 Hello and welcome to this session in which we will discuss what is a budget, the benefits of a budget and the different types of a budget. This topic is covered in managerial accounting, cost accounting, CPA exam, BEC section, as well as the CMA exam. Now if you are an accounting student or a CPA candidate, especially if you are a CPA candidate or a CMA candidate, I strongly suggest you check out my website, farhatlectures.com. I don't replace your CPA or your CMA review course. However, however, I can be a useful addition to those courses. I can add 10 to 15 points to your score, thus helping you pass. How? I explain the material differently, differently than your CPA review course. Therefore, you might be able to understand the material, then take advantage of your CPA course to pass the exam. Your risk is one month of subscription, your potential gain is passed in the exam. And if not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I do have resources for other accounting courses. Please connect with me on LinkedIn. If you haven't done so, take a look at my LinkedIn reviews, people that actually use my material to pass the CPA exam and connect with me on YouTube, like this recording, subscribe, connect with me on Instagram, Facebook, Twitter and Reddit. So first we're going to talk about a budget. What is a budget? If you think of a budget, think of a map. What is a map? A map helps you chart the road for you from point A to point B. And this is basically what a budget would look like. It's a financial plan, manager used to coordinate business activities. So basically the plan is to all of us working together to go from point A to point B. So we're all working on the same goal. So we use the budget to develop strategies. This is what we want to do. We want to increase sales, for example, or we want to expand our market or we want to increase our margin, whatever our strategy is. Then we're going to plan in budget. We're going to have to interpret this strategy somehow in figures and numbers so we can take specific actions to achieve. If we want to increase our sales by a million dollars or 10%, well, we have to express that. Where do we express that in a budget? So we can implement the plans. Now we know what we need to do. We're going to implement the plans and when we implement the plans sometime we're going to have to take corrective actions. It was not as expected or it was as expected or we need to increase our marketing or we need to reduce our exposure somewhere. So we'll take corrective actions based on that budget. Now obviously once we work with an actual budget, you'll see how all these steps fits together. Now what are the benefit of a budget? Why do we have a budget? Budget helps you in many different ways. For one thing, it requires you to plan for the future and that's important. Planning is important. You don't want to go based on a day to day and if something comes up, you don't know how to deal with it. Once you have a plan, then you have a vision for the future. Then you can plan ahead three, six months, nine months down the road. If you know you need supplies down the road, you can plan for it today and input that information into the budget. So the benefit of a budget is you can coordinate the company's activities. Everyone is making the decision all on the same page, why? Because if I know I'm going to be selling one million, I am using this number. My plan is to sell a million dollar worth of sales. I may need to purchase 400,000 worth of input. So I need to talk to the purchasing department. And the purchasing department will need to talk to the cash department to make sure we're going to have, we can pay for this. So we are all coordinating our activities in a formalized plan. So it facilitates coordination and communication. So basically, we're all on the same page. Then if we're going to sell them, maybe we need shipping costs. How are we incurred the shipping costs? And the third benefit of budgeting is benchmarking. Okay, what's benchmarking? It's basically setting a record, say this is what we want to do. This is what we want to achieve, to motivate employees and help manager evaluate performance. So basically, what you do is you compare yourself to last year and the budget will help you do that. How did you, how much did you budget last year? How are you doing this year? Or you can compare yourself to another company. Budgeting will help you in this process as well. And benchmarking is important. This way you know where you stand vis-a-vis a prior period, vis-a-vis another competitor. Now, the budgeting procedures, what are the budgeting procedures? Basically, how do we set a budget? Okay, the budget should include, should include input from all level of the company. Okay, in other words, from top managers, medium and low level managers. Okay, this is called a participative budget. Okay, where all individuals who are directly impacted by a budget are involved. So rather than just impose the budget on them, you let everybody get involved. And research shows that's a better way of building a budget. And we're gonna see the benefit of this. Those budgets, which is participative budgets, tend to be achievable because you bought in, you participated. It was not imposed on you. Okay, so that's why you are more likely to be motivated to work hard to achieve those plans. So managers must support the budget. And when they participate, usually you should gain that support, show employees how budget can help them achieve better results, requires that employees participate in developing the budget. So those are all good three steps. And sometime we have budgetary games. What are budgetary games? One term that we use something called budgetary slacks. And basically occur when the managers intentionally understate expected revenues and overstate expenses. Now why would they do that intentionally? Well, because they want to look good. So when they understate expected revenues and they come up with higher revenues, then they are compensated more. They are valued more. They are rewarded. So it's basically a game. So you say I'm gonna make 600,000 worth of sales and you'll come up at 750. You would look good. Or why would you understate overstate expenses? It's because you want to reimburse. You want those resources. You want those resources to be allocated to your department, to your division. Therefore you would say I need more expenses. I need more resources. Why? This way you have some room to wiggle because you have additional expenses for the manager of that division. Those are resources. The more you have, the more you do. Another game that could be played with budget is spend it or lose it. A lot of budget where it says if you don't spend the money, next year you don't get it. Or you would lose it this year and next year we'll cut it out. Therefore what happened often times is managers, they spend the money regardless whether they knew the supplies, whether they need the inventory or not. It's because they said, well, I don't want to lose this amount of the budget. Therefore I'm going to spend it. Now we're going to look at different types of budget. There are different types of budget. I'm going to go through them one by one. And we're going to look at them eventually in one way or another. So this is basically only the types. What do they look like? One is a strategic budget. And hopefully you understand from your management course. Once we talk about strategic, it means long-term financial plans. So it's a fancy word for long-term planning, strategic planning. And here we're talking about a strategic budget three to 10 years sometime. It's a strategic. It's for a long period of time. It's not for a day-to-day operation. Now we have operational budget. Operational budget to operate the business on a day-to-day basis. It's a short-term financial plan used to coordinate the activities for the short-term goals of the company. And what are the short-term goals for the company? To make profit, to operate the business on a day-to-day basis. So this is the operating, operational, operational budget. We also have something called continuous budget. Continuous budget is a type of operational budget. And basically what happens is let's assume you plan for 12 months. Let's see. 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12. And what happens once you're done with this month, you will add another month at the end. So this is called the continuous budget. A zero-based budget, you just need to know what this is. This is where all revenues and expenses must be justified for each period. Why do we say this? Because usually, budget are based on the prior period. So basically when you start the period, you would say, OK, this is what we did last year. Let's start the budget from there. Let's roll over the numbers. So the previous year budget here are ignored under this approach. And a zero-based budget, basically you're starting from scratch. Don't worry about last year what we did in revenues and expenses. Tell me this year, how are we going to create the budget? This is a zero-based budget, basically starting from zero. This is what it means zero-based. You're not comparing yourself. You're not looking at numbers from a prior period. Another type of budget, which we're going to look at later on, is a static budget. And you will need to know how to do this. It's a budget prepared for one level sales of activity. You will see I'm going to sell 100,000 units. What would my budget looks like under this one level of sales volume, 100,000 units or whatever we are selling? This is a static. It means it's fixed. It doesn't change. Versus a flexible budget, a flexible budget is prepared for various level of sales volume. You would say, I'm going to create a budget for 90,000, a budget for 100,000, and a budget for 110,000 in volume. Those are called flexible budget. It's showing you the scenarios under different sales volume. It's called flexible. It means it flexes. If this changes, what would happen? If that changes, what would happen? Also, we have something called a master budget. A master budget, and we're going to talk about the master budget next, much, much, much more in details, is a set of budgeted financial statement and supporting schedule. We're going to work on the supporting schedule as in the financial statement for the entire organization. It includes three types of budgets. Now, we're talking about master budget here, and don't worry, you're going to get to know this inside out. The operating budget. Operating budget versus operational budget. They're not the same thing. The operating budget is what you're going to be using on a day-to-day operation. It's a set of budget that project, for example, sales, cost of sales, selling expenses. So this is the operating budget. We're going to have a capital budget. Capital budget is if we need to buy capital asset. What are the capital asset? Property, plant, and equipment, long-term assets. That's the capital budget, and we also have the financial budget. The financial budget would include the cash budget and the financial statements, obviously financial, but it would also include the cash budget. Now, the next session, what I'm going to have to do, I'm going to have to break those into separate recording because that's a lot of information, okay? The supporting schedule plus the financial statements. And this is what we're going to be focusing on the next two to three session is the master budget. Now, when we do variances, we look at the flexible and the static budget. Those are important, and the strategic and operational, you just need to know what they are. Now, this is what a master budget would look like in case you're wondering. This is the operating budget. This is the operating budget, which is what start with sales. We'll start with sales, a sets of budget that project sales cost, then we'll project how much do we need, of course, to produce that sales. We're going to look at selling and administrative expenses, all which will feed into something called the cash budget right here. This is all going to feed into the cash budget, and don't worry, we're going to actually work with numbers. This is just basically the big picture. So when I start again, the next session, I'm going to say, this is what we talked about in the prior session, and I will start to use numbers. A capital budget, a capital expenditure budget, is right here, present a company's plan for purchasing long-term assets, or sometime you might be selling and getting some income rather than purchasing. It doesn't matter. It feeds also into the cash budget, of course, because you need money to buy those assets. And you have the financial budget, which would include the cash budget and the budgeted financial statement, because remember, we need the cash amount to plug into the balance sheet because cash is part of the balance sheet. And the cash budget details how the business expect to go from the beginning cash to the ending cash imbalance. And this is what we're going to be doing next. Actually, I'm going to be starting with the master budget, and most likely, I will only cover operating budget. I'll break them into several components. Then I may include the capital expenditure within the operating because it's easy. Then I will work on the other budgets separately. Again, at the end of this recording, I'm going to invite you to visit farhatlectures.com. Look, I can help you. I can help you with your courses. I can help you with your CPA review, CMA review. At least give me a shot. Invest in yourself, invest in your career, invest in your education. And again, I don't replace your CPA review courses. I don't replace your accounting courses. I'm only a supplement. It's like that vitamin pill that's going to help you increase your knowledge. Study hard, good luck, and of course, stay safe.