Pages 341 to 347 show some examples of budget preparation for
different types of budget
• It is common practice to start at the sales budget then work out
the direct expenses (labour, purchases etc) required to meet that
sales budget.
• Overhead and other operating expenses are often budgeted off
the current year plus an uplift factor eg CPI where applicable
– When preparing the operating expenses budget off current
year data the accountant will be mindful of one-off and ad
hoc expenses that don’t need to be budgeted
Cash Flow Forecast
• Refer “Cash Budget” in the text book
• Statement of expected future cash receipts and payments to
calculate ending cash balance – remember, cash is king!
• Generally prepared on a month by month basis
Cash Flow Forecast
• By monitoring the cash flow forecast on a monthly basis,
corrective action can be taken as required:
– Improve cash collections
– Arrange external finance
– Targeted action to improve sales/service fees
– Reducing non-essential costs
– Minimising inventory/stock levels
– Leveraging terms of credit
– Deferring capital expenditure
• It is important to understand the distinction between
unrestricted and restricted (externally committed) cash also
Budget & Behaviour
Style of Budget
- Authoritarian v participative (most common in 2022 because
insights from lower levels of the business are critical and must be
factored in to senior management/board aspirations)
Budget (& stretch) Targets
- The budget should feel attainable to managers and staff and
there should be a sense of ownership
- Stretch targets are built in to motivate within areas of control
- Empowerment and accountability
Revision
• Why a budget?
– Assist in decision making re: operationalising strategy,
setting profit targets, identifying resource constraints,
planning labour allocation, assessing ability to meet
financing commitments, determining inventory levels and
purchasing requirements, managing cash flows
– Unite the entity in understanding where the entity is going
and how everyone plays a role in that success
– Accountability
Week 8 Budgeting
Learning outcome 6 – Construct and analyse
budgets
Tutorial Q&As for practical examples
Learning Objectives

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