BUDGETING

FUNCTIONAL AND ACTIVITY-BASED

BUDGET DEFINED
A budget is a financial plan of the
resources needed to carry out
tasks and meet financial goals.

The act of preparing budget is called budgeting.
The use of budgets to control a firms activities is
know as budgetary control.
FUNCTIONS OF BUDGETING
Budgets make the decision-making
process more effective by helping
managers meet uncertainties. The
objective of budgeting is to substitute
deliberate, well-conceived business
judgment for accidental success in
enterprise management.
THE PURPOSES OF THE BUDGET
1. Planning Function
2. Coordination and Allocating Resources
function for Goal Congruence
3. Communication function
4. Motivation function
5. Control function
6. Standard in evaluating performance
COMPREHENSIVE ILLUSTRATION
COMPREHENSIVE ILLUSTRATION
COMPREHENSIVE ILLUSTRATION
SALES BUDGET
SALES BUDGET
PRODUCTION BUDGET
PRODUCTION BUDGET
RAW MATERIALS BUDGET
PAYABLES
Account Payables Management
Account Payables Management refers to the
set of policies, procedures, and practices
employed by a company with respect to
managing its trade credit purchases.
In summary, they consist of seeking trade
credit lines, acquiring favorable terms of
purchase, and managing the flow and
timing of purchases so as to efficiently
control the companys working capital.

WHY COMPANIES FINANCE
THEIR PURCHASES
Purchasing inventory, raw materials, and other
goods on trade credit allows a company to
defer its cash outlays, while accessing
resources immediately.

When managed appropriately financing
purchases can contribute to effective
working capital management.
WHY COMPANIES FINANCE
THEIR PURCHASES
A company that employs best
practices with regards to payables
management can reap the
benefits of stable operating cycles
that provide a stable source of
operating cash flows and place it
in a good liquidity position with
respect to its competitors.

OBTAINING TRADE CREDIT
Companies seeking trade credit must
demonstrate that they meet certain criteria
with respect to their creditworthiness and
financial condition.

This typically entails credit analysis by the
supplier.
OBTAINING TRADE CREDIT
The financial statements of the company are
analyzed, paying particular attention to its
working capital, short-term liquidity and
short and long-term debt to gauge its
ability to meet obligations.

The final product of such analysis is usually
some form of a credit risk rating.

EVALUATING THE PERFORMANCE
OF PAYABLES MANAGEMENT
Accounts payable are one of 3 main
components of working capital, along with
receivables and inventory.

Understanding how these 3 accounts
interact among each other and the
resulting effects on working capital levels,
cash flow, and the operating cycle can
help in managing and evaluating payables
management.
EVALUATING THE PERFORMANCE
OF PAYABLES MANAGEMENT
An appropriate balance must be struck,
whereby the advantage of deferring cash
outlays using trade credit is weighted
against the risk of excessive short-term
credit.
It is therefore important to maintain optimal
utilization of credit lines and timing of
payments, and create a balance between
the need for cash, working capital, and
liquidity.
EVALUATING THE PERFORMANCE
OF PAYABLES MANAGEMENT
A number of metrics and
short-term financial ratios
can be used to evaluate the
performance payables
management.