N5 Entrepreneurship


Case study You have started a new business producing and selling leather bags. You put R10 000 into the business and borrowed the rest from a bank. What is to follow it the various budgets that you as an entrepreneur need to prepare in order to make various financial decisions.


1 Sales budget


The sales budget serves as the basis of all the other budgets. All the other budgets depend on it in some way. The sales budget will indicate the expected sales units for the year multiplied by the sales price to give the expected total sales (turnover) for the year. It is also the most difficult budget to compile since you have to look into the future and decide what is going to happen. It is therefore only an estimate, but you must prepare for it. The budget can also be accompanied by a schedule of the expected cash collections for the year. Therefore, your sales budget will determine how many products you are going to make, what your purchases should be, your cash requirements, etc.


1 Sales budget Expected sales in units Selling price per unit Total sales


production budget 200


R 150 R 30 000


This is your sales forecast. Remember, if it were possible to know your future sales – planning your business is easy!


If you have a manufacturing business, the following budgets will follow on the sales budget: •


• direct materials budget •


direct labour budget • manufacturing overhead budget


Businesses usually also budget the level of their ending inventories to ensure that the levels remaining at the end of a budgeting period are sufficient. If inventory levels are too high, funds will be tied up in unwanted goods. If levels are too small, it can lead to cash production efforts or loss of sales.


2 Production budget The production requirements for the budget period can be determined from the sales budget. There must be sufficient goods available to meet the sales needs. Some of these goods will already be available in the beginning inventory, but the rest will have to be produced. The production needs can be determined as follows:


Expected sales + desired ending inventory – beginning inventory = units to be produced


2 Production budget Expected sales in units Desired ending inventory Total needs


Units to be produced


200 10


210 210


If you have a few items in stock at the


beginning, subtract them from the “units to be produced”.


124


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