Topic 3 – Budgets

Lecture 1 - Introduction to Budgets

A What is a Budget?

Review :-

Financial estimate / plan
Focuses on future performance

B. Reasons for Budgeting

Review :-

Planning Co-ordination Control

C. The Cash Budget

Describe the definition, purpose and advantages as set out on p.73

D. Lecture Illustration Small Business – Neville’s Nut Shack

Prepare the Cash Budget for first year.

Review each of the 13 points listed. Ask students to identify if they are receipts or payments.

Go through the questions at the bottom of p.75

If you have time, indicate how a monthly Cash Budget provides further information on the cash position. It allows the future cash position to be monitored monthly. If there are months when there is a shortage of cash, then an overdraft can be arranged. If there are months where there is excess cash on hand then some form of investment that earns interest may be arranged.

Monthly cash flow budget is included for the first 6 months – see p.77

Ask students to identify if each of these cash transactions are receipts or payments.

D. Lecture Illustration 1: Cash Budget – Small Business

Neville’s Nut-Shack

1. Neville has organised a stall at a three day market where he plans to sell assorted nuts. The business will commence on 1July 2007 with a capital contribution from Neville of $15,000. Neville also has a motor vehicle valued at $5,000 which he expects to last for 5 years. The stall will cost $400 per calendar month.

2. After discussing the nut market with his cousin who has a similar stall at a market on the other side of the city, Neville estimates his sales will be as follows:

Estimated Monthly Sales
July $2,600
October $3,400
January $2,400
April $3,400
August $2,800
November $4,000
February $2,800
May $3,600
September $3,000
December $5,000
March $3,000
June $4,000

Neville expects that his sales will build up as he does some advertising and as he becomes known in the market. Sales should peak in November and December before Christmas and then slow down during January and February, before picking up gradually.

3. His mark-up will be 100% on his purchase costs, and purchases will be made early in the week of sale.

4. He plans to have one employee paid $200 per week. Workcare payments are 10% of wages.

5. He paid his accountant $400 for start-up advice and expects to pay a further $200 in March.

6. Advertising of $250 will be paid in each of the first two months of operation.

7. Public Liability insurance of $200 will be paid at the start of the business and a general policy covering fire, theft and damage will be taken out in November for $800.

8. Estimated motor vehicle expenses include $120 per calendar month for petrol and oil, registration of $430 in November, insurance of $440 in April and repairs and services of $200 every quarter commencing in August.

9. Stationery of $200 will be purchased in the first month.

10. A mobile phone costing $800 will be purchased at the start of the business operations. Expected life is 4 years. Phone bills of $300 per quarter are expected from September.

11. Equipment costing $1,000 will be purchased at the start of the business. Expected life is 5 years.

12. Miscellaneous expenditures of $50 per month are expected to be incurred from month 3 onwards.

13. Drawings will be $100 per week. There are five weeks in the months of July, October, January and May. All other months comprise of 4 weeks.

Neville’s Nut Shack
Cash Budget for the year ended 30 June 2008

Notes

$

$

BUDGETED RECEIPTS

2
Cash Sales
40,000

1
Capital
15,000

TOTAL RECEIPTS

55,000

BUDGETED PAYMENTS

3 Stock Purchases [50% Sales]
20,000

5 Accounting Fees [400+200]
600

6 Advertising