This guide aims to give you insight into finance and accounting in your company. We will do this by describing, in straightforward terms, the format in which financial accounting information is presented and the why and how that information is used in pursuit of business goals. You will then be in a better position to understand the financial aspects of your company and to know the questions to ask of your finance department. This will also help you to understand more about the basis of your department's budgets and the issues involved in such financial important transactions as investment or acquisition decisions, where you may be involved from a legal perspective. Lastly, it will help you form a judgement of target companies, using available financial data.
Budgets put numbers to the future plans of the organization. The budget is a key planning and control tool which can be viewed as an attempt to forecast in advance the financial accounts of the company for an accounting period. As such, it represents what the organization expects to happen in the future, sets targets for all aspects of the organization's activities to that end, and most importantly provides a basis for identifying and dealing with significant variances between actual and expected performance as they arise. Budgetary control is the monitoring of how actual activity compares with budgeted activity and the action taken on any significant variances, favourable or unfavourable.
It is essential for budgetary control that those with the responsibility and authority for implementing the budget - budget holders at all levels - are clear as to what they are being asked to achieve and the range and limits of their authority and responsibilities.
There is one master budget for the organization with all subsidiary budgets within the organization being constituent parts of that budget. The number of subsidiary budgets to be formulated will be based on what is needed for the sensible control and coordination of the business. For example, the master budget may comprise:
- sales budget, including budgets for sales price and volume for products A, B, and C;
- production budget, including budgets for direct materials, labour, direct expenses, and plant utilization respectively;
- selling budget, including advertising, marketing, and promotion budgets;
- distribution budget, including transport, warehouse, and packaging budgets; and
- administration budget, including budgets for HR and accountancy.
The cash budget is one of the most important. It will reflect, at least on a monthly basis, the projected cash inflows from customers and, against it, the cash requirements of the organization such as payments to suppliers, salaries, interest, etc. Periodic shortfalls of funds may have to be financed by, for example, bank overdraft.
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