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Question

1) Prepare a monthly Cash Budget in tabular form for the months February, March and April, showing the bank balance at each month's end.

2) Write a 750 word brief essay integrating aspects of the module with at least three external sources to support your position about whether you agree or disagree with the following statement: 'Budgeting is a key component in management short and long term planning.'

The following data is available from the various functional budgets prepared at Congo Limited.

January		February		March		April
$'000		$'000		$'000		$'000
Cash sales	1,500		1,850		1,620		1,400
Credit sales	13,800		12,500		11,100		12,900
Purchase for resale	7,900		8,400		7,700		5,900
Salaries and wages	3,000		3,200		3,100		3,000
Overhad expenses	2,500		2,850		3,200		2,730

Solution

Budgeting is a key component in management short and long term planning

Planning may be defined as, 'a process of setting goals, developing strategies, and outlining tasks and schedules to accomplish their goals.' Planning is an important activity as it gives the organization direction and this will give managers specific targets which they will try to achieve.

Chartered Institute of Management Accountants (CIMA) has defined budgeting as, 'a plan expressed in money. It is prepared and approved prior to the budget period and may show income, expenditure and the capital to be employed. May be drawn up showing incremental effects on former budgeted or actual figures, or be compiled by zero-based budgeting.'(Chadwick, 1998)

Budgeting is a key component in management short term and long term planning. We would now look at the reasons why a budget is such a key component of planning.

Budgetary planning helps in linking the strategic plans with the operational plans. The strategic plans are long term plans that state where the organization should be going. Operational plans are short term plans that detail the day to day work that needs to be carried out. A budget will be prepared keeping in mind that the strategic objectives of the entire organization are achieved and the operational plans will be formulated keeping the budget in mind. The budget will strive to achieve the strategic plans and the operational plans will strive to achieve the budget for a given period.(Scarlett, 2009)

A plan may be to cut costs by as much as possible, or to grow by a certain percentage every year. These plans become more clear and understandable with the help of a budget which would quantify the plans. Without quantification the plans would just be a vague indicator of the direction in which the organization wants to move.

A budget can be considered as a plan in monetary terms. As it is clear from the definition above the main steps in planning are setting goals and setting objectives to achieve these goals. A budget will help the management to define its goals and objectives in monetary terms. Each department in the organization comes up with their own budget which is a monetary representation of their goals and objectives. In this way the plans of various departments will be converted into a common denomination. The budgets of each department such as the sales budget of the marketing department, the purchase budget of the production department and so on will be combined to form the master budget. This would make the plan easily understandable by everyone in the organization and will be a formal way of making the stakeholders aware of the organizations plans.

Budgeting plays an important role in integrating the whole organization and that is one of the main reasons why budgeting is so important. Various departments will come up with various budgets. Each department head will keep his interests above the interests of the organization as a whole. It integrates the plans of various departments and ensures that all the departments work together for the growth of the organization. The planned revenue, expenditure and capital requirements are integrated.

A budget acts as a standard against which actual performance can be measured. The variance can be used for implementing feedback control. This analysis will provide the managers

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