Budgeting Techniques An Overview

(September-2011)

Prof. V Ramachandran

Times Business School ,Vashi,

Navi Mumbai.

Agenda

Budgeting
Basic Definitions Merits Limitations

Types of Budgets

Illustations

Case study

Budgeting Basic Definition

Budget :
is a financial and/ or quantitative statement prepared prior to defined period of time about the policy to be pursued during that period for attaining the given objectives.

The essential features are :

A future plan of action. Relates to the objectives to be achieved in future. A statement expressed in monetary and/ or physical terms for implementation of policy formulated by the management.

Budgetary Control Basic Definition

Budgetary Control :
The establishment of Budgets relating to the responsibilities of executives to the requirements of the policy and continuous comparison of actual with Budgets either to secure action for achievement of objective and / or to provide a basis for its revision. Budgetary control involves Establishment of Budgets Continuous comparison of actual with Budget for achievement of target and placing responsibility for failures. Revision of Budgets in the light of changed situation.

Budgeting (Contd.)
Merits of Budgets:
Essential tool of Management for controlling cost and maximizing profits. Brings all round economy in working. Buck passing can be minimized and / or avoided. Establishes better coordination Guards against undue optimism. Acts as a safety signal. Adoption of uniform policy.

Budgeting (Contd.)
Decrease in production costs. Adoption of standard costing principles Management by exception. Optimum mix. Favored by credit agencies. Optimum capitalization.

Budgeting (Contd.)
Limitations :
Opposition against the sprit of Budgeting. Budgeting in changing economy. Unrealistic Assumptions and Basic parameters Time factor Not a substitute to management Cooperation of all concerned.

Types of Budgets (Contd.)

According to time Long term Budget ( 5 10 years ) Short term Budget ( 3 5 years ) Current Budget ( 1 and less than 1 year )

According to function :
Sales Budget Production Budget Purchase Budget Personnel Budget Cash Budget Capital Budget

Types of Budgets
According to Flexibility
Fixed Budget Flexible Budget

Case Study
Company - A Joint Venture company manufacturing specialty chemicals for Petroleum Industry. Customers - Public and private sector Oil Companies. Time Frame - 1992 to 1998 Performance profile Past Prior to July 1991
The company was enjoying a status of being only producer before July 1991. Having a market share of 95% balance being met by imports

Case Study
Turnover of about 500Cr., Turnover of about 46500 MT. PBT of about 70Cr. and PAT of about 45Cr.

Performance profile Current (1993/94)

Turnover of about 200 Cr., Turnover of about 18000 MT. PBT of 10 Cr. and PAT of 3 Cr. Market share about 30%

Case Study
Sales and Pricing policy
The company sales was mainly obtained from tenders from public and private sector companies. The company largely adopted the principle of cost plus approach for responding to tenders.

Budgeting and costing

The company was preparing Budgets as an annual feature and no detailed effective budgetary control techniques was in place.

Case Study
The company had adopted an oversimplified system of costing wherein the cost incurred on material was ascertained precisely and all other elements of Labour and expenses were apportioned to the products on a very adhoc / arbitrary basis. The company sales were on ex-factory basis. The company sales were mostly on advanced payment and on fortnightly settlements.

Case Study
The broad composition of cost was as under. Material Personnel Power and Fuel Other Costs Depreciation Financial costs 55% 06 % 18% 15% 03% 03% = 100 %

Case Study
Problems
Substantial deterioration in the physical and financial performance. During 1992/93 to 94.=95) Loss of Market Share. (95 % to 35 %) Pricing policy and terms of sale not in line with the customer options/ aspirations. Budgeting and costing information was not timely and accurate to facilitate decision making process. Excess staffing. (850 permanent + 350 Tem. As against International of 350 Nos.) Low morale of the staff/ management. Outdated technology and machinery.

Illustration on Budgeting

Illustration on Budgeting