Budget planning with an example

Budget planning determines not only the company’s goals related to the organization and control of the activity, but also substantiates the interactions between investment and financing decisions.

The cost planning process enables the individual company to deal with the problems of the future in the best possible way.  Reference: Cost planning, BVOP.org Through the planning process, the management of the company is able to assess the effect of financial and investment activities, which reduces risk and provides a more stable company development. Reference: The Five Stages of Small Business Growth, by Neil C. Churchill and Virginia L. Lewis, hbr.org

At the core of the company planning process is prepared a financial plan that offers information and methods by which the company goals will be realized. This plan answers the questions:

  • How much money does the company need?
  • How to get them?
  • How to secure financial capital?

The purpose of the financial plan is to improve the management of the enterprise and to improve the results of its activities. Reference: How to Write the Financial Section of a Business Plan, By Elizabeth Wasserman, www.inc.com

The tasks of the financial plan are to provide an idea of ​​the movement of assets and liabilities of the enterprise, as well as to give a forecast for their development.

The methodology of the financial plan is defined as work on calculating various indicators, based on a pre-selected basis. According to these indicators, a forecast version of the movement of cash, inventories, human resources, etc. is given.
The purpose of this study is to analyze and compile a financial plan of a joint stock company, using the methodology of financial – accounting analysis and calculate the necessary indicator coefficients.

Example presentation of the organization

Product Technologies, New York was founded in 1957 as a state-owned enterprise.

In 1990, the company separated from the heavy structure of mergers with other related companies and began to pursue its own market and financial policy. Still state-owned, the company managed to orient itself in a short time in the new market situation that occurred after 1990. Without downtime and loss of capacity, the production was oriented entirely to exports based on efficient orders to Europe, Canada and the United States. The realization on the domestic market covers about 5% of the sales volume.

The company was entered on 30.09.1993 in the Commercial Register under No. 34 volume 34 page 135 of company case No. 6146/1993. Invest Innovations is a joint stock company. In 1996 it was privatized and from 100% state ownership became an entirely private enterprise. The majority owner of Product Technologies AD is “Investments”, New York with 90.50% share as of 31.12.2003. The company is managed by a Board of Directors.

The products manufactured by Product Technologies are designed for a wide range of customers of all ages. Learn more about manufacturing and production: Definition and tasks of production management, stc-montreal.org, 2020, Emergence and development of Industrial and Production management, mstsnl.net, 2020

Income and expense statement

The following topics need to be defined:
  • Sales revenue
  • Changes in the balance of finished goods and work in progress
  • Raw materials and consumables
  • Staff costs
  • Depreciation
  • Delivered services
  • Other operating expenses
  • Value of assets sold
  • Operating profit
  • Financial income / (expenses)
  • Profit before tax
  • Tax expense
  • Profit after tax
  • Non-current assets
  • Properties, machinery facilities, equipment
  • Intangible assets
  • Financial actives
  • Total non-current assets
  • Current assets
  • Trade and other receivables
  • Inventories
  • Cash and cash equivalents
  • Deferred tax asset
  • Total current assets
  • Capital and reserves
  • Registered capital
  • Reserves
  • Revaluation reserve
  • Accumulated profit / (loss)
  • Total capital and reserves
  • Interest payable
  • Bond loan
  • Total non-current liabilities
  • Current liabilities
  • Trade and other liabilities
  • Short-term loans
  • Bond loan
  • Current part of non-current liabilities
  • Total current liabilities
Based on the initial data, the following indicators must be calculated:
  • Profitability indicators
  • Profitability ratio of sales revenues
  • Return on equity
  • Profitability ratio of liabilities
  • Asset capitalization ratio
  • Liquidity indicators
  • Total liquidity ratio
  • Rapid liquidity ratio
  • Immediate liquidity ratio
  • Absolute liquidity ratio
  • Indicators of financial autonomy
  • Coefficient of financial autonomy
  • Indebtedness ratio
  • Turnover indicators
  • Duration of one turnover in days
  • Number of revolutions
How can the indicators calculated in this way be treated?

Profitability ratios are positive values ​​when the financial result is a profit and show the rate of return on capital. In this case, however, they have a negative sign and show the rate of decapitalization of the enterprise.

The negative amount of the sales revenue ratio is due to various reasons: – in this case it is a matter of reducing the prices of production and increasing the total production costs.

Return on equity is related to the leverage effect. In this case it is a negative effect of the financial lever.

The calculated liquidity ratios characterize the ability of the company to meet its current liabilities and payments on short-term loans with available and available assets.

In this case, the Total Liquidity Ratio decreased in 2003 – its normal value is about 2, which is classified as an unsatisfactory state of the liquidity of the enterprise.
The quick liquidity ratio gives an idea of ​​the condition of the company’s cash register.

From satisfactory in 2002 / over 1 /, for 2003 the condition has worsened – that is, it is assessed as unsatisfactory.

The expected tendency is for the company to delay its payments, to experience a shortage of funds for the payment of salaries, etc.

For the other liquidity ratios, the balance is assessed as satisfactory if their values ​​are above 0.5. In this case, both indicators are below these values.
The ratios that characterize the degree of financial independence from creditors are influenced by the size of equity and liabilities. For the enterprise in question both indicators are unsatisfactory.

For the effective management of working capital are used indicators that reflect the relationship between sales revenue and the average availability of capital used.

In this case, relatively long periods of turnover are observed.

In general, the company is characterized by indicators well below the industry average. The following graphs illustrate the dynamics of the indicators in the periods 2002 and 2003 and give an idea for the formation of the planned balance for 2004 of the enterprise.

The formation of the planning balance / Table 4 / is based on the thus calculated indicators, the general trend of development of the enterprise and the use of the tempo method.

The growth rate is calculated as the ratio between the parameter of the forecast indicator and the baseline level of the same indicator. For the purposes of the planned balance will be used in relative numbers.

SUMMARY

Based on the analysis of the financial condition of the enterprise, the following conclusions can be formulated:

The main goal of the company should be to minimize the amount of work in progress and speed up the process of realization of the produced products.

Serious attention should be paid to the results obtained from the calculated indicators of the state of the company, which are not favorable.

The company does not have a particularly stable financial condition, no improvement of its indicators is planned in the next period.

The company’s assets are growing, in terms of rising property prices in New York. Equity remained the same in 2004.

The purpose of the report was to make a budget plan of a company existing under conditions of competition. During the development a study of the macroeconomic environment and the parameters that determine the planned balance of resources and sources of company funds was made.

The developed financial plan complies with the requirements of International Accounting Standards for the information contained in the main stages of financial planning, namely the conditions for comprehensibility and usefulness, relevance, reliability, comparability and independence, value relationship between final and initial period.