Summary
Summary - Financial Management 332 (Finman332)
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Includes theory and interpretation of all the components 1 -6
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Component 1: Budgets as Financial Management ToolChapter 1 – Budgets as financial management tool
Objective:
• To forecast the future bank balance
• Considered all activities conducted as part of an entire firm’s operations
• Converted income statement items into the corresponding cash receipts and cash
payments
• Nature of Budgets as a Tool of Financial Management
- Budget: quantified statement of proposed activities by means of which the enterprise
hopes to achieve its objectives
- Budget should satisfy the following requirements:
o Objective
o Consistent
o Reliable
o Realistic
- Key words:
o Planning
o Future
o Quantitative money terms
o Comparative measures
o Control
• Purpose of budgets
- Higher profitability
o limit waste
o improve management decisions
- Ensure optimal liquidity
o Identify best means of financing
o Advanced knowledge of future cash requirements
• Functions of budgets
- Task management
- Means of communication
- Forecasting function
- Means of coordination
- Means of control
- Educate managers
• Most important obstacles
- Conflict as a result of conflicting interests
- Excessive emphasis of control functions
- No room for own discretion
,Management planning and control
• Planning
- Development of future orientated objectives and drawing up plans quantified in
monetary terms (budgets) to achieve these objectives
- Drawing up plans quantified in monetary terms to achieve objectives
- Integrated budgeting system
- 3 types of projections:
o Reference: look at past and compare
o Desired:
o Planned: how will the budget feed into plans
• Control
- Observations of differences between financial norms and actual figures
- Combined with critical evaluation and reporting
- Budgetary control
o Ex post transaction control
o Purpose: analyse deviations, corrective measures, reward and reprimand,
planning data, errors kept to a minimum
- Steps of control:
o setting of standards
o collection of information
o comparing actual performance with standard
o analysis and evaluation of performance
o corrective action
, Integrated budget system
• system that draws all the different sub-budgets into one system resulting in the main
budget
Cash Budget
• Definition
- Tool, in the form of a statement, which contains an estimate of all the outgoing and
incoming amounts during a particular future period
• Preview of:
- Expected cash receipts and payments
- Future cash requirements
- Periods where financing is required for cash shortages, investment of surplus cash
Cash management
• Delays payments, speeding up recoveries
• Synchronising inflow and outflow of cash
• Inventory model applied for cash management
Differences between profit and cash
• Income statement shows profit or loss (gain/loss on disposal of PPE, etc.)
o (convert corresponding cash values)
• Contains non-cash items (excluded but impact on tax calc)
o Excluded, but impact on tax calculation is important
• Cash budget must show all cash tax payments
o income tax, tax on gains on disposal of PPE
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