The managers most likely to succeed in today’s business environment, are those who understand how to use budgets as business tools, for departmental and personal success. Managing Budgets is an informative and practical guide to the essential skills needed. produce accurate and useful budgets.

1. Essential Of Budgeting
Iyad S. Attari

2. INTRODUCTION
Essential Of Budgeting

3. INTRODUCTION
• The managers most likely
to succeed in today’s
business environment, are
those who understand how
to use budgets as business
tools, for departmental and
personal success.

4. INTRODUCTION
• Managing Budgets is an
informative and practical
guide to the essential skills
needed.
• produce accurate and
useful budgets.

5. BUDGETING IN BUSINESS

6. BUDGETING IN BUSINESS
• Using budgets is vital for the planning and
control of a business.
• Budgets help co-ordinate actions of different
managers and departments to achieving
results.

7. BUDGETING IN BUSINESS
• Budgets also give authority for departmental
managers to sustain expenditure by their
department.
• And provide targets for earning revenue.

8. BUDGETING IN BUSINESS
• Budgets are a way for an organization to
generate information.
• It can measure actual performance.

9. WHY BUDGET?
• Budgets help an individual, department,
and organization achieve planned
objectives.
• Budgets also help to show the financial
responsibilities of the organization
Stakeholders.

10. WHY BUDGET?

12. THE DISADVANTAGES
• Budgets increase paperwork and consume time,
especially in the early hours.
• Budgets are slow to work, since the benefits
will not be seen until the next year.

13. THE DISADVANTAGES
• Budgets require standardization, which can lead
to inflexibility.
• Budgets can meet with resistance from
managers unwilling to hold new procedures.

14. Managing Budgets
Chapter One

15. Managing Budgets
Three key stages of budgeting to
improve the quality of your budgets:
• preparing
• writing
• monitoring

16. UNDERSTANDING BUDGETING
• Budgeting is the process of preparing,
gathering, and monitoring financial
budgets.
• It is a key management tool for planning
and controlling a department within an
organization.

17. WHAT IS A BUDGET?
• A budget is a plan for future activities.
• It can be expressed in a number of ways, but
usually it describes all of a business in
financial terms.
• It is the scale by which a organization’s
performance is measured.

19. DEFINING A BUDGET
• A budget is a statement of monetary plans.
• that is prepared in advance of a coming
period, usually one year.

20. DEFINING A BUDGET
• Include only planned revenues and expenditures
(the profit-and-loss account).
• which show the income that each part of
anorganization is expected to generate and the
total cost that it is authorized to incur.

21. DEFINING A BUDGET
• Budget should also include a plans for
assets and liabilities (budgeted balance
sheet).
• And the estimates for cash receipts and
payments (budgeted cash flow).

23. Managing Budgets
First: WRITING A BUDGET
Second: MONITORING A BUDGET

24. Managing Budgets
First: WRITING A BUDGET
• GATHERING INFORMATION
• ANTICIPATING REVENUES
• ESTIMATING EXPENDITURE
• UNDERSTANDING COSTS
• PRODUCING THE FIGURES

25. Managing Budgets
First: WRITING A BUDGET
• UNDERSTANDING CAPITAL BUDGETS
• PRODUCING CASH BUDGETS
• CONSOLIDATING BUDGETS
• FINALIZING A BUDGET

26. Managing Budgets
Second: MONITORING A BUDGET
• ANALYZING DISCREPANCIES
• MONITORING VARIANCES
• ANALYZING BUDGET ERRORS
• INVESTIGATING UNEXPECTED VARIANCES

27. Managing Budgets
Second: MONITORING A BUDGET
• MAKING ADJUSTMENTS
• RECOGNIZING BEHAVIORAL PROBLEMS
• BUILDING ON BUDGETING
• ASSESSING YOUR SKILLS

28. WRITING A BUDGET
First Step

29. WRITING A BUDGET
To write a budget you must:
 gather information.
estimate figures for income and
expenditure.
and bring everything together in one
agreed overall document.

30. GATHERING
INFORMATION
• By gathering information on all the
possible internal and external
influences on your budget.
• Be able to determine what can and
what cannot be achieved.
• And what limiting factors might
constrain your organization’s
activities.

31. GATHERING
INFORMATION
• External influences can have a
greater effect on the success of a
business than internal influences.
• So pay them close attention.
• Do not ignore the internal influences.

32. GATHERING
INFORMATION
• Take time to understand what is
happening and what is about to
happen around you.

33. Type Of Risks
what is the obstacles not only effect the business negatively (income) but
also to Maximize income .
Inflation Risk :
 Inflation has an advantage for producers but disadvantages for consumer.
 To measure the inflation= The Average of all goods and services. ( The
important prices and non important prices taking together .
 So the simple average not considered to measure inflation and replaced by
the Weighted Average .
 Weighted Average (price level) = (p1 * w1) + (p2 * w2)+…………(pn * wn)
= Points.
 The relationship between inflation and unemployment . ( is negative , when
the inflation increase the employers or producers use more employees to
collect more revenues from the increase prices because it become worth it .
( Fillips theory ).

34. Political Risk :

35. Political Risk :
• The probability of loss from actions of
governments.
• Political system in the country .
• Changes in public opinion ,government
policy , tax laws, regulations on
exportations, foreign influence, & War.

36. Exchange Rate Risk :
 Is the risk that a foreign currency transaction will be
negatively exposed in exchange rates.
 For example the Jordanian currency drop in year 1989
against the us dollar.
 Foreign currency risk : Hard currencies ( US Dollar, Euro
, Pound , Yen )
 Other currencies called the Soft currencies.
 What effect the currency price : a) GNP b) Inflation
c) The increase in the interest rate on the currency effect to
increase the demand on it .

37. Interest Rate Risk :
 Is the risk of fluctuations in the value of assets due to changes
in interest rates.
 Greater the longer the maturity of the asset.
• The value of bonds decline when the interest rates increase .
• If interest rate Decline lower return will be available for reinvestment of interest &
principal payments received .
Default risk:
 Is the risk that the borrower will be unable to repay debt.
 The higher the default risk the higher the rate of return
required by the investor .

38. Credit Risk :
 Ex. When you can collect the loans after 3 years so the purchasing power will decrease.
 Type of credit risk :( Default risk , interest rate changes ).
 Credit Policy :
Credit period. ( 2/10 , net 30 )
Discounts given for early payments. ( 2/10 , net 30 )
Credit Standards. ( financial strength can accept credit customers, but this cause bad debts).
Collection Policy. ( speed up collections but it might also anger customers).

39. Market Risk :
 Changes in prices will result from changes that effect all firms.
 The Competition is the risk but not the monopoly .
 Prices correlated to some degree with broad swing in the economy caused by
recession , inflation high interest rates ,etc.
 Called unsystematic risk or no diversifiable risk.
Business Risk :
 Is the fluctuations in earnings before interest & tax ( Operating income) when the
firm it used no debt.
 Depends on factors such as:
1) Demand Variables.
2) Sales Price Variables.
3) Input Price Variables.
4) Amount Of Operating Leverage.

40. Regulations Risk :
 Such as the central bank regulation for the local banks to increase their
capitals for a higher limits . The solution here is to increase the capital or
merge with other banks .
Finance Risk :
 The possibility that an asset cannot be sold on short notice for its market
value .
 Which is the risk to the shareholders from the use of financial leverage.
 Called the liquidity risk for the short term period but when it became a
chronic or long term we call it Bankruptcy.
 From business failure , stock market, interest rates, etc.
Employee Risk :
 Strikes.
 Labor unions.
 Unskilled labor.
 Ethical risk .

41. Management Risk :
 Inefficient management.
 mismanagement.
 Ethical risks.
Technological Risk :
 Old machines or systems for production and services.
 From advances in technology technical failure etc.

42. Natural Risk :
 Earth quick.
 Volcano.
 Flood.
 Fires.
 Accident
 Disease.

43. Environmental Risk :
 Pollution.
Natural of the Business Risk :
 Place of the building, (position far from the harbor or airport ).
 Operational ( to distribution to supplies & operations, loss of access to essential
assets , failures in distribution).

44. Portfolio Risk :
 Is the risk remaining after allowing for risk reducing effects of combining securities
into a portfolio .
 Portfolio risk is attributable to the poor balance of risks within the portfolio.
 There is a limitation for the no. of securities in the portfolio.
120
Diversification by using portfolio
100
80 1
Risk
60
40
4
20
0
1 2 3 4 5 6
Size of portfolio

45. According to the source of risks
A) National Risk : Inside the co.
 Firm risk. ( any risk inside the firm).
 Market risk. ( Competition from other co. from the same
country ).
 Inflation risk. ( and the local industry for the same industry
).
B) International Risk : Outside the co.
 Firm risk. ( in the international markets).
 Market risk. ( Competition from other co. from the other
country ). Economy
 Inflation risk. ( International relations between 2Market such
co.
as Mercedes international effect Mercedes in Jordan
strongly ). firm

46. According to the standard of controllability
risk
A) Controllable Risk :
 You can minimize it but can not delete it.
 Called  Firm risk  Systematic risk  Avoidable risk.
Diversifiable risk.
B) uncontrollable Risk :
 The risk that you can not minimize it .
 Called  Market risk  Economy risk  Unsystematic risk
Non-Diversifiable risk.

47. 2nd Anticipating Revenues
Managing Budget

48. Anticipating Revenues
• Most budgets are driven by the overall
level of sales.
• so to produce an accurate budget you
must correctly estimate the
type, amount, and timing of revenues.
• Focus on the sources of income, to be
expected volume and price, and the
timing of receipts.

49. Anticipating Revenues
• ASSESSING REVENUE TYPES
• ESTIMATING REVENUE AMOUNTS
• PROJECTING REVENUE TIMING

50. Anticipating Revenues

52. ESTIMATING EXPENDITURE
Managing
Budgets

53. ESTIMATING EXPENDITURE
• Actual expenditure is usually greater than
that budgeted for.
• Organizations are often surprised by
this, even though it happens every year.

54. ESTIMATING EXPENDITURE
• To ensure an accurate expenditure
forecast, focus on the types, amounts, and
timing of expenditure.

55. ESTIMATING EXPENDITURE
(costs driven by particular
products & services)
• To ensure an accurate expenditure
forecast, focus on the types, amounts, and
timing of expenditure.
(shared costs incurred for the
whole organization)
• (costsstarting or by particular products and
(incurred when
driven
services)
growing a new operation)

56. ESTIMATING EXPENDITURE
• ESTIMATING THE AMOUNT OF
EXPENDITURE
• Ask every relevant department
• about quantities needed, prices, and total
amounts for all the different possible costs.

57. ESTIMATING EXPENDITURE
• ESTIMATING THE AMOUNT OF
EXPENDITURE

58. ESTIMATING EXPENDITURE
• PROJECTING EXPENDITURE TIMING
• Timing of expenditure is crucial to producing
an accurate cash flow forecast.
• Especially the timing of the largest
expenditure.

59. ESTIMATING EXPENDITURE
• PROJECTING EXPENDITURE TIMING
• It is important to coordinate with the
purchasing department.
• since they might have recently negotiated
some expenditure timings

61. UNDERSTANDING COSTS

62. UNDERSTANDING COSTS
• It is important to fully understand
costs.
• so you can produce accurate
budget.
• And provides a better basis for
analysis and decisions.

63. UNDERSTANDING COSTS
View costs from two perspectives:
• fixed or variable,
• and direct or indirect.

64. UNDERSTANDING COSTS

67. PRODUCING THE FIGURES

68. PRODUCING THE FIGURES

69. PRODUCING THE FIGURES
CHALLENGING MONETARY AMOUNTS
• You should check and double-check your figures
carefully.
• When the budget committee examines your
budgeting you must be confident that you have
accurate figures.

70. PRODUCING THE FIGURES

74. CONSOLIDATING BUDGETS

75. CONSOLIDATING BUDGETS
• Submit your budget to the budgeting
committee to prepared the master
budget.
• When budgets consolidated, you may
have to modify your budget.

78. CONSOLIDATING BUDGETS

79. NEGOTIATING BUDGETS
• Budget meetings requires an
understanding of the agendas of each
member of the budget committee.
• understanding why they are
there, and what they are trying to
achieve.

80. FINISHING THE BUDGET
• Once the budget committee has agreed on
the master budget.
• All departmental and subsidiary budgets will
have been consolidated.

81. FINISHING THE BUDGET
• The Master Budget will contains:
 Profit-and-loss accounts
 Balance sheets.
 Cash flow statements.

82. FINISHING THE BUDGET
• These documents used to plan and control
activities for the following year.
• Your budget will remain the centerpiece of
control in your department.

83. Second: MONITORING A BUDGET
Managing Budgets

84. MONITORING A BUDGET
• ANALYZING DISCREPANCIES
• MONITORING VARIANCES
• ANALYZING BUDGET ERRORS
• INVESTIGATING UNEXPECTED VARIANCES

85. MONITORING A BUDGET
• MAKING ADJUSTMENTS
• RECOGNIZING BEHAVIORAL PROBLEMS
• BUILDING ON BUDGETING
• ASSESSING YOUR SKILLS

86. MONITORING A BUDGET
Once you have written the budget:
 Revenues must be achieved.
 Expenditure must not be exceeded.
• You should constantly review your
budget and adjust as necessary.

87. MONITORING A BUDGET
ANALYZING DISCREPANCIES
• There will always be discrepancies between
your budget and actual performance results.
• Understand and analyze all discrepancies.

88. MONITORING A BUDGET
ANALYZING DISCREPANCIES
• Understand why there are discrepancies.
• No matter how small discrepancies.
• Understand and analyze all discrepancies.

89. MONITORING A BUDGET
ANALYZING DISCREPANCIES
By assessing why discrepancies occurred You
will be able to ensure that:
 The chances are reduced
 And the future discrepancies are more
efficiently expected.

92. MONITORING A BUDGET
MONITORING VARIANCES
By assessing why discrepancies occurred You
will be able to ensure that:
 The chances are reduced
 And the future discrepancies are more
efficiently expected.

94. MONITORING A BUDGET
ANALYZING BUDGET ERRORS
• Budget errors occur as a result of poor
preparation of the original budget.
• Sales will be lower than expected.
• While costs will be out of control.
• It is vital that you understand where you went
wrong so that you do not make the same
mistakes again.

95. MONITORING A BUDGET
ANALYZING BUDGET ERRORS
CHECKING OFF SALES REVENUE
• Use a checklist to help investigate the source
of errors when predicting sales revenues.
• It will help to discover possible explanations in
a logical and systematic way.

97. MONITORING A BUDGET
INVESTIGATING UNEXPECTED VARIANCES
• There are often cases where a variance could
not possibly have been predicted or avoided.
• There may be something you can do about
them and ways that you can learn from their
consequences.

98. MONITORING A BUDGET
INVESTIGATING UNEXPECTED VARIANCES
• There are often cases where a variance could
not possibly have been predicted or avoided.
• There may be something you can do about
them and ways that you can learn from their
consequences. View

101. MONITORING A BUDGET
MAKING ADJUSTMENTS
• The process of comparing actual figures with
budget is a continuous one.
• You should constantly adjust the budget.

103. MONITORING A BUDGET
RECOGNIZING BEHAVIORAL PROBLEMS
• Manage not only financial interactions but also
the staff in your department.
• To success: budget will depend on the co-
operation of all those who are involved in all
stages of the budget process.

106. MONITORING A BUDGET
BUILDING ON BUDGETING
• After your budget has been set and
monitored, you should look back over your
budgeting activities to learn from your
experiences.
• You should do this after the first three months
of your budget and at regular times later.

108. Thank You
Iyad S. Attari 2009