UNIT 4 WRITTEN ASSIGNMENT
a. What financial tools described in this chapter can help you make better financial decisions?
The financial tool such as a pro-forma statement can give a better view of a real financial situation of an individual. The financial statements are used to prepare budgets in order to make better financial decisions and planning to achieve short and long term goals. There are different processes in order to prepare a budget, and these processes are: defining goals and gathering data; forming expectations and reconciling goals and data; creating the budget; monitoring actual outcomes and analyzing variances; and, adjusting budget, expectations, or goals.
b. What are the components of a comprehensive budget and what is the purpose of each component?
The components
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How are specialized budgets prepared? What is the relationship of specialized budgets to the comprehensive budget?
A specialized budget focuses on a specific financial aspect or a goal. “It usually reflects one particular activity in more detail, such as the effect of owning and maintaining a particular asset or of pursuing a particular activity” (Siegel & Yacht, 2010). Examples of specialized budgets are cash budget and tax budget. A cash budget analyzes an inflow and outflow of cash over a certain period of time and it helps the individual to determine if he has enough liquidity to meet obligations. The tax budget is the tax charged on an income such as self-employment, a sale of real estate or other goods that may have relevant tax consequences.
The relationship of the specialized budget to the comprehensive budget is that the specialized budget is incorporated in the comprehensive budget as a component of the total financial activity. For example, if an individual finds out, through the cash budget, that the loan repayment has been paid off and the last payment was refunded 50%, he can use this extra cash to finance some of the projects and achieve a goal sooner.
Budget management analysis is used by mangers as a tool and helps determine that all resources available are being used efficiently. The budgets are determined yearly and are based upon the previous year’s budget and variances. This paper will discuss specific strategies to manage budgets within forecast, compare five to seven expense results with budget expectations, describe possible reasons for variances, give strategies to keep results aligned with expectations, recommend three benchmarking techniques, and identify those that might improve budget accuracy, and justify the choices made.
The budget process is a powerful planning tool for government to make important resource decisions. According the Carney and Schoenfeld‘s article on How to read a Budget, an operating budget is a reflection of government’s financial plans. When a budget is
4. Explain why it is important to identify the following when preparing a budget: [2.3]
There are different types of budgeting that businesses typically use and those include Operating budgets, Capital Budgets and there are many subtypes that exist because a budget can also be created for special events, the recruitment and retention of new staff, and to manage the advertising expenses and return on investments for a business (Demand Media, 1999-2012). According to Demand Media (1999-2012), "An operating budget outlines the total operating expenses and income for the organization, typically for the period of a fiscal year. Capital budgets evaluate the investments and assets of the business, and a cash budget shows the predicted cash flow in and out of the business over a period of time” (para.2 ). According to the Cost-Benefit Analysis (2012), “Capital budgeting has at its core the tool of cost-benefit analysis; it merely extends the basic form into a multi-period analysis, with consideration of the time value of money. In this context, a new product, venture, or investment is evaluated on a start-to-finish basis, with care taken to capture all the impacts on the company, both cost and benefits. When these inputs and outputs are quantified by year, they can then be discounted to present value to determine the net present value of the opportunity at the time of the decision” ("Cost-Benefit Analysis," 2012).
The cash budget is another aspect of budget expectation. The cash budget determines how much cash an organization have on hand, and how much is needed to meet each expense. The cash budget will reveal to companies the availability of any type of surplus the company has for short-term investments.
Capital planning and budgeting is a very vital piece in the Public Budgeting System process. It is an essential implement in the financial management practice and is effective in both public and private organizations. It is the method which consists of the determination and the evaluation of the investments and the possible expenses by an organization. As explicate by Lee, Johnson, & Joyce (2008), capital budgets help in determining how much of each form of investment is needed, and it supports an organization in assessing the available revenue which includes loans is required to finance those investments (p. 475). Capital budgeting is a central part of the universal
A budget requires an organized layout that categorizes revenues and expenditures within particular funds to account for operations, administration, student services, salaries, benefits, transportation, and curriculum development, to name a few. The four funds for budgeting are the General Fund (10), Special Revenue Fund (20), Capital Fund (30), and the Debt Service Fund (40). Categorizing items into funds facilitates the budgetary process by grouping revenues and expenditures to compare expenses and make adjustments to meet educational goals as needed.
The budget process for each year begins by examining how much was spent each month. For each month, a budget is created for the following year. Staff members at the unit level impact the budget with supply usage.
In outlining a budget there are two phases that must be determined to create a budget, an operating phase and a financial phase. “Developing a new operating budget starts with examining budgets from previous years and identifying what components are going to change, by how much and if any new components need to be added or existing ones reduced or cut” (Budget Challenges, 2012). In the first phase of the budget it needs to be determined how much money is going to be needed to operate the day to day activities of the business.
Analyze the scope and sequence of budgeting in terms of sources of revenues, purpose of government expenditures, budget cycles, budget preparation, and debt administration.
\Governments undertake budgeting as one of the crucial activities with a budget comprising of a plan regarding financial operations that comprise of estimated revenues for financing estimated expenditures within a given period (Florida Finance Officers Association, 2011). Effective budget processes require involvement of all stakeholders so as to enhance in arriving at a budget that is well planned as well as communicated to the respective stakeholders.
The budgeted income statement, cash flows, and balance sheet follow in order. The income budget relies on the revenue and expense forecast from the operating budget, while the budget cash flows are planned for financial and investment activities. A final component of the budget process, the projected balance statement, can be used to tie in all the budgeting dependencies. Once a budget has been prepared, evaluation can be expected before approval. Budgetary components may require several iterations before finalizing the organizational budget.
Another type of budget is the capital expenditure budget, which reflects expenses related to the purchase of major capital items (Stafford, 2007). Capital items are those that have a useful life of more than one year and must exceed a cost level specified by the organization such as $1000. If the item is below this cost, it is considered a routine operating cost. Capital
Budgeting is crucial in the well-being of a company especially the financial health status of a company. In fact, no professionally managed firm would fail to budget, since the budget establishes what is authorized, how to plan for purchasing contracts and hiring, and indicates how much financing is needed to support planned activity. It is routine for a company to budget for its expenses. Expense budgets act as a guideline of how much revenue a company would require keeping the activities running. It is used to set the company’s targets for a certain period.
A budget is a financial statement which is an estimate of income and expenditure of a set period of time, which may include planned revenues, expenses, assets, liabilities and