Module 4 - Corporate Finance
Module 4 - Corporate Finance
Objectives of Budgeting:
1. Planning- The financial plan of the different sub-units are prepared geared
towards the attainment of the company’s predetermined objectives. These
include the profit plan, budgeted balance sheets, capital expenditures budget,
and the cash budget so that expected results of operations and their effects on
financial resources can be visualized.
2. Coordination- Budgeting brings about harmony and synchronized operations for
the different levels of management. Heads of the different sub-units of an
organization are made aware of their common goal and their contributions to the
attainment of company objectives.
3. Control- Budgeting provides management with the yardstick in evaluating
performance. Periodic comparison between actual and budget figures is done to
ensure that operations are in accordance with plans and therefore geared
towards predetermined objectives. Variances are analyzed and the possible
causes are determined to minimize if not totally avoid them for the rest of the
year.
4. Budgetary Control- Refers to the use of budgets and budgetary reports to
coordinate, evaluate and control day-to-day operations to attain the goals
specified by the budget.
Top management formulates its overall objectives, plans, and policies and assumptions
to serve as guidelines in the preparation of the budget estimates.
The preparation of budget estimates starts with sales forecasting. Sales forecasts are
considered the cornerstone in budgeting.
The heads of the different responsibility centers, in consultation with their immediate
superiors, prepare their individual budgets based on planned volume of activities.
The individual budgets are then consolidated into a tentative master budget which may
undergo revisions until an acceptable one is produced.
Finally, top management approves the final master budget and disseminates the
approved budget to the different responsibility centers.
Master Budget
1. Operating budget or profit plan- This refers to the plan of operations wherein details
of revenues and expenses are shown and takes the form of budgeted income
statement.
2. Financial resources budgets- These show the effects of the profit plan on the
financial resources of the company and consist of the budgeted balance sheet and
cash budget.
3. Capital expenditures budget- This is in the form of a statement showing the planned
procurement, and disposal of plant, property and equipment.
CAPITAL BUDGETING
Management is originally hired to take control of the funds of the owners of the
business. In most cases, it involves the maximization of the earning power of these
funds. The planning and control of capital expenditures is, therefore a basic executive
function. As such, the budgeting of funds for capital expenditures is a very important
activity of management.
Capital Budgeting – the planning and control of capital expenditures. This activity is
essential because it provides a systematic evaluation of the firm’s alternatives. It helps
management in choosing an alternative that will provide the best yield for the company.
Valuation- The process of determining the proposal’s real worth to the firm.
Investment- It is made when a firm spends some of its funds for the establishment of a
project. By doing so, the opportunity to use the same funds in other possible projects is
lost.
2 Forms of Investment
1. Initial Investment- it refers to the amount that has been devoted to a project until
it generates cash inflows from operations.
2. Later Investment- expenditures made after the first cash inflow
1. Establishing Priorities;
2. Cash Planning
3. Construction Planning
4. Eliminating Duplication
5. Revising Plans
CAPITAL BUDGETING SYSTEM
BUDGET REQUESTS
Budget Requests are those made to include in the corporate budget capital
projects which are felt to be desirable by those in the lower organizational levels.
1. Project Title:
2. Cost, including estimates on:
a. Fixed Capital
b. Working Capital
c. Non-operating Outlays
d. Other, including opportunity cost;
3. Priority Rating of the Project;
4. Profitability of the Project;
5. Timing or the ability to adhere to a construction schedules;
6. Financing Methods;
7. Project Classification; and,
8. Project Narrative.
The Approval of the Budget is a process which requires the following steps:
After the approval of the budget, the next step undertaken is getting an
appropriations request approved. The officers and managers of the corporations are
usually given the authority to approve appropriations requests up to certain established
limits.
1. The request and the authority section- this serves to identify the originator
and the project:
2. The narrative section- this details the requesting entity’s justification for
undertaking the proposal. This section normally includes the following:
a. Proposal;
b. Objectives;
c. Conceptual Framework;
d. Alternatives; and
e. Sensitivity and Risk.
3. Supporting Documentation Section- This contains cost estimates and the
results of market studies and financial analysis.
Progress Reports are submitted at regular intervals for the following purposes: