Title:

“BUDGETING; Expenditures and Cash Non-

Manufacturing Businesses and Non Profit Organizations”

Submitted To

Sir, Yaseen Zia

Submitted By

Saima Rana
Shafaq Saeed
Sadia Tabassum
Fozia Dost
Rabia Saeed
Sonia Arif
3rd Semester

DEPARTMENT OF BUSINESS MANAGEMENT SCIENCES

UNIVERSITY OF AGRICULTURE
FAISALABAD

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 IN THE NAME OF ALLAH, WHO IS
MOST GRACIOUS, MOST MERCIFUL.

O LORD

ADVANCE US IN PURE KNOWLEDGE AND

LEAD US IN THE STRAIGHT PATH. (AMEEN)
 A ll prayers are for “ALLAH ALMIGHTY” Who helped us at the

very stage of life.

T To bless us ever with the best of all the choices
O As the best creature with the best of all the believers
B
L By the best of the religion
E
S With loving families
S
M With sincere friends and foes
E
We offer our humblest thanks from the core of our heart to the Holy
Prophet Hazrat Muhammad (Peace be upon him) who is forever a model
of guidance and knowledge for humanity.
We offer our special and sincere thanks to a dignified personality
Sir, Yaseen Zia, Department of Business Management Sciences, U.A.F., for
his valuable suggestions and guidance. .
Gratifications are of meaningless importance if we don’t acknowledge
the sacrifices, help and prayers of our affectionate and respected parents.
We are thankful for their lots of love, favor and help which they give us during
our study period.

Thank You! All

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 LIST OF CONTENTS

HEADING TITLE PAGE

#

Introduction of Budgeting
I 05

Cash Budget
II 07

Structure of the Cash Flow Statement

III 10

IV

Financial Forecasting For External Users

V

VI Pert & Pert/Cost System For Planning &

Control

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 Executive Summary

“Budget is a formal written statement of management’s plans for a specified

future time period, expressed in financial terms.”
“Capital Expenditures are long term commitments of resources to realize future
benefits.” Firms have established different procedures to minimize no of errors.
Management’s conviction to consistency of long range objectives of business.
Certainty that project will contribute to the earnings of co. Research and
development budget is also imp for improvement in existing processes.

Cash budget is the forecast of estimated cash receipts and disbursements for a
specific period of time. It consists of four major sections. it is an important mgt
task that shows the cash position of the company and allows u to evaluate n plan
for your capital need. There are two methods to prepare it. Cash Receipt and
Disbursement Method, Adjusted Income Method. But most effective is Cash
receipt and Disbursement Method.
Electronic cash mgt is the nation wide electronic transfers that accelerate the
collection of deposit from local banks into a central account.

Zero base budgeting procedure is unique in approach rather than in basic

planning and control philosophy. In 1975, AICPA recommended guidelines for
external forecasting. HEC guidelines are in harmony with AICPA
Recommendations.
Planning, Scheduling (or organising) and Control are considered to be basic
Managerial functions, and CPM/PERT has been rightfully accorded due
importance in the literature on Operations Research and Quantitative Analysis
PERT is a manufacturing-based project planning and scheduling network. In
many instances, managers have attempted to apply PERT principles to other
types of projects, including hospital planning for such issues as costs and social
security, educational planning and development, various accounting functions,
and even real estate development.

In short, Planning is a management responsibility of crucial importance to

business success. Budgeting is the process used by management to formalize its
plans. Budgeting promotes analysis by management and focuses its attention on
the future. Budgeting also provides a basis for evaluating performance

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 Budgeting:

“Formal written statement of management’s plans for a specified future

time period, expressed in financial terms.”
a) Provide historical data on revenues, costs, and expenses,
b) Express management’s plans in financial terms, and
c) Prepare periodic budget reports.

Benefits of Budgeting:

a) All levels of management plan ahead.

b) Definite objectives for evaluating performance.
c) Early warning system for potential problems.
d) Coordination of activities within the business.
e) Management awareness of the entity’s overall operations.

Types of budgeting:

• Capital Expenditure Budget

• Research and Development Budget
• Cash Budget
• Projected Income Statement
• Projected balance Sheet
• Budgeting for Nonprofit Organizations
• Zero based Budgeting
• Pert and Pert Cost System

Capital Expenditure Budget:

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 “Capital Expenditures are long term commitments of resources to realize
future benefits.”
• Important areas of managerial decisions
• Managerial errors could be costly because of long time
period

Evaluating capital expenditures:

Firms have established different procedures to minimize no of errors.

Management’s conviction to consistency of long range objectives of
business. Certainty that project will contribute to the earnings of co.

Research and development budget:

• Research:
“Research is planned search or critical investigation aimed at discovery of
new knowledge.”

• Development:
“It is the translation of research findings into a plan or design for a new
product or process for a significant improvement.”

Forms of a research and development budget:

The controller’s staff may assist in the preparation of budgets with clearly
defined goals and properly evaluated cost data.
It should be supported by a specific budget request which indicates the
jobs and steps within each project.

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 Accounting for research and development costs:

The costs of research and dev. must be expensed in the period incurred
because of the uncertainty of the extent of future benefit to the co.
An exception to the to expensing requirement applies to research
a) Conducted for others
b) Unique to extractive industries
c) Incurred by a govt. regulated enterprise

Cash Budget:
A forecast of estimated cash receipt and disbursement for a
specific period of time .Budget for cash planning and control that presents
expected cash inflow and outflow for a designated time period. It aids in avoiding
idle cash and possible cash shortages. The cash budget typically consists of four
major sections: (1) receipts section, which is the beginning cash balance, cash
collections from customers, and other receipts; (2) disbursement section
comprised of all cash payments made by purpose; (3) cash surplus or deficit
section showing the difference between cash receipts and cash payments; and
(4) financing section providing a detailed account of the borrowings and
repayments expected during the period.

It is used where investment is made. It includes sale, collection, payment, inflows

and outflows. It includes sale forecast, Collection & other Cash disbursement,
Net cash flow and cash balance. Sale forecast is done before preparing cash
budget.

The Sale Forecast:

The key to accuracy of most cash budget is the sale forecast. it
can be based on internal as well as external analysis.

Collection & Other Cash Receipt:

After sale forecast, the next step is to determine the cash receipts from these
sales. There are two types of sales: cash sale and credit sale.

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Cash Disbursement:
Next step is to forecast the cash disbursement. It shows cash outflows. It further
includes Production outlays and other disbursement.

Net Cash Flow and Cash Balance:

Once we are satisfied that we have taken all foreseeable cash inflows & outflows
into account. We combine the cash receipts and disbursement schedules to
obtain the cash inflow and outflow for each period.

Purpose and Nature of cash Budget:

• Indicate effect on cash position of season ional requirement, large

inventories,

• Indicate cash requirement needed for plant & equipment expansion and
for additional funds.

• Indicate availability of cash and in planning the financial requirement of

bond retirement.

• Shows need for additional funds from sources.

• Shows the availability of excess fund for short term and long term
investment.

• Provided basis for evaluating the actual cash management.

The period of time covered by a cash budget varies with type of business .A
yearly cash budget should usually be prepared by months, with changes made at
the end of each month in order to (1) incorporate deviation from the previous
forecast. (2) Add a month to replace a month just passed rolling cash budget
covering the next 12 months. It includes no accrual items

Preparation of a cash budget:

• The cash receipt and disbursement method.

• The adjusted Income method.

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Cash Receipt and Disbursement Method:
In this method, all anticipated cash receipts, such as cash collections on
accounts receivable, dividend, interest on loan, are estimated. The primary
source of cash receipts are cash sales and collection of account receivable.
Estimates of collection of account receivable based on the sale budget and on
company's collection experience. Collection during the month will be the result of
(1) month's sale (2) account receivable of prior months.

To illustrate, assume that during each month, collection on account receivable

show the following pattern:

From this month's sale....................................................................................20%

From prior month's account receivable:

Last month's sale................................................................................60%

2 months old.......................................................................................8%

3 months old.......................................................................................6%

4 months old.......................................................................................3%

Cash discount taken....................................................................................2%

Doubtful accounts.......................................................................................1%

100.0%

On the basis of this percentage, collections for the month of July are computed
as follows:

MONTH CREDIT SALE % COLLECTIONS

July.......................................... $150,000 20 $30,000

June......................................... 190,000 60 114,000

May......................................... 160,000 8 12,800

April......................................... 140,000 6 8,400

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March....................................... 180,000 3 5,400

Total collection for July..................................................... $ 170,600

Estimated cash disbursements are computed from the:

Material Budget, Labors Budget, Expense Budget, Plant and Equipment Budget,
Treasurer’s Budget

Adjusted Income Method:

This method is not as effective as is the cash receipt and disbursement method
.It helps in anticipating the working capital requirements. But fails to monitor cash
movements & is therefore not helpful for cash management purpose. It is
proffered for longer duration. It considers all receipts & payments on accrual
basis. Under this method cash estimates come from the forecast income for the
period, adjusted for non cash transaction and for expected cash orientation
changes in asset and liability account. The non cash transactions are added back
to income for the period .The next step is to add anticipated increase in liabilities
or decrease in asset and to deduct the opposite of it. The expected cash position
at the end of the period is the cash balance at the beginning of the period plus or
minus the net cash increase or decrease as indicated by the forecast income and
other cash transaction.

Structure of the Cash Flow Statement

The most commonly used format for the cash flow statement is broken down into
three sections:
• cash flows from operating activities,
• cash flows from investing activities, and
• cash flows from financing activities.
Cash flows from operating activities are related to your principal line of
business and include the following:
Cash receipts from sales or for the performance of services
Payroll and other payments to employees

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Payments to suppliers and contractors
Rent payments
Payments for utilities
Tax payments
Investing activities include capital expenditures – disbursements that are not
charged to expense but rather are capitalized as assets on the balance sheet.
Investing activities also include investments (other than cash equivalents as
indicated below) that are not part of your normal line of business. These cash
flows could include:
Purchases of property, plant and equipment
Proceeds from the sale of property, plant and equipment
Purchases of stock or other securities (other than cash equivalents)
Proceeds from the sale or redemption of investments
Financing activities include cash flows relating to the business’s debt or equity
financing:
Proceeds from loans, notes, and other debt instruments

Projected Income Statement:

A projected income statement contains summaries of the sales, manufacturing

and expense budgets. It projects net income the goal toward which all efforts are
directed and it efforts management the opportunity to judge the accuracy of the
budget work and investigate causes for variances. No new estimates are actually
made, figures taken from various budgets are merely arranged in the form of an
income statement, as illustrated below. The sales budget gives expected sales
revenue, the manufacturing budget furnishes manufacturing costs and cost of
goods sold which ,when deducted from sales, given the estimated
profit.Estimates from the marketing and adminstative expense budgets are
subtracted from estimated gross profit to arrive at income from operations. Other
income and expense items are either added or deducted to determine income

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before income tax. Finally, the provision for income tax is deducted to determine
net income.
Projected Income Statement

Industr J F M A M J J A S O N D Annual Annual

y% total %
Total net sales
Cost of sales
Gross profit
Gross profit margin

Fixed Expenses
Rent/mortgage
Utilities
Insurance
Licenses/permits
Loan payments
Depreciation
Other
Total Fixed
Expenses

Variable Expenses
Payroll
Supplies
Travel/auto
Professional fees
Dues/subscriptions
Advertising/marketin
g
Other
Total Variable
Expenses

Total Expenses

Net profit before

taxes

Taxes

Net profit after taxes

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How to fill out the income projection statement:

1. Determine and enter industry averages for total sales.

2. If your business is already operational in any way, use those figures to

estimate the year’s numbers. Otherwise, take your most educated guess
as to sales figures and costs.

3. When determining total sales, include any likely discounts, returns, and
bad debts.

4. Subtract cost of sales from total net sales to arrive at gross profit.

5. Divide gross profits by total net sales to arrive at gross profit margin.

6. Insurance costs include worker’s compensation.

7. Depreciation includes amortization of capital assets.

8. Payroll expenses include wages and salaries, overtime, bonuses, payroll

taxes, social security taxes, unemployment insurance, benefits, health
insurance, and any other wage-related costs other than workers’
compensation.

9. Professional fees includes legal and accounting services as well as

contracted/subcontracted labor of any kind.

10. Subtract total expenses from gross profit to arrive at net profit before
taxes.

11. Subtract taxes from net profit before taxes to arrive at net profit after
taxes. (Remember that payroll taxes are included in your payroll
expenses.)

12. Complete line projections for each month, bearing in mind seasonal and
other cyclic effects on your business. Then total the twelve months to
arrive at the “Annual Total” figures. Adjust the columns to fit your yearly
totals, if necessary.

13. Divide the annual total by the total net sales to determine the annual
percentage, then compare your percentage to the industry average.

The income statement details may be segmented by individual products or

product groups and by individual marketing territories.

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 • The Percent of sales method:

This method simply takes the last available year and uses the balance sheet and
income statement to forecast next year by assuming that most items on the
statements will have to go up if sales go up.

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FINANCIAL FORECASTING FOR EXTERNAL USERS

Recent years have seen increasing recognition of the importance of

financial forecasts for external users, because investors and potential investors
seek to enhance the process of predicting the future. The question whether to
forecasts should be included in external financial statement is controversial.
Opponents say that uncertainty of forecasts result in added legal liability, a drop
in credibility or both. Positive side says that forecasts enhance the reliability of
user’s predictions.
In 1975, the American Institute of Certified Public Accountants (AICPA)
issued a statement having guidelines for published financial forecasts. Primarily,
the AICPA recommended that:
1- Financial forecasts are presented in the same format as historical financial
statements.
2- Accounting principles used in forecasts is consistent with those expected to be
used in historical statements.
3- Forecasts amounts should represent the single most probable forecasts
result.
4- Key factors in financial results be disclosed.
SEC guidelines are in harmony with AICPA recommendations.

PLANNING AND BUDGETING FOR NONMANUFECTURING

BUSINESS AND NONPROFIT ORGANIZATIONS

Non manufacturing Businesses;

Under the guidance of the nation retail merchants association
department stores have followed merchandise budget procedures that have a
long and quiet successful history. A budget for a retail store is a necessity, in as
much as the profit of sales is generally low usually from 1 to 3 percent. Planning,
budgeting, and control administration is strongly oriented towards profit control
on the total store as well as on the departmental basis. The merchandise budget

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shows predetermined sales and profit, generally on a six months basis following
the two merchandise seasons: spring summer and fall winter .The merchandise
budgets includes sales, purchases, expenses, capital expenditures, cash, and
annual statements.
Nonprofit Organizations;
Basically, the objective of nonprofit organizations are directed
towards the economic, social, educational, or spiritual benefit of individuals or
groups who have no vested interests in these organizations in the form of
ownership or investment. The president, board of directors, trustees or
administrative officers are changed with the stewardship of economic resources,
except that their job is primarily to use or spend these resources instead of trying
o derive monetary gain. It is expressly for this nonprofit objective that these
organizations should install adequate or effective methods and procedures in
planning, budgeting, and cost control.

This difficulty of planning and budgeting in government and nonprofit

organizations is measuring the benefits or output of programs. A private
enterprise measures its benefits in terms of increased revenue or decreased
cost. In the public sector, however, the social problem complicates the
measurement of benefits. Consequently, such endeavors have often resulted in
resulted in relatively meaningless monetary outcome data. For governmental as
well as other nonprofit organizations, program performance evaluation is
needed. Problems encountered in monetary output measurement suggest that
monetary inputs might be more meaningfully related to nonmonetary outcomes
for specific programs.

ZERO BASE BUDGETING

Zero base budgeting is a budget planning procedure for the

reevaluation of an organization’s program and expenditures. It requires each

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manager to justify the entire budget request in detail and places the burden of
proof on the manager to justify why authorization to spend any money at all
should be granted. It starts with the assumption that zero will be spent on each
activity - thus, the term ‘‘zero base’’. What a manager is al-ready spending is not
accepted as a starting point.
The zero base budgeting approach asserts that in building the budget
from zero , two types of alternatives should be considered by managers :
1) Different ways of performing the same activity.
2) Different levels of effort in performing the activity.
Success in implementing zero base budgeting requires:
1- Linkage of zero budgeting to the long range planning process.
2- Commitment from executive managements.
3- Innovation among the managers who make the budget decision packages.
4- Sale of the procedure to the people who must perform the work to keep the
concept vigorous.

Therefore, the zero base budgeting procedure is new and unique mainly in
approach rather than in basic planning and control philosophy.

PERT & PERT/COST-SYSTEMS FOR PLANNING &

CONTROL:

Network Planning Techniques:

• Program Evaluation and Review Technique (PERT)
• Critical Path Method (CPM)

CPM and PERT are powerful tools that help to schedule and manage complex
projects. They were developed in the 1950s to control large defense projects, and
have been used routinely since then.

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 Critical Path Method (CPM) or the Critical Path Method (CPM) helps to plan all
tasks that must be completed as part of a project. They act as the basis both for
preparation of a schedule, and of resource planning. During management of a
project, they allow to monitor achievement of project goals. Both;
• Graphically display the relationships & sequence of activities
• Estimate the project’s duration
• Identify critical activities that cannot be delayed without delaying the project
• Estimate the amount of slack associated with non-critical activities
• Two network planning techniques are PERT and CPM. Pert uses
probabilistic time estimates. CPM uses deterministic time estimates.
• Pert and CPM determine the critical path of the project and the estimated
completion time. Reducing the cost of the project.

Examples: Both are useful management tools for planning, coordinating, and
controlling large, complex projects such as formulation of a master
(COMPREHENSIVE) budget, a political campaign, construction of buildings,
installation of computers and designing a political campaign.
Crashing:
• Reduced project completion time is “crashing”
• Crashing is the same whether you have used CPM or PERT.
• Project completion times may need to be shortened because
i. Different deadlines
ii. Need to put resources on a new project
iii. Promised completion dates

PERT Chart:

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The milestones generally are numbered so that the ending node of an activity
has a higher number than the beginning node. Incrementing the numbers by 10
allows for new ones to be inserted without modifying the numbering of the entire
diagram. The activities in the above diagram are labeled with letters along with
the expected time required to complete the activity.

Steps in the PERT Planning Process:

PERT planning involves the following steps:
• Identify the specific activities and milestones.
• Determine the proper sequence of the activities.
• Construct a network diagram.
• Estimate the time required for each activity.
• Determine the critical path.
• Update the PERT chart as the project progresses.

Benefits of PERT:

No doubt PERT has some limitations like time estimate is somewhat subjective
and depends upon judgment but it is useful because it provides the following
information:

• Expected project completion time.

• Probability of completion before a specified date.
• The critical path activities that directly impact the completion time.

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• The activities that have slack time and that can lend resources to critical
path activities.
• Activity starts and end dates.

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