Finance Essay Sample: Sales Budget

The sales budget is one of the most important parts of the budgetary control system. The sales budget is the starting point of the preparation of the budget. All other budgets like production budget, purchase budget, labor budget, cash budget etc are prepared on the basis of sales budget. Sales budget contains item wise information of budgeted sales of the company. It contains information in both units and dollars. Sales budget is usually prepared for group of products if company has large number of items. The sales budget helps the sales and marketing manager to achieve their targets. It provides guidance to the sales team how much units and amount of items the company plans to sale. This makes it easier for them to achieve their sale targets (Higgins, 2007).

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Generally, sales budgets are prepared on the basis of past trend and future estimates of number of units and selling price. The expected sales units and selling price used for the purpose of preparing sales budget should be realistic. If the management uses unrealistic figures in sales budget, actual performance will differ from the budgeted performance and this will create variances. In the given case, general manager of the company Mr. Lipscomb wants to prepare budget for the year 2013 by taking monthly sales from highest sales of monthly sales in previous year. Moreover, he also wants to take highest selling price of previous year as budgeted selling price of current year. The recommendations of Mr. Lipscomb are very optimistic and it may be difficult to achieve for the sales team. The company should make realistic assumptions while preparing sales budget for the upcoming year. The company can take average monthly sales and average selling price of previous year for the purpose of preparing budget for the next year (Higgins, 2007).

Purchase Budget

Purchase budget is also very important part of master budget. Purchase budget contains item wise details of amount of inventory that must be purchased by the company during the budget period. If the company has numerous items, it is recommended to group similar items in meaningful group so that budget manager can prepare budget conveniently. Purchas budget is prepared on the basis of production budget. Raw material requirements for production of budgeted production unit are calculated and desired ending inventory is added to this amount to ascertain total material requirement during the budget period. Opening inventory is deducted from this amount to ascertain desired purchase amount during the period (Neale and Pike, 2009).

In the given case, the company needs three items (Metal, Plastics and Handles) for the purpose of production of Screwdrivers and two items (Metal and Plastics) for the purpose of production of Saws. We have calculated total units of these items required for the purpose of producing desired units of finished goods. The production manager is required to maintain adequate amount of inventory so that production can continue without any disruption. We have added desired ending inventory in raw material requirement and actual opening inventory from raw material requirement to calculate budgeted purchase quantity. We have multiplied with figure with budgeted purchase price of items to ascertain item wise purchase (Neale and Pike, 2009).

Thus, it can be seen from the above discussion that purchase budget is very important part of budgetary process and the company must prepare it (Neale and Pike, 2009).

Budgeted Income Statement

Budgeted Income Statement is very important part of financial planning process of the company. It is prepared on the basis of budgeted sales, budgeted cost of goods sold and budgeted expenses. It contains all the line items contained by traditional income statement. However, there is a big difference between the two. The traditional income statement contains historical data whereas the budgeted income statement contains future estimates based on assumptions. The budgeted income statement is prepared to estimate result of financial operations of the company. It shows budgeted income / loss for the budget period (Arnold and Estrada, 2006).

The budgeted income statement can be very useful to the management to review financial performance of a particular division of the company. The company can provide budgeted income statement to the divisional manager at the start of the budget period and actual performance for the period can be compared with this budget. This will help the management in objective review of performance of the division and divisional manager (Arnold and Estrada, 2006).

In the given case, we have prepared budgeted income statement on the basis of estimated sales of the company for the budget period, related direct material, labor and overhead expenses. We have also considered fixed overheads and selling and admin overheads for the purpose of preparation of budgeted income statement. This budgeted income statement can be very helpful to Mr. Lipscomb and Mr. Owens. Therefore, they should carefully review the budgeted income statement and compare actual performance against this statement (Arnold and Estrada, 2006).

Cash Budget

Cash flow budget is the most widely used budget in the business organizations. In fact, it is widely used in all the areas of life. Cash budget shows item wise information of source of cash and outflow of cash. Cash budget is very important tool to plan cash inflows and cash outflows of the firm. Cash flow has mainly four parts; opening cash balance, cash receipt, cash payment and closing cash balance (Brooks, 2009).

Cash receipt contains all the cash expected to be received by the company during the budget period. Cash receipts from cash sales, collection from customers, sale of assets, loan, issue of shares etc are shown under cash receipt. Cash payment contains item wise list of cash required to be paid by the company. Cash payment to suppliers, labors, overheads, interest, loan, purchase of fixed assets etc is shown in the cash payments section (Brooks, 2009).

The company can ascertain whether it has adequate cash to meet its payment obligations or not. If the cash budget shows cash deficit, the company can arrange short term / long term finance to pay its liabilities. If the cash shortage is for short term and company expects to bridge this gap in short period of time, it can raise short term loan / bank overdraft. However, if the cash shortage is continuing one and expected to be last for long period of time, the company must arrange for long term cash (Brooks, 2009).

The cash budget will be very helpful to the company to plan its cash receipts and payments. Therefore, Mr. Lipscomb and Mr. Owens should actively involve in the preparation of cash budget (Brooks, 2009).

References:

Arnold, G. & Estrada, J. (2006) The Handbook of Corporate Finance, Prentice Hall

Brooks, R. (2009) Financial Management: Core Concepts, 1st edition, Pearson Education

Higgins, R. (2007) SE edition. Analysis for Financial Management. McGraw-Hill Education

Neale, B. & Pike, R. (2009) 6th edition. Corporate Finance and Investment Decisions and Strategies. Prentice Hall