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- makes you think about details and implications ahead of time
- think forward and predict future
- highlights potential problems
- quantifies plans (theories into numbers)
- creates benchmarks (comparison for what actually happens)
What is an operating cycle?
"The activities the business performs between creation and selling of goods and services"
What would a retail business operating cycle consist of?
- Use cash to buy inventories
- Sell the goods
- Collect cash from sales
What would a service business' operating cycle consist of?
- the design and marketing of the service
- selling of the service
- collection of cash
What is a Master Budget?
"A plan which the business will try to follow"
"A set of interelated reports (budgets) showing the relationship among a companies golas, activities in operating cycle, resources to be used, and expected financial outcomes"
Components of a Master Budget for a retailer (7)
- Sales Budget
- Purchases Budget
- General and Administrative Expenses Budget
- Selling Expenses Budget
- Cash Budget
- Projected Income Statement
- Projected Balance Sheet
What is the Sales Budget? What does it tell us?
"How many units/services plan to be sold and how much cash the business will collect from sales"
What does the Purchases Budget consist of?
- Goods the business will buy
- Purchase price
- Total cost
- Cash payments
What does the Selling Expenses Budget consist of? And what does it do?
Consists of: expenses involved with the selling of goods and services
"The budget divides the expenses into their cost behaviour (fixed or variable per unit of sales)"
What does the General and Administrative Expenses Budget consist of?
Consists of: expenses to do with the running of the business
Also divides them into their cost behaviour (fixed or variable per unit of activity)
What does the Cash budget consist of?
"Cash collected in revenue and cash paid in expenses" (receipts and payments)
What does the Projected Income Statement involve?
Expenses and Revenues
"Summarises sales revenue, and expenses for the budget period to obtain the net profit of the business"
Wha tdoes the Balance Sheet involve?
"Summarises the company's expected financial position at the end of the budget period"
Assets, Liabilities, Owners Equity
How does budgeting help to evaluate a business' performance?
"By analysing the differences between a companys budgeted results and its actual results"