Transcript Money Tracks (Nature of Budgets) Financial Analysis LAP 3 Money Tracks (Nature of Budgets) A Explain the importance of budgets. B Describe the characteristics of an effective budget. A Explain the importance of budgets.  Teddy knows.

Money
Tracks
(Nature of Budgets)
Financial Analysis
LAP 3
Money
Tracks
(Nature of Budgets)
A
Explain the
importance of budgets.
B
Describe the characteristics
of an effective budget.
A
Explain the importance of budgets.

Teddy knows the route from Kiyah’s house
to the theater very well.

Could Teddy drive to the theater blindfolded?

Of course not!

Running a business can be like driving a car.

Businesses need to see where they are and
where they are going.

They do this with budgets.
Why Use a Budget?
To
accomplish
a financial
goal
What Is a Budget?
An estimate of
income and expense
for a specific time period
The Three M's of Budgeting
M oney

Budgets use dollars to define and
quantify company goals.

Money falls into two broad categories:
• Expense
• Income
The Three M's of Budgeting
M aps

The budget shows:
• Where the company is
• Where it wants to go
The Three M's of Budgeting
M anagement

Budgets help managers to make
informed decisions.
What Do Budgets Do?
 Translate goals into actual means for
accomplishing them
 Create physical records
 Organize business activities
 Guide operational decisions
 Evaluate long- and short-term performance
 Protect against financial crisis
B
Describe the characteristics
of an effective budget.
What Do Budgets Look Like?

Think of a budget as a large tree.

The trunk of the tree is labeled
either income or expense.

The main branches are types
of income or expense.

Then, those branches are divided
into smaller branches.
Categories That Appear in Budgets
Income

Sales
• Cash
• Credit


Investments
Other sources
Categories That Appear in Budgets
Expense
 Rent
 Insurance
 Utilities
 Supplies
 Wages
Developing Specific Dollar Amounts
for Budgets

Adjust the previous year's budget based
on changes in the:
• Company
• Competitive environment
• General economy

Use the previous budget with an
across-the-board, percentage increase.

Demonstrate the need for every expense
(a.k.a. zero-based budgeting).
Budget Time Periods

Budgets are usually
prepared for a fiscal year.
 The annual budget is
broken down into smaller
time periods.

Many businesses now use
rolling (continuous) budgets.
The Master Budget
Cutting Tools
3%

Example Machinery
27%
Is made up of
information from
specialized
budgets that
are generated
by individual
departments
Specialized Budgets

Reflect the goals and
activities for specific
areas of the company

Are interrelated
Budget Report Formats

Can change to meet
managers' needs
How Are Budgets Prepared?

By individuals
responsible for
managing people
and money

With input from
people responsible
for generating
income and
incurring expense
Characteristics of Effective Budgets
 Well planned
 Realistic
 Flexible
 Clearly
communicated
 Evaluated
 Business owners plan ahead
for income and expense.
 Imagine you're developing a
swimming pool's budget.
 What income and expense
categories would you include?

Gina has a $10,000 travel budget.

She is on track to spend only $9,000
this year.

That means her travel budget will
be lowered by $1,000 next year.

To keep her $10,000 travel budget,
she could stay at nicer hotels and
take clients to fancier restaurants
for the rest of the year.

What would you do?
Acknowledgments
Original Developers:
April J Miller
and Lelia Ventling, MBAResearch
Version 2.0
Copyright © 2012
MBA Research and Curriculum Center
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