Introduction
Budgeting is a critical process in finance planning and management as it presents a platform for forecasting future performance based on operational and finance estimates. In that respect, the organization’s planning is based on the budgeting process that involves a number of budgets that are finally incorporated in the final financial forecast statements. Thus, each department and operational functions should have budgets that spell expected output and costs hence providing an overview of how the organization is expected to perform. As the director of finance for Mobitel Ltd, the following are guidelines and instructions as to the preparation of a cash budget covering all the organization’s operations. The guide clearly outlines the purpose and objectives of the budget, the requirements for the budgeting process, the type and format of the expected budget as well as the suitable control measures for the budgeting process.
Proposal/Instructions
- Budget’s Purpose
The purpose of the cash budget will include the following:
- Determining availability of the organization’s cash resources.
- Aid allocation of cash in the most efficient way.
- Aid in planning for a suitable capital structure. (Shim & Siegel, 2005)
- Objectives
In line with its purpose, the budget will be used to achieve a number of objectives guided by the organization’s goal of enhancing finance profitability performance and improving the capital structure.
- The budget will enhance cash payments and collection through identification of receivables and payables as well as cash-flow areas that need to be addressed during the budget review.
- Cost control through suitable budget variation when necessary, given that market conditions and organization operations are prone to changes that could affect output and sales figures. (Rachlin, 2000)
- Requirements
- Appropriate budgeting, finance and accounting skills for effective budget forecasting.
- Appropriate accounts and records keeping that will act as a basis for budget preparation and evaluation.
- Coordination and effective communication with all departments to ensure availability of necessary information for budgeting and review purpose. (Shim & Siegel, 2005)
- Budget type and format
Cash budget
This guideline refers to the preparation of a cash budget that will act as a tool for determining the organization’s cash position, which is a clear indicator of company’s growth and ability to service debts. In addition, it will act as a tool for measuring profitability and performance of shareholder equity. (Rachlin, 2000) This will require making estimates about different aspects of the organization and its operational environment since future sales are contingent on many factors such as economic climate, market competition, organization’s capacity and internal operations. Further, the budgeting process will involve estimation of potential costs. Finally, the budget estimates will be guided by past performance, which will be useful in basing the future estimates on reality. (Shim & Siegel, 2005)
The cash budget will also have critical aspects including the time frame, sales and expenses estimates as well as cash position as described. In addition, the budget is expected to be attainable and understandable with innovation and flexibility to allow for contingencies. (Rachlin, 2000) This will be aided by having authorized variances and revisions according to the business situation.
- Time period
The budget will have a short term horizon with annual cash budgets within which the cash receipts and payments will be forecasted and reviewed against actual performance on a quarterly basis.
- Sales and expenses estimates
Sales and expenses estimation will be the fundamental concept of a cash budget, forecasting the future cash payments and receipts during the stated timeframe. In that respect, sales estimates will be the most important as it will act as a guide for expenses forecast. (Rachlin, 2000)
- Cash position
The cash position will depend on the estimated business needs and position in respect to receivables predictability as well as the probability of future occurrences that may result to unexpected cash need. (Shim & Siegel, 2005)
In summary, the cash budget will present estimated cash inflow and outflow for the given period consisting of the following sections.
- Receipts section that will include cash balances, sales collections and other receipts
- Disbursements section that will show cash payments and their purpose.
- Cash surplus/deficit section that will show the difference between cash payments and receipts
- Finance section that will provide a detailed account of the organization’s borrowing and repayments for the one year period. (Shim & Siegel, 2005)
Running budget
The budget will take the form of running budget that can be adjusted according to change in revenues. This will be appropriate as the core purpose of the budget is cost control and management. In this format, it will be possible to reduce budget provisions when revenues decline which will be applied to ensure that the organization does not incur expenditures beyond its finance capacity. (Rachlin, 2000)
- Controls and measures
In order to ensure effective budgeting, the following control measures will be applied including audit and continuous evaluations against actual performance.
- Audit
Internal auditors will undertake budget audits to determine the correctness of the estimated figures by conducting suitable cost evaluations which will be guided by cost and sales trends. In addition, the auditors will seek to identify whether the budget is supported by appropriate documentation and procedures as stipulated by the organization’s policies. (Shim & Siegel, 2005)
- Evaluation against actual performance
The budget should be continuously evaluated against actual performance on a quarterly basis to establish the suitability of the estimates that will act as a basis for a variation authorization by management. (Rachlin, 2000)
Summary/Conclusion
In view of this guideline, it is, therefore, expected that all departments will coordinate through appropriate communication and information sharing for the purpose of setting realistic estimates for output, sales and costs. In that respect, this will require appropriate records keeping and operations’ evaluation that will guide cash payments and receipts’ estimates. Further, the budget’s crucial aspects have being identified as being the time-frame, expenses and sales estimates as well as the forecasted cash position. Thus, the budget will provide a performance review benchmark for the set period of one year with quarterly reviews that will be used to authorize necessary budget adjustment. In addition, the finance department will have internal audits to evaluate the budgeting process and estimates for appropriateness. Finally, budget review against actual performance will be carried out on a quarterly basis as a control measure to ensure that actual results are in line with the forecasted figures. This will be done for the purpose of achieving efficiency in operations and enhancing performance.
References
Rachlin, R. (2000). (4th Ed.). Handbook of Budgeting. New Jersey: Wiley & Sons Inc.
Shim, J. & Siegel, J. (2005). (2nd Ed.). Budgeting Basics and Beyond. New Jersey: Willey &
Sons Inc.
