Budgeting and

UNIT 12 BUDGETING AND BUDGETING Budgeting Control

CONTROL (TRAINING)
Structure
12.1 General Objective
12.2 Specific Objective
12.3 Planning
12.4 Background Material

12.1 GENERAL OBJECTIVE

After studying this Unit, you should be able to help participants in your training
session to discuss the needs and importance of budgeting and keeping.

12.2 SPECIFIC OBJECTIVES

This Training Unit will help you to enable trainees to:
● Assess how much cash is needed at any time;
● Ensure that payments are made on time;
● Ensure that payments are received on time;
● Ensure that the enterprise has adequate cash available for operations;
● Differentiate between and relate cash flow with profit;
● Prepare realistic cash flow statements;
● Develop their own cash flow statement for their selected enterprise;
● Write simple books of account; and
● Prepare simple profit and loss accounts.

12.3 PLANNING
Time : Sessions of three hours each
Training Methodology : Case study, discussion and exercise
Training Material : Case on ‘Anita Papad’, cash flow statement
proforma, exercise, posters, chart papers and
markers
Trainer’s Preparation : Read thoroughly the “Anita Papad” case and
practice preparing the cash flow statement.
Collect a few simple examples to give practice
to women participants.

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Case Studies and
Activities 12.4 BACKGROUND MATERIAL
Introduction
A budget is a financial plan. It specifies how much money an organization
thinks it will take in and how much it will spend. A budget is generally laid out
in two sections that are grouped under two main headings:
12.4.1 Income (or Revenue)
12.4.2 Expenses (or Expenditure).
The main purpose of preparing a budget is to have an instrument with which to
monitor a business. It is useful only if one “follows up” the budget, constantly
keeping an eye on income and expenditures to see whether or not they agree
with the estimates made. Timely review and monitoring helps the activity attain
it’s target as planned.
Budgets can be prepared for and used by anyone and anything. That is, we
can prepare and use personal budgets. Organizations, ministries and non- profit
making organizations can all use them.
Budgets, by definition, have to be prepared in advance; and for this reason,
they are often referred to in terms of their being part of a feed forward system.
Feedback is a term frequently heard both in accounting and ordinary use. Feed
forward, on the other hand, tends to be less frequently heard, yet this word
incorporates the most important aspect of budgeting: looking at situations in
advance, thinking about the impact and implications of things in advance,
attempting to take control of situations in advance.
Importance of Budgets
A budget is a plan expressed in quantitative and money terms. Budgets need to
be prepared and approved in advance of the period in which they are to be used.
Budgets can include some or all of income, expenditure, and the capital to be
employed. Moreover, a budget can be drawn up for an entire organization; any
segment of the organization such as a department or sales territory or division, or
for a significant activity such as the production and sale of a specific product.
Also a budget can include non-monetary information as well.
Budgetary Control
Budgets are simply exercises in calculation unless they are used. When we use
a budget, we do so as part of a system of budgetary control. That is, we have
some basic ideas about what we want to do, we prepare budgets to help us
achieve those ideas; and then once we have done whatever it is that we wanted
to do, we check to see if we kept to our budget.
Budgetary control relates to the establishment of budgets relating to the
responsibilities of budget holders and the needs of a policy. Budgetary control
also relates to the continuous comparison of actual with budgeted results: it
does this to try to ensure that the objectives of that policy are achieved; or to
provide a basis for the change of those objectives.
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In summary, a budget is a statement setting out the monetary, numerical or non- Budgeting and
quantitative aspects of an organization’s plans for the coming week or Budgeting Control

month or year. Budgetary control is the analysis of what happened when those
plans came to be put into practice, and what the organisation did or did not do
to correct for any variations from these plans.
The Benefits of Budgeting
Many of us prepare budgets on a personal level: how much is my income for
the month? How much am I going to spend? and, most importantly, is there
anything left over? It seems true, however, that many entrepreneurs do not
prepare budgets for their enterprises. Thus, even though managers prepare
budgets for their relatively simple lives, when it comes to the much more
complex situation of their business, they prefer to let cash inflows and outflows
look after themselves. The purpose of this session is to demonstrate that budgets
are useful, informative and communicative. It will be seen that a budget is a
necessity not a luxury.
Applicability of Budgeting and Budgeting Control
Budgeting can be applied to virtually every situation. It does not matter whether
we work in the urban or rural sectors of the economy. We may work for a
profit making business or a non-profit making business. Your enterprise may
be engaged in trading, manufacturing, or providing a service. In all of these
situations, budgeting and budgetary control is of use to you.
As we will see, there are many issues underlying the use of a budgeting system
that need careful consideration. For example, we will see that budgeting systems
cannot just be imposed in an enterprise nor do they run themselves. Producers
or owners often resent budgets and budget targets for a variety of reasons.
The Budgeting Process
If budgeting is a form of financial planning, then it is important to know what
specific procedures are involved in doing it effectively.
It would be wrong to think of the budgeting process as beginning when the first
budget is prepared, and as being complete when the master budget is finalized.
In reality, the budgeting process begins a long time before the budget period
begins; and the process ends once the budget period has ended. This means the
budgeting process is a very lengthy process.
Also simply allocating money is not enough, using it strategically is what
the budgeting process ideally should be. It is important that the members are
involved in the budgeting process, both in the “ forecasting stages” and later
when the budgets are “monitored”.
The Budget Period
The budget period is the period for which a set of budgets is prepared: typically
the budget period is of one year’s duration, and is designed to coincide with the
financial year. There is no reason why a budget period has to be one year, but
typically it is.
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Case Studies and On the other hand, if we are dealing with a project, then the budget will clearly
Activities be linked to that project. A three-month project will have a budget covering the
whole project and will thus be a three months budget.
Most enterprises also divide their budget period into calendar months. These
divisions of a budget period are control periods.
Budget Centres
As in the case of division of the financial year, the organization will be divided
up into budget centres. A budget centre is one part of an organization for which
budgets are prepared. That is, a budget centre, like a cost or profit centre, is a
section of an organization (division, department, building, individual) for which
a separate budget is prepared.
Interrelationships of Budgets
Many interrelationships exist in budgeting and budgetary control. If we are
preparing budgets for our enterprise we will find that the sales budget has
strong links with the stock budget and it has strong links with the cash budget.
When the sales budget is changed, the stock and cash budgets will also have
to change. Similarly, if the stock levels are changed, then that could impact on
both the sales and cash budgets.
However, not all organizations have all of these interrelationships. Some
organizations prepare budgets only for part of the organization.
Limiting Factor
The limiting factor is anything that limits the activity of an enterprise. Examples
of limiting factors are shortages of supply of a resource and a restriction on sales
at a particular price. That is, the limiting factor is the one factor that dominates
all other factors.
Each of the following can be a limiting factor:
12.4.3 Cash;
12.4.4 Raw materials;
12.4.5 Skilled labour;
12.4.6 Land; and
12.4.7 Equipment.
The most important point about the limiting factor, then, is that this must be
the budget that is prepared before all others. For example, if the raw material is
the limiting factor, we cannot attempt to make budgets without keeping that in
mind. If we do not keep this in mind, all budgeting will become useless because
it may provide for more raw material than can be acquired. Similarly, if cash
is the limiting factor, preparing any budget that takes no account of the cash
position may lead to a lot of unnecessary work having to be carried out.

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Cash Flow Budgeting and
Budgeting Control
In a business, cash keeps coming in and going out. If the total cash going out
is greater than the total cash coming in for a longer period, business may fail
due to cash flow crisis. Cash coming in is not the same as profit. Many business
which fail, are often profitable but not planned properly with respect to the flow
of their cash. A cash flow forecast looks at when the payment changes hands
and not the goods and services. Regular cash planning is, therefore, essential for
managing an enterprise successfully.
Step 1
You can initiate discussion about various forms of cash moving in and out.
Participants often name these as income or expenses in various forms. You, as
the trainer, can display the use of income and expenses for forecasting profit or
loss.

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287
Case Studies and Total Expenses
Activities
Deduct the Total Expenses from the Total Income
And what is left is the Profit. = Profit ___________
In case Total Expenses are greater than Total Income
the business is running on Loss = Loss ___________
Step 2
After discussion, participants are told that income is the cash ‘coming in’ and
the expenses show the cash ‘going out’. If the ‘cash in’ is faster than the ‘cash
out’, there is no problem. The problems arise when ‘cash out’ exceeds the ‘cash
in’.
There will be no money available to pay to suppliers, labour and other operating
expenses. You can explain to the participants that this situation may arise in a
profitable as well as in a loss making business. This may happen when a major
customer fails to pay the amount when due.
It may also happen when creditors do not wait for the loan and bank finance is
not processed in time.
Whatever may be the reason, the cash flow statement helps in identifying the
problem areas for which corrective actions can be taken.
For example, an entrepreneur may then take certain decisions such as selling
goods more quickly; or on different (cash) terms; or delaying the payment of
some expenses.
Step 3
After discussion, participants may express their desire to learn the process of
preparing a cash flow statement.
At this point, you can distribute the case on ‘Anita Papad’.
Divide participants into smaller groups of 3 to 4 persons and ask them to identify
the ‘income’ and ‘expense’ sources described in the case.
Also display the proforma of cash flow statement. Discuss the items described
in the proforma.
Help each small group to enter all items of income and expenses under
appropriate headings given in the proforma.
Then ask them to total the cash inflow as well as the cash outflow.
Assist them to estimate the net cash flow by deducting total cash outflow from
total cash inflow.
The cash flow statement based on the ‘Anita Papad’ case is illustrated in the
table given below.

288
 Cash Flow Statement Anita Papad) Budgeting and
(Illustrated data only for 4 months) Budgeting Control

Total Order Value 6000 6000 6000 6000

Months April May June July
Opening Balance 2000 -450 -250 300
Sources of Cash Inflow Income 3000 3000 3000 3000
from sale + + +
Income from other source 3000 3000 3000
Total of INFLOW (A) 5000 5550 5750 6300
Cash Available
Sources of Cash Flow
● Employee Salaries 2000 2000 2000 2000
● Rent 300 300 300 300
● Materials 2000 2000 2000 2000
Moong Dal –1500
Maida 200
Masala 300
Utility
● Electricity 250
● Telephone etc. 250 250 250
● Advertising
● Commission
● Travel 600 600 600 600
● Repayment of loan 250 250 250 250
● Tax 50 50 50 50
Total of OUTFLOW (B) 5440 5700 5450 5700
Cash Needed 5440 5700 5450 5700
Net Cash Flow (A-B) - 450 -250 300 600
Once participants filled in the proforma of the cash flow statement, help them
to draw conclusions such as:
12.4.8 Anita is making good profit. She need not worry.
12.4.9 However, her cash situation is not satisfactory. She is short of cash
primarily because the department which is purchasing her product is
making payment for only half of the total sale. Payment for another
half is received only in the next month. As a result the cash flow
statement forecasts the shortage of cash. The ‘cash-in-hand’ will be
less than the ‘cash needed’ in the months of April and May.
12.4.10 The situation however improves from June onwards.
12.4.11 Ask participants to discuss the ways to improve the situation.
Step 4
Following the exercise of preparing a Cash Flow Statement, suggest to the
participants to work out the following: 289
Case Studies and 1. Cash-in-hand: How much money is needed in the beginning of the
Activities `month?
2. Work out the sources of cash. From the sales forecast prepared, estimate
how much cash will be generated during each month. Remind them to
carry forward the cash due in the current month from the credit sales of the
previous month.
3. At the end, point out that all participants should prepare the cash flow
statement for their own business.
Processing
To many producer women financial calculation is a very complex thing to
understand. Besides there is a tendency to ignore the movement of money in
and out of business. If money movement is not monitored well, not only will the
business suffer a cash shortage, but a highly profitable business can also face a
critical cash crisis.
It is extremely important for women entrepreneurs to understand the difference
between profit and cash flow. It is equally important to know in advance the
cash availability.
A cash flow statement can be made for the implementation period i.e. starting
a business. Here the sources of cash can be one’s own loans or subsidies and
outflow could be money spent towards land building machinery and preliminary
expenses etc.
While explaining all concepts care should be taken to simplify the process by
giving suitable examples.
Case Study: Anita Papad
Anita, a producer woman from Chaksu, Rajasthan, runs a papad making unit.
On April 1, she found that there is no raw material left in the stock. At the same
time, she had no money left in the kitty. She borrowed Rs.2000/- from a local
money -lender at very high rate of interest – Rs. 50 per month. She purchased
material like Mung dal for Rs. 1500, Maida for Rs. 300/- and Masala (Spices)
for Rs. 500/-.The local papad that she produces in a month are sold for Rs. 6000.
Her total produce is purchased by a department in the capital city of Jaipur. She
finds it difficult to sell the produce in the open market due to competition and
lack of marketing place. She pays a commission of 10% of total sale (Rs. 600/-
for total sale of Rs. 6000/-) to the purchasing officer of the department. From
April onwards the department has decided to purchase papad worth Rs.6000
but agreed to pay only 50% i.e. Rs. 3000, in the current month and remaining
50% in the next month. She makes frequent visits to Jaipur to deliver goods
as well to receive payment. In this connection in April she spent Rs. 250 on
travel. Anita has employed two workers. To each of them she pays Rs. 1000 per
month. She has taken the work premises on rent at Rs. 300 a month, from her
friend Madhavi. In addition she pays electricity and water bills which comes
once in a two months period for an average amount of Rs. 250. Every month
Anita requires to spend Rs. 250 on telephone, stationery and refreshment of
workers at work premises. She knows that her business is a profit making Unit
290 but she often faces cash crisis.
Cash Flow Statement Proforma Budgeting and
Budgeting Control
Months Jan. Feb. Mar. Apr. May June July Aug.
Sep. Oct. Nov. Dec
Opening Balance
Sources of CASH FLOW
Income From Sale
Income From Other
Source
Total CASH INFLOW (A)
Cash Available
CASH OUTFLOW Sources
Salaries/Wages
Rent Supplies/Materials
Utilities
Travel
Telephone/Stationery Loan
Installment/Interest
Insurance
Other Expenses
Total OUT FLOW (B)
Cash Needed
Net CASH FLOW (A-B)
Closing Balance
Keeping Business Accounts
One important information for every owner of an enterprise is to know whether
the unit is making profit or running on loss. In addition, an entrepreneur requires
to balance the cash flow to keep the unit running. Microenterprises need simple
accounting but keeping proper business accounts is a must for monitoring
success of enterprises of all sizes.
Procedure
Step 1
Participants are invited to think and discuss the needs and reasons for keeping
business accounts.
List the participants’ responses on a chart.
The likely answers may be as follows:
● To monitor the success and growth of the enterprise
● To estimate whether business is giving profit or incurring loss.
● To know the financial condition of the enterprise. 291
Case Studies and ● To assess the current financial position – the cash flow.
Activities
● To get the information related to current assets and liability.
● To meet legal (tax and others) obligation.
● To control cost of product.
Summarize the discussion emphasizing the importance of financial planning
and control in enterprise management. Business needs working capital for day
to day operation and long-term finances for growth. It is necessary, therefore,
to anticipate their requirement, locate resources and ensure smooth flow. This
is, however, possible only if the accounts are recorded properly. Explain to
the participants that two statements of accounts are often used to describe the
performance of an enterprise:
These are :
1. Balance Sheet
2. Profit and Loss Account
Balance Sheet shows what a firm owns and what it owes on a particular date in
terms of assets and liabilities respectively.
Profit and Loss Account shows income, cost of sales, gross profit, expenses and
net profit during a given period.
For preparing such statements, accounts are recorded in several account books
out of which the following are relevant to any microenterprise:
● Purchase Register
● Sale Register
● Stock Book
● Cash Book
The trainer explains that there are definite methods of recording accounts in
these registers which can be learnt with little practice.
Step 2
For practice purposes, the trainer presents the case of a group of producer
women who are manufacturing soap.
All transactions made by the soap unit during December are displayed on a
chart paper as illustrated below.

Date Transaction Details of a SOAP UNIT during December

Dec. 1 Ten producer women deposited Rs. 200 as their share @Rs. 20
each
Dec. 3 Group purchased raw materials – Soda for Rs. 50 and Oil for Rs.
50
Dec. 4 Ten more producer women deposited Rs. 200 as their share
292 Dec. 5 Group sold 30 soaps @ Rs. 6 – total sale Rs. 180
 Budgeting and
Dec. 6 Group paid Rs. 20 as rent of the factory shed. Budgeting Control
Dec. 7 Group purchased raw material worth Rs.150
Dec. 15 Group sold 25 soaps for Rs. 150 and also purchased raw materials
worth Rs. 200
Dec. 25 Group purchased raw material worth Rs. 100
Dec. 28 Group sold 10 soaps for Rs. 60
Dec. 29 Group sold 20 soaps for Rs. 120
Dec. 30 Group sold 10 soaps for Rs. 60
As the trainer, you can explain that all such transactions are one of the following
two types:
1. Showing revenue or cash coming in, i.e. ‘receipts’
2. Showing cash or money going out, i.e., ‘payments’
All transactions resulting into ‘receipts’ are entered in the left hand side
of the cash book.
Whereas all those transactions showing ‘payments’ are entered in the right hand
side of the cash book.
Following this system the entries of all transactions are made in the cash book
which when filled in looks like the following table:
Cash Account

Receipts Payments
Date Date
To Balance b/f 10,000 By payment
Details 4,000

To receipts By payment
(details) 2,000 Details 5,000
12,000
By Balance b/f 3,000 By Balance c/d 3,000
12,000
Thus both the receipts and payment items are entered in the cash account and the
net effect of the cash in hand of Rs. 3,000 is taken as balance brought forward
for further transactions.
Following this system, participants are asked to enter all financial transactions
of “Soap Unit” into a cashbook. Trainer provides the format. For practical
purposes, participants are divided into small groups of 3-4 women and a
set of cashbook form and the copy of the financial transactions of ‘Soap Unit’
is distributed and explained to each group.
The final version of the filled in cashbook as illustrated and enclosed is displayed
in the training session.

293
Case Studies and Step 3
Activities
One of the most important items of information for every entrepreneur is to
know whether a business has earned profit or not during a particular period.
From the accounts maintained above, it is possible to work out the following:
Total Income and
Total Expenses (Total Direct Cost + Total Overheads).
With this information, participants can work out the profit and loss account for
a particular period.
To give practice to participants, data from the case of “Anita Papad” may be
used.
Anita Papad
Profit and Loss Account Year Ending 31 December, Year A

Income Rs. Rs.

From Sales 72,000
Other Sources 3,000
Total 75,000
Cost of Sales 3,000
Stock Jan 1, Year A
Production Cost
● Raw Materials 24,000
● Electricity
Stock Dec 31, Year A
Total 26,500
Gross Profit 48,500
Operating and Selling Expenses
1. Salaries 24,000
2. Rent 3,600
3. Telephone 3,000
4. Travelling 3,000
5. Commission and Advertising 7,200
6. Interest Paid 600
Total Operating and Selling Expenses 41,400
Profit before Tax 7,100
Tax 710
Net Profit 6,390
In this context the trainer explains the following concepts:
Income
The profit and loss account start with the total of all the revenues or income
earned during the period. For a manufacturing Unit, the income is predominantly
from the sale of goods.
294
Cost of Goods Sold Budgeting and
Budgeting Control
This is computed by deducting the price of balanced stock from the total cost of
old stock and new purchases during the period.
Gross Profit
Indicates the profit earned through the manufacturing operation and is derived
by deducting the total cost of goods sold from the income.
Operating and Selling Expenses
These are the general administrative, expenses selling and financial, not
strictly related to the manufacturing process during the period. Also stands for
overheads.
Profit Before Tax
By deducting the operating expenses from the gross profit, one arrives at profit
before tax.
Net Profits
Obtained by deducting the tax amount from the profit before tax. This is the
balance retained in the business as retained earning.
Cash Account of Soap Unit – December, Year A
( Based on the transactions listed in the Text)

Date in Items Amt. Total Items Amt. Total Balance

Dec Amt.
1 2 3 4 5 6 7 8
1 Amount 0
brought
forward
10 women’s
shares
@ Rs.20/-
per share 200
Total 200 200
3 Brought 200
forward Bought 50
Soda
Bought 50
oil
Total 200 100 100
4 Brought 100
forward 10
women’s 200
shares @ Rs.
20/- each
Total 300 300 295
Case Studies and
Activities
5 Brought 300
forward
Sold 30 180
soaps
Total 480 480
6. Brought 480 Rent 20
forward
480 20 460
7 Brought 460 Bought
forward Raw 150
materials
Total 460 150 310
15 Brought 310 Bought
forward Sold raw 200
25 Soaps @ Materials
Rs. 6/- per 150
piece
Total 460 200 260
25. Brought 260 Bought
forward raw
materials 100
Total 260 100 160
28 Brought 160 Bought
forward Raw 100
Sold 10 Materials
Soaps @Rs.
6/- per piece 60
Total 220 100 120
29 Brought 120
forward Sold
20 Soaps @ 120
Rs. 6/- per
piece

Total 240 240

30 Brought 240
forward Sold 60
10 soaps @
Rs. 6/- per
piece

Total 300 300

296
 Budgeting and
Annexures: A Note
Budgeting Control
The Annexures we have provided you give you an opportunity for further
reading not only on microenterprises but also on small-scale enterprises.
They can also serve as additional background material/reference material.
Use your orginality to build them into your training sessions. The material
has been adapted/adopted from the following IGNOU course materials:
● MS–93: Management of New and Small Enterprises
Course Preparation Team: Prof. H.N. Pathak, Dr. K. Ramachandran, Mr.
Vijay Jain, Dr. V.G. Patel, Mr. B.P. Murali, Prof. K.P. Kumar, Dr. D.D.
Kaushik, Dr. VSP Rao, Prof. Rakesh Khurana, Prof. Madhulika
Kaushik, Mr. Upendra Gupta and Mr. Q. Haider
Cours Coordinator: Prof. Madhulika Kaushik
● CWDL-03: Development of Self-Help Groups Course Preparation:
ACORD, Delhi
Course Coordinator: Prof. Prabha Chawla

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