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Budgeting and Controlling - Budgeting  [Modifier]

The budeting process

In this part of the course, you will find general information about what budget's are, how they can be understood as a part of the enterprise's strategy. You will then find an introduction into the method of establishing budgets.

General information : THE BUDGETING PROCESS.pdf

Cases : 

Metal'UP case : 

data : MMIC Budgeting METAL'UP enonce.pdf

solution : MMIC Budgeting METAL'UP solution.pdf


Optima case :

data : MMIC budgeting OPTIMA general information.pdf , MMIC budgeting Optima enonce.pdf

solution : MMIC budgeting Optima solution.pdf


Cia Case :

data : MMIC budgeting CIA general information.pdf

solution : MMIC 2014-2015 Budgeting case CIA solution.pdf


Development Case : (budget, profit & loss account, discussion of adjustments to achieve profit-rate-goal)

data : MMIC 2014-2015 development case data.pdf

solution round 1MMIC 2015-2016 dvpmt case solution round 1.pdf on the basis of the data = first "round" of the budgeting procedure. The objectifs are not met, instead of a profit, the company would loose money. This appears to be inacceptable for the board of directors. The managers are asked to reconsider the figures, without modifying the production schedule.

Round 2 : a few proposals are made by the managers - calculate the consequences :

- additional price increase of 1% for sales, compensated by a generalized 60-day payment term / discussion with the suppliers about better price conditions (price increase of only 1,5 % for MAT1, of 8% only for MAT2) - compensated by generalized payments after 30 days  / reduction of the invetory increase to +200 for MAT1 and +300 for MAT2 / limit the growth of service costs : save 5% of the initially calculated increase / wage increase postponed to Q1-2016.

After transmission and interation of the figures of the different departments, the budget and profit&loss account now has the following shape : MMIC 2015-2016 Dvpmt case solution round 2.pdf

Make an anlysis of the situation : profit & loss account, budgets, cash. What are your comments ? Do you think, that the board of directors will agree on these budgets ?

Round 3 : 

Due to the impact of the previous proposal on the cash account, the board of directors rejects the suggested combination of measures, even if they allowed to reach the set goals in terms of profitability.

Pure cash-management tools, like factoring, are considered to be too expensive and would lead the company into dependency on financial institutions, which is categorically refused by the directors.

The sales-manager is asked to develop an aggressive strategy of conquest of market-shares, in line with severe control of expenses. Furthermore, profitability should of at least of 10% of the equity capital and of at least of 2% of the turnover.

The department managers submit a third proposal at the end of the two weeks period which they were allowed to take to establish the updated plan :

- maintain of the initial prices, 2/3 of the sales are to be paid with 30-days term, the rest with 60 days term / an agressive campaign of advertisement and communication in January and Februar shall prepare the market - cost estimation 20 000 € in January, 25 000 € in February (amounts before VAT) / the other services shall be strictly managed, ceiling per month = 120 000 € / all service supply is payable after 30 days / the sales team would be allocated a 2% bonus calculated on the margin (turnover - cost for consumed material), payable at the en of March after review of the achieved results.

- these measures should allow to reach a market share of 5 %.

- consequences : necessity to employ 4 more persons (2 sales-persons / 2 administrative employees) whose remuneration would be the same as those scheduled for the 4 new employees already scheduled under the previous proposals : 2000 € gross salary per month / adapt the purchase of material (MAT1 and MAT2) to production and obtain for MAT1 the maintain ofthe prices of 2014 - payment term for all material = 30 days

All other parameters remain unchanged (ref. : proposals of round 2)

Solution round 3 : MMIC 2015-2016 Dvpmt case solution round 3.pdf   => Proposal accepted by the board of directors.


Forecast & Budget

The slides of the course : Regression model for short term forecast.pdf

Forecast & Budget case :

data : MMIC Fin 2 Ex 4 forecast budget enonce.pdf

solution , version 1-a  (calculation of the seasonal coefficients as the average, per quarter,  of the observed values divided by the projected value: MMIC Fin 2 Ex4 forecast budget Solution version 1.pdf  

solution, version 1-b (calculation of the seasonal coefficients as the average, per quarter, of the observed values divided by the annual average of the quarterly values) : MMIC Fin 2 Ex4 forecast budget Solution version 2.pdf

A third alternative would be the calculation of the seasonal coefficients as result of the dicison of the obeserved values, per quarter, by the general quarterly average calculated over the full 3-year period of available data.

You may have remarked, that the coefficient of correlation in the forecast method is very weak and you might be well adviced to make alternative forecast based on market research, etc.

Here are two alternative models :

a) The statistical center of the sector delivered a quite negative perspective for the next year. Sales estimations, based on these perspectives help you build a "worst case scenario" - budget :

data : MMIC Fin 2 Ex 4 forecast budget V2-1enonce.pdf

budgets : MMIC Fin 2 Ex 4 forecast budget V2-1solution.pdf

b) Based on the staistical center's estimation, the management of the company decided on launching additional commercial efforts to keep the negative evolution as small as possible. Here's the scenario based on this perspective :

data : MMIC Fin 2 Ex 4 forecast budget V2-2 enonce.pdf

budget : MMIC Fin 2 Ex 4 forecast budget V2-2 solution.pdf

The final decision will take into account all the scenarios which were established, and the top managements arbitration will put the company on the track for next year. 


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