Scarcity leads to
Innovation
BUDGETING &
Forecasting
The Basic Framework of
Budgeting
A budget is a detailed quantitative plan for
acquiring and using financial and other resources
over a specified forthcoming time period.
1. The act of preparing a budget is called
budgeting.
2. The use of budgets to control an
organization’s activity is known as
budgetary control.
Planning and Control
Planning –
involves developing
objectives and
preparing various
budgets to achieve
these objectives.
Control –
involves the steps
taken by management
that attempt to ensure
the objectives are
attained.
Advantages of Budgets
Budgets
Goals and
Objectives
Advantages of Budgets
Compels managers
to think ahead
Aids managers in coordinating
their efforts
Provides definite expectations that are the
best framework to evaluate performance
Advantages of Budgeting
Define goal
and objectives
Communicate
plans
Think about and
plan for the future
Advantages
Coordinate
activities
Means of allocating
resources
Uncover potential
bottlenecks
BMB

Bhaag Milkha Bhag Case

31/2 years in Making.
Innovations to enhance the audience base
which led to increase in revenues and
reduction in costs.

Human Factors in Budgeting
The success of budgeting depends upon three
important factors:
1.
2.
3.
Top management must be enthusiastic and committed to
the budget process.
Top management must not use the budget to pressure
employees or blame them when something goes wrong.
Highly achievable budget targets are usually preferred
when managers are rewarded based on meeting budget
targets.
Budgeting Example



Royal Company is preparing budgets for the quarter ending
June 30.
Budgeted sales for the next five months are:
April
20,000 units
May
50,000 units
June
30,000 units
July
25,000 units
August
15,000 units.
The selling price is $10 per unit.
The Sales Budget
The individual months of April, May, and June are
summed to obtain the total projected sales in units
and dollars for the quarter ended June 30th
Sales Forecasting
Step 1: Create the ROLL Out Plan
Planning the Number of Doors/outlets
Step 2: Find the Sales for each outlet
A. On the basis of SPF for (EBO/LFRS):
SPF= Sales /Area in square ft.
1)
Find out the benchmark SPF
( Find for atleast two competitors and calculate average SPF)
2) Forecast Organization’s SPF in different scenarios.
Sales Forecasting
Different scenarios can be:
 Pessimistic Scenario: 10% to 30% of
Benchmark SPF

Normal Scenario: 40% to 70% of Benchmark
SPF

Optimistic Scenario: 80% to 100% of
Benchmark SPF
Sales Forecasting
3) Forecast Sales= SPF * Area
Step 3:
Cumulate the Sales of all the Outlets.
Sales Forecasting
B. On the basis of Quantities for (MBOs)
1) Find out the benchmark Quantity sold per
month
( Find for atleast two competitors and calculate
average quantities sold)
2) Forecast Organization’s Quantity sold in
different scenarios.
Sales Forecasting
Different scenarios can be:
 Pessimistic Scenario: 10% to 30% of Quantity
sold

Normal Scenario: 40% to 70% of Quantity
sold

Optimistic Scenario: 80% to 100% of Quantity
sold.
Sales Forecasting
3) Forecast Sales= ASP * Quantity Sold.
Step 3:
Cumulate the Sales of all the Outlets.
Computation of ASP
Step 1
Identify key product categories
 Step 2
Decide the pricing of each category
( Competitive Benchmarking)
 Step 3
 Indentify the Weightage of each category

Computation of ASP
Computation of ASP: Year 1
Key Product Categories/Business Verticals
Q1 ( Say T-Shirts)
Q2 ( Say Gift Items)
Q3 ( Say Accessories)
Q4 ( Say Bags)
Weights
Price
20%
40%
20%
20%
10000
15000
20000
5000
ASP= SUM of (W*P)=
W*P
2000
6000
4000
1000
13000
Purchases Budget
Budgeted purchases = Desired ending inventory
+Sales– Beginning inventory