2. Ch 6: Budgeting and Budgetary Control: When the organization’s plan for the future is expressed in dollars it is called a budget. A budget may be: part of the organizational planning process; a standard against which the organization is controlled; a target, at which the organization is aiming. Budgets may be prepared: incrementally (previous year + % increase) “ zero based” (a fundamental rethinking every year) based on previous year, but with challenges to the major assumptions

3. Exhibit 6.1: The Master Budget: Sales forecast/budget changes in receivables changes in finished goods inventory Production budget changes in raw material inventory changes in payables Other expense budgets BUDGETED INCOME STATEMENT CASH BUDGET CAPITAL BUDGET BUDGETED BALANCE SHEET

4. Sales Forecasting: The budget normally starts with a sales forecast because sales is usually the “limiting factor”. A sales forecast may be prepared by: professional forecasters (e.g. econometricians); sales/marketing staff; a committee of informed personnel. Useful information in preparing a sales forecast includes: past data and trends; macro-economic factors; knowledge of customer preferences; knowledge of technological change; knowledge of competitors’ plans.

5. Production Forecasting: In a “just-in-time” environment production exactly equals sales. Inventory of finished product allows sales and production are uncoupled, and may be different amounts, enabling smoothing of cyclical demand (e.g Christmas cards). production – increase of inventory + decrease of inventory = sales Labour forecasting: This is generally a function of production plans and labour needs in non-production areas.

6. Cash Forecasting: Cash forecasting is critical to organizational survival. Opening cash balance + Total cash received = Total cash available Total cash received: Cash collections from sales (Sales +/- changes in receivables) + Other cash receipts: (share issues, loans, sale of plant assets)

7. Cash payments: To suppliers for goods purchased (cost of goods sold +/- changes in inventory and accounts payable) To employees for labour costs To other expenses Interest & dividends Major plant asset purchases Cash available – cash payments = closing cash balance

8. Ontario Brewery: Cash Budget: $’000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year Sales 500 500 700 700 900 1000 1700 1700 1000 800 800 1700 12000 Collections from sales: n-1 800 400 400 560 560 720 800 1360 1360 800 640 640 9040 n-2 180 180 90 90 126 126 162 180 306 306 180 144 2070 Other nil Total 980 580 490 650 686 846 962 1540 1666 1106 820 784 11110 Payments: R.M. 500 500 500 500 500 500 500 500 500 500 500 500 6000 B&K 100 50 50 70 70 90 100 170 170 100 80 80 1130 D&M 100 100 140 140 180 200 340 340 200 160 160 340 2400 G&A 100 100 100 100 100 100 100 100 100 100 100 100 1200 New plant 200 200 Interest & debt repayment 10 10 10 10 10 10 60 Total 800 750 790 810 850 1090 1050 1120 980 870 850 1030 10990 Net 180 (170) (300) (160) (164) (244) (88) 420 686 236 (30) (246) 120 Start 200 380 210 (90) (250) (414) (658) (746) (326) 360 596 566 200 End 380 210 (90) (250) (414) (658) (746) (326) 360 596 566 320 320

9. Cash Budgeting: The cash budget reveals that over the year the cash increases from $200,000 to $320,000. However there is a cash crisis between May and August, with cash deficit rising to as much as $746,000. If you are unaware that there will be a cash crisis you will be totally unprepared to deal with it. If you are aware you can take steps to deal with it: Possible solutions: Delay payment for the new plant until the fall; Sell short-term investments in the spring; Get a short-term bank loan from May to August. Note this is a temporary problem, so it needs a temporary solution: raising a long-term loan or issuing new shares would not be appropriate, as these are long-term solutions.

11. Truffle Inc: North Bay Store: $’000 July 2002 7 months to July 2002 Budget Actual Variance Budget Actual Variance $ % $ % $ $ % $ % $ Sales 500 100 550 100 50 3,500 100 3,400 100 (100) COGS 250 50 290 52.7 (40) 1,750 50 1,720 50.6 30 Gross Margin 250 50 260 47.3 10 1,750 50 1,680 49.4 (70) Operating Expenses: Wages 160 32 150 27.3 10 1,120 32 1,150 33.8 (30) Rent 25 5 25 4.5 175 5 175 5.1 Utilities 5 1 7 1.3 (2) 35 1 30 0.9 5 Dep’n 10 2 10 1.8 70 2 70 2.1 Total 200 40 192 34.9 8 1,400 40 1,425 41.9 (25) Operating income: 50 10 68 12.4 18 350 10 255 7.5 (95)

12. The Balanced Scorecard: Budgetary control focuses on the financial results of the organization. If the organizational strategy can be expressed solely in financial terms, then that is acceptable. Most organizations have strategies that are wider in scope, so a more comprehensive approach to planning and control is necessary. The balanced scorecard is a way of envisioning strategy and measuring progress towards its achievement. The four sections commonly used are: financial perspective; customer perspective; internal business perspective; learning & growth perspective. This articulates and communicates a balanced approach to strategic management.

13. Carberry Hotels: Balanced Scorecard: September 2002 : Objective Measure Target Actual Financial perspective: Shareholder value Return on investment 15.0% 15.6% Share price growth 5.0% 6.0% Customer perspective: Quantity Occupancy rates 90.0% 93.2% Quality Room rack-rate growth 4.0% 0.0% Customer satisfaction 9/10 9.3/10 Written complaints nil nil Internal business perspective: Cleanliness Random checks 10/10 10/10 Restaurant Menu changes 5 6 Accessibility Wheelchair access 98.0% 98.0% Learning & growth perspective: Staff training Training hours 100 75 Market segments New segments targeted 2 1 Product development New facilities 1 0