manage budgets and forecasts



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Refer to your textbook and/or conduct independent research to answer the following short answer questions. Where applicable, answers should be in your own words.

Record your answers in the text boxes below.


Briefly explain three (3) benefits of budgeting for businesses


Having a budget allows a business to prepare for future cash flow requirements. This helps a company maintain enough cash flow to meet its regular financial commitments.


Budgeting is useful since it drives careful spending and reveals where savings might be made. This has the potential to increase productivity and revenue.


Strategic planning benefits from the budget's structure, which helps determine where to put the organization's money. It enables a company to think forward and make preparations for the future.


Describe a flexible budget and indicate the type of data required to create a flexible budget

A flexible budget is one that shifts as needed in response to changes in activity levels. It's a flexible budget that adjusts expenses based on anticipated revenue. The quantity of future income and spending is the sort of information needed to build a flexible budget. Sales forecasts, cost estimates, and other financial information would fall under this category. Future changes in the business environment might have an impact on the budget, therefore it's important to keep this information up to current. Any variable that might have an impact on finances should be considered, such as the state of the economy, the price of raw materials, changes in consumer preferences, and so on. Businesses need flexible budgets so that they can adapt to new circumstances and avoid going bankrupt.


What are three (3) key features of budgetary policies and procedures that enable businesses to set realistic budgets?  Your answer should include: 

  1. budget proposals
  2. ratification and 
  3. implementation.


Proposed budgets are an integral part of the budgeting strategies and processes that help organisations establish sensible spending limits. Managers may use them to create an in-depth budget for their unit that accounts for all anticipated costs and revenues. The suggestions are then sent up the chain of command for approval.


The procedure requires the board of directors or other governing body to approve a proposed budget. By the time a budget is ratified, it has been thoroughly evaluated by the relevant parties, is founded on solid financial principles, and represents the organization's overall goals.


After the spending plan has been authorised, it may be implemented. Budgeting is the process of determining how much money will be available for use during the year and then distributing it to various teams, divisions, and projects. Businesses may keep their activities within the budgetary constraints if they successfully execute the budget.


Select which budget(s) the following items could be included in.






Balance Sheet










Materials / Purchases









Explain the two types of variance trend analysis as follows:

  1. Horizontal Trend Analysis

Financial statements may be compared across time using horizontal trend analysis. The method involves comparing the same financial statement items across time to see whether there has been an increasing or decreasing trend. A company's financial performance and management's efforts to boost that performance may both be better understood with the help of horizontal trend analysis. It's useful for monitoring a company's progress over time and contrasting it to the market as a whole. Financial analysts may utilise it to get insight into a company's financial performance and spot potential growth or trouble spots.

  1. Vertical Trend Analysis

Comparison of financial statements and other company records over many reporting periods is the "vertical trend analysis" approach of financial analysis. It helps investors and analysts evaluate a company's financial health and make informed decisions about the company's profitability, liquidity, and solvency. Investors may benefit from the vertical trend analysis by learning the causes and effects of changes in key performance indicators including sales, costs, expenditures, and profits. It's useful for spotting weaknesses and openings for development as well. The effectiveness of the company's resource management and its responsiveness to market shifts may also be evaluated through vertical trend analysis.


In the context of budgets, explain what a Milestone is used for and provide an example. 

A Milestone is an important event in a budget timeline, that includes the end of phase of a project or the beginning of a new time period. To make sure that a project is on pace to finish within its allotted time and budget, its progress may be monitored using milestones. In a financial plan, a Milestone might be the beginning of a new fiscal year or the end of a certain part of the project, such as the design phase.


Identify and explain two (2) qualitative forecasting methods: 

Qualitative method 1

The Delphi methodology is a kind of qualitative forecasting in which a group of experts (thus the name) is polled to offer input and comment on a potential result. It takes into account the opinions of many professionals and produces an overall prediction. In the absence of hard evidence, it is generally used when attempting to predict outcomes that are heavily influenced by a large number of factors. The procedure starts out with a preliminary prediction provided by a professional or group of specialists. The group of experts then reviews this prognosis and is asked to offer their own prediction based on it. This procedure is repeated until a decision is made by the panel.

Qualitative method 2

Scenario planning is a qualitative form of predicting in which several future scenarios are explored. It analyses the effects of many elements and events to help you plan for a variety of outcomes. The goal of scenario planning is to find the most probable result by designing and analysing a number of alternative courses of action. This strategy aids businesses in foreseeing future threats and opportunities, allowing them to better prepare for them. It's a common tool in the field of strategic planning, where it helps businesses adapt their strategies to the realities of the market.


Identify and explain two quantitative forecasting methods:

Quantitative method 1

Quantitatively projecting future values from past data, trend analysis is a popular budgeting tool. The rate of change or trend in a dataset over time is what is being forecasted by this approach. Sales, costs, and profits are just few of the financial performance indicators that may be looked at using trend analysis to project into the future. By offering an estimate of how future performance may pan out, this kind of forecasting aids organisations in setting budgetary goals.

Quantitative method 2

Another quantitative technique used in budgeting is regression analysis, which uses the linear connection between two variables to project their future values. This technique takes historical information and utilises it to derive a mathematical formula for forecasting the future. Using the present trends and patterns, the equation may forecast the future values. Future sales, costs, profits, and other indicators of financial performance may be predicted with the use of regression analysis. Companies may use this type of prediction to better manage their budgets as well as move forward with confident choices.


Provide an example of a key performance indicator used in financial budgets?

A crucial performance metric called return on investment (ROI) is used in financial budgeting to assess how effective an investment is. It is computed by multiplying the result by 100 after dividing the investment's net gain or loss by its cost. The ROI would be 50%, for instance, if an investment cost $1,000 but generated a net profit of $500.


Provide an example of a financial risk, and explain how the budgeting process can minimise the risk for an organisation?

Any doubt that might result in unanticipated financial loss is a financial risk. Market risk, or the chance that shifting market prices would cause the company's assets to lose value, is an illustration of a financial risk. By ensuring that the company's assets are diversified, the budgeting process may assist to reduce this risk. This is accomplished by assigning a certain amount of the budget to various asset classes, including stocks, bonds, and mutual funds. In this manner, the other asset categories should provide some protection against the financial loss even if one asset group underperforms. In order for the business to react promptly, if necessary, emergency money might also be put aside via the budgeting process. These actions may be taken throughout the budgeting process to reduce financial risk for a business.


Explain how budgets support the role of financial management, including corporate governance and maintaining ethical standards. 

A major aspect of financial management is budgeting. They aid in ensuring that resources are used effectively and efficiently and that business goals are accomplished. Budgets also aid in ensuring that moral and corporate governance standards are upheld. They provide a tool for keeping tabs on and reining in expenditure while also giving information about the expenses of running the business and the resources that are accessible. This makes it possible to guarantee the responsible, effective, and ethical allocation of resources. They also aid in the establishment of financial goals and objectives and the monitoring of the organization's compliance with its rules and regulations. The business may hold itself responsible for its financial choices and practises by creating budgets and targets.


Explain how a company’s remuneration and/or performance bonus policy may lead to unethical behaviour with regards to budgeting and forecasting. Provide an example.

When it comes to budgeting and forecasting, a company's remuneration and/or performance incentive programme may encourage workers to exaggerate the business's financial performance. An employee could get a bonus, for instance, if the business achieves certain goals, such as a specific amount of sales or profit. In order to artificially meet those goals, the employee can subsequently be persuaded to manipulate the budgeting and forecasting process, creating an unethical scenario. In order to look as if the firm is doing better than it really is, this might entail exaggerating the budget or overestimating the organisation's future success.

Part B

Practical Activities

Complete the Case Studies below using the Excel answer template provided.  

  • Written answers should be entered into the text boxes for each question, within this Word document.
  • Ensure you check all your calculations carefully before submitting your assessment.
  • All budgets must be prepared using accepted accounting principles and taking legislative requirements, such as GST, into account.


Up The Creek Pty Ltd provides the following information.

SALES (excluding GST)

October (actual)

$ 8,571

November (actual)


December (actual)


January (budget)


February (budget


March (budget)


  • Sales are expected to be 70% credit and 30% cash.
  • Cash sales are received in the same month they are invoiced.
  • Invoices for credit sales are issued at the end of each month.  i.e. 70% of December’s credit sales will be received in January.  


70% within 30 days of invoice receiving 5% discount.

20% within 60 days

5% within 90 days

5% bad debts




(budgeted excl GST)


(budgeted excl GST)


$ 4,000








Additional Information: 

  • Purchases are paid for in the month in which they are made.
  • Other expenses are paid in the month that they are incurred.
  • Marketing expenses are budgeted at 10% of sales and are paid in the month in which they are incurred.
  • Depreciation is included in the other expenses above and is $500 per month.
  • Machinery will be paid for on the 20th February for $5,000 (excluding GST).
  • Closing bank balance at the end of December is $8,000.


Prepare the following reports for Up the Creek Pty Ltd.

  1. A Cash Budget for January, February and March (incorporating GST – accruals basis).
  2. A Budgeted Income Statement for the three months ending 31 March.  Assume that inventory at the end of each month is nil.
  3. Comment on Up The Creek’s outlook as indicated by the above budgets, particularly with regards to liquidity risk.

Regarding liquidity risk, Trout Creek's future is not promising. Despite an increase in income, their expenditures are rising far more quickly, leading to a net loss. Trout Creek runs the danger of being unable to pay their short-term debts since they are not making enough money to cover their expenditures. If they want to enhance their liquidity, they could have to take out a loan or raise their income.

  1. What milestone and KPI would you recommend Up the Creek implement to ensure they are able to meet their cashflow requirements?  (Describe 1 milestone and 1 KPI).


Reduction in cost.


The Cost is to be considered as KPI for the Creek. If we decrease the cost, it will enhance the profit proportion.


City Engineering manufactures Gobies. 

As a special project they received an order to produce 5,000 Gobies during month of April.

  • It takes 5kgs of alloy and 3 labour hours to make one Gobie.
  • Supplier of alloy only supply orders in 10,000 kg lots  
  • City Engineering has a policy of maintaining a maximum stock of 8,000 kg of alloy due to its storage capacity. 

Inventory balances are expected to be as follows:


31st March

Work in Process (kgs of alloy only)