BUDGETING
PROCESS
AND
PITCHING
D R. P RI YA SA CH D EVA
WHAT IS A BUDGET?
A budget is a financial plan for a defined
period, often one year. It may also include
planned sales volumes and revenues,
resource quantities, costs and expenses,
assets, liabilities and cash flows
TRADITIONAL BUDGETING
Traditional budgeting is a budget preparation method that considers last year’s budget as the base. The
current year’s budget is prepared by making changes to the previous year’s budget by adjusting the
expenses on the basis of the inflation rate, consumer demand, market situation, etc. The basis of the
preparation of current year’s budget is last year’s revenues and costs. Only those items in traditional
budgets need to be justified which are over and above the last year’s budget. This technique is easy to
prepare and implement, barring some amount of rigidity as budgets, once prepared, cannot change.
INCREMENTAL BUDGETING
METHOD
Incremental budgeting is a method where the executives prepare the current year’s budget by making
changes in the past year’s budget. The changes are in the form of addition or reduction of expenses to
last year’s budget. In Incremental budgeting, the starting point for preparing a budget is the prior
period’s budget. The budgeting technique gives no priority to the vital activities of a business. We
simply adjust last year’s budget, considering the inflation factor. This is a quick and easy method of
preparing budgets.
ZERO BASED BUDGETING
METHOD
Zero-based budgeting method is commonly in use by many organizations. In ZBB, the current year’s
budget preparation begins from scratch, without considering the budget of the previous year. For every
financial period, a new budget is prepared to take the base as zero, and resources allocated to each
department is justified according to the expenses of that particular period. The ranking for allocation of
resources is on the basis of the priority of all the activities of the business. Though this method is time-
consuming, it gives accurate results.
ACTIVITY BASED BUDGETING
METHOD
Activity-based budgeting is a method where the output or the budget targets or activity is decided first.
In other words, here, the management adopts a top-down approach. After defining and determining the
activities, what all cost drivers required to complete that activity, target, or output is analyzed. And
then a budget is prepared after considering all those cost drivers.It does not take into account last
year’s budget or expenses. This method does an in-depth analysis of all the activities that incur the
cost. The outcome of the research determines the allocation of resources to an activity. This method
aligns business activities with business goals. It helps in increasing the efficiency and profitability of a
business.
FACTORS AFFECTING
BUDGETING
1. The decision to select a particular method depends on various factors like
2. size of the business,
3. area of operations of a company,
4. the focus of the business,
5. competition in the industry,
6. market situation,
7. complexity and
8. availability of data for projections, etc.
COMPONENTS OF BUDGET
ESTIMATED REVENUE
FIXED COST
VARIABLE COST
ONE TIME EXPENSE
CASH FLOWS
PROFIT
IMPORTANCE OF BUDGETING
It gives a direction to the entire organization internally where it needs to run and reach on the one hand
and will help management in communication and guiding the team with full clarity.
On the other hand, this document is useful to the outside world also. It shows what the business is
trying to achieve and whether the path and direction are right or has a flaw.
Whether the objective and targets or aligned with the market realities.
Whether the budget is only a dream on paper or it has a clear cut and well-defined plan of action to
achieve those dreams.
The comparison of budgeted performance with actual performance throws light and indicates:
1. Whether the company is performing as planned,
2. Whether the organization is on the right track and what are the chances of achieving the budgets.
3. What areas are not seeing traction as desired and what is needed to get the traction.
4. Whether something somewhere is going wrong that requires immediate attention or there is a need for a different strategy
to contain that wrong,
5. It will help the organization to do midway course correction so that deviations are minimized. The expectation or
performance could be re-allocated amongst the departments. It may help the organization to achieve the budgeted targets
still, making internal adjustments.
DIFFERENT TYPES OF
BUDGETING
Annual Operating Budget
Rolling Budgets
Performance Budget
Master Budget
Operating Budget
Program Budget
Financial Budget
TYPES OF BUDGETS IN MEDIA/
ADVERTISING
The most common are listed below:
•Percentage of Sales method.
•Objective and Task method.
•Competitive Parity method.
•Market Share method.
•Unit Sales method.
•All Available Funds method.
•Affordable method.
Advertising Budgeting methods
LEVELS OF INVOLVEMENT IN
BUDGETING
PHASES OF BUDGET CYCLE
The budget cycle consists of four phases:
(1) preparation and submission
(2) approval
(3) execution
(4) audit and evaluation.
The preparation and submission phase is the most difficult to describe because it has been subjected to
the most reform efforts.
Once the budget for sales or income is developed, the expense budget
is prepared. The expenses have to be estimated based on the sales and
the past trends in the tax regulations, interest rates on borrowing.
There are three types of expenses;
1. Variable cost – these cost changes with the change in sales.
2. Fixed cost – the fixed overheads which remain fixed such as rent of
factory or machinery is fixed irrespective of the production.
3. Semi-variable cost – these are the cost which is fix for certain level.
However, it becomes variable after reaching a certain point. For
example, a minimum wage of the marketing staff is USD 2,000 and if
the sales increase above a certain limit, the commission shall be based
on a percentage of sales.
IMPORTANCE OF OPERATING
BUDGET
1. Tracks incomes and expenses
2. Improves efficiency
3. Operating budget improves the overall efficiency of the organization.
4. It helps in operating the plant at its optimal capacity.
5. It also guides the staff to have better and efficient planning in performing the business
functions apart from making them accountable.
6. The operating budget may be categorized in a deficit budget, balanced budget, surplus budget
based upon the actual performance for the period.
APPROACHES
TOP DOWN APPROACH
BOTTOM UP APPROACH
Clients use a variety of methods to determine their advertising budgets. One basic distinction is between top-
down and bottom-up methods. Top-down approaches are easier; they basically use last year’s expenditures as a
starting point. However, they also are more simplistic and may be self-defeating because they wind up allocating
more money to promote products that are doing well at the expense of products that are doing poorly—when
just the opposite adjustment may make more sense. Bottom-up approaches start by specifying the particular
objectives a firm has for a brand and then estimating how much it will cost to meet those objectives. Budget-
setting is more complicated than just tallying up what it costs to make and place advertising; the client also has
to consider the resources an agency will need to conduct research, develop an advertising strategy, and measure
how well the strategy worked so it can tweak the approach in the future if necessary.
Objective and task method
A method of setting a promotional budget in which the marketer decides the objective to be accomplished and the
tasks necessary to achieve the objective. The budget is decided by estimating the costs of carrying out the tasks.
Objective-and-task budgeting is an advertising budget method in which advertising expenditures are determined on
the basis of a specific audit of the resources needed to achieve the specific objectives and tasks outlined in the
advertiser's media plan- Marketing Dictionary.com
Three steps:
Defining the communications objectives to be accomplished.
Determining the specific strategies and tasks need to attain them.
Estimating the cost associated with performance of these strategies and tasks.
PERCENTAGE OF SALES
METHOD
The percentage-of-sales method is
ratio of the firm’s past annual promotional budget divided by
past sales to arrive at the percentage of sales.
That percentage of sales is then applied to the expected sales
in the coming year to arrive at the budget for that year.
For example, if the company spent $20 million on
advertising last year and had $100 million in sales, the
percentage of sales would be 20 percent. If the company
expects to achieve $120 million in sales the following year,
then 20 percent of $120 million is $24 million, which would
be the budget for advertising that year.
Businesses with stiff competition tend to go for zero-based and activity-based budgeting. ZBB justifies and
explains each item of cost. Similarly, in an activity-based method, all the business functions align with the
business goals. It leads to the elimination of all wasteful activities, resulting in cost savings. So, ZBB and
activity-based budgeting are the best choices to cut the cost of production and survive the competition.On the
other hand, incremental and traditional budgeting methods can be used where there is limited fluctuation in the
market price, consumer demand, etc. Since these budgeting methods consider the previous year’s budget as a
base and do only incremental changes like an adjustment for the inflation rate, consumer demand, market
situation, etc.,
This method could be most suitable for the organization not much affected by the change in environment. No
significant internal or external changes anticipated or can influence the business.Same way, large-scale
organizations generally do not opt for zero-based or activity-based budgeting, because these methods are costly
and consume a lot of resources. Also, the manager’s primary focus is to prepare an easily achievable budget, and
that in turn ignores the business’s core activities.
XYZ Pvt.Ltd.is a manufacturer of clothes. In the men’s category, it manufactures two varieties of shirts: A and B. The company
managed to sell 4000 pcs. of A and 6000 pcs. of B in the last month with a profit margin of $10 and $8 per piece respectively. In
the present month, it manages to produce and sell 8000 pcs. of variety A and 7000 pcs. of variety B.
In order to calculate the Sales quantity variance, let us first find out the standard sales mix or ratio.
A= 4000 pcs. / (4000 pcs. + 6000 pcs.)
=4000 /10000 = 40%
B= 6000 pcs. / (4000 pcs. + 6000 pcs.)
= 6000 / 10000 = 60%
Actual total sales in the month=8000 pcs. + 7000 pcs. = 15000 pcs.
Thus, sales as per standard mix=
A= 40% of 15000 pcs = 6000 pcs.
B= 60% of 15000 pcs.= 9000 pcs.
Now we will calculate the difference between the sales units as per budget and actual sales as per the
standard mix.
A= 4000 pcs – 6000 pcs= 2000 pcs. favorable
B= 6000 pcs – 9000 pcs = 3000 pcs favorable
As the final step, let us calculate the Sales quantity variance.
A= $10 x 2000 pcs.= $20000 favorable
B= $8 x 3000 pcs. = $24000 favorable
Total Sales Quantity Variance = $20000 + $ 24000= $ 44000.
EXAMPLE
Company A estimates that its fixed overhead in a year should be $600,000. However, the production
manager of Company A left the job, and there was no new replacement for a few months. Due to this,
the actual expenses were less than the estimates. The actual fixed overhead was $550,000.
FOSV in this case will be = $550,000 less $600,000 = $50,000
As the actual overhead cost was less than what was budgeted, it is a favorable variance
EXAMPLE
Suppose Company A has a standard mix of 100 skilled labourers @ $20 per hour and 200 semi-skilled labourers @ $15 per hour.
Suddenly there was a shortage of skilled labourers and the company had to engage unskilled labourers as well @ $10 per hour. The
actual mix of workers stood at 50 skilled labourers, 300 semi-skilled labourers and 50 unskilled labourers. Both the composition of
labourers gives the same level of production.
In order to calculate the variance, let us first calculate the standard cost of the standard mix of labourers.
(100 x 20)+ (200×15)= $ 5000.
Now, let us calculate the standard cost of the actual mix of labourers.
(50 x20)+ (300×15) +(50 x10)= $6000.
Therefore, the variance in the above example is $1000 ($6000- $5000) and this is unfavourable.
In order to keep the advertising budget in line with promotional and marketing
goals, a business owner should start by answering several important questions:
1. Who is the target consumer?
2. What media type will be most useful in reaching the target consumer?
3. What is required to get the target consumer to purchase the product? Does the product lend itself to
rational or emotional appeals? Which appeals are most likely to persuade the target consumer?
4. What is the relationship between advertising expenditures and the impact of advertising campaigns
on product or service purchases? In other words, how much profit is likely to be earned for each
dollar spent on advertising?
COMPETITIVE SPENDING
MEDIA MIX
OBJECTIVE AND TASK BUDGET
Also known as the "objective and task" method, the objective task method is a system in
which a company allocates a certain amount of money to its marketing budget based on
specific objectives, rather than choosing an arbitrary amount or basing its
marketing budget on sales revenues or projections alone.
Three steps:
1.Defining the communications objectives to be accomplished.
2.Determining the specific strategies and tasks need to attain them.
3.Estimating the cost associated with performance of these strategies and tasks.
OBJECTIVE AND TASK BUDGET
The process involves identifying objectives, ranking them in terms of importance, and
deciding which tasks are most appropriate to meeting them. It also involves estimating
the cost of tasks, and fitting allocations within an overall budget framework and dollar limit.
The budget is decided by estimating the costs of carrying out the tasks.
EXPENDITURE PER RATE
Expenditure share, or market share, is the percentage of the total expenditure for an item that can be
attributed to a particular sub group of households, e.g., the percentage of all clothing expenditures
made by households in the lowest income group.
Your spending rate is calculated by dividing your spending by your income. As you can see from the
equations, saving rate and spending rate are simply the inverse of one another. If you have an 80%
spending rate, then you have a 20% saving rate. If you have a 5% saving rate, then you have a 95%
spending rate.
MEDIA PLANNING
Media planning is the process of identifying and
selecting media outlets – mainly newspapers,
magazines, websites, TV and radio stations, and
outdoor placement – in which to place paid
advertisements. ... They decide where, when, and
how often to feature a specific ad.
PRESENTATION OF A MEDIA
PLAN TO A CLIENT
A media plan will include details such as specific media channels best for message delivery, the
number of impressions, the cost per million clicks and creative development specifications.
Explain them as best you can with customized graphics. Plan the structure of your media planning
presentation with care. Describe your media planning goals and incorporate your target audience so
your presentation's audience understands your intentions.
PRESENTATION OF A MEDIA
PLAN TO A CLIENT
4 Things to Consider When Developing a Media Strategy
Set Measurable Goals and Objectives. This is the first and most important step that should be taken
while developing a media strategy. ...
Identify and Research Your Target Audience. ...
Determine Your Media Budget. ...
Establish the Main & Key Messaging Points.
https://www.infodiagram.com/diagrams/media-planning-advertising-process-
charts-template-ppt.html
Media Planning Process: How to Create a Media Plan
Set your goals. The foundation of any great media plan is to have clear goals and objectives. ...
Define your audience. ...
Plan your content. ...
Create your content. ...
Review and approve your content. ...
Select media outlets. ...
Execute. ...
Measure your results.
EVALUATION OF A MEDIA PLAN
Brand Matrix
To characterize the product and branding strategy of a firm, one useful tool is the brand-product
matrix, a graphical representation of all the brands and products sold by the firm. In the brand-product
matrix all products offered under different brands are represented by columns.
MEDIA MATRIX
A media matrix is an organised spreadsheet outlining media outlets to contact for a
certain story.
Social tool matrix
The Social Tool Matrix basically makes sure you and your organization analyze and
choose a set of social tools that can deliver on strategy.
Retrieval and interpretation of
data
Data retrieval typically requires writing and executing data retrieval or extraction commands or queries
on a database. Based on the query provided, the database looks for and retrieves the data requested.
Applications and software generally use various queries to retrieve data in different formats.
Data retrieval means obtaining data from a Database Management System (DBMS) such as
ODBMS. ... The retrieved data may be stored in a file, printed, or viewed on the screen. A query
language, such as Structured Query Language (SQL), is used to prepare the queries.
Information retrieval, recovery of information, especially in a database stored in a computer. Two main
approaches are matching words in the query against the database index (keyword searching) and
traversing the database using hypertext or hypermedia links.
RETREIVAL AND
INTERPRETATION OF DATA
The biggest advantage of using data retrieval and analysis techniques is that it allows users across
different parts of the system to use the same data and apply their own methods
MEASURABILITY OF MEDIA
PLAN
GLOBAL CHALLENGES
DIFFERENCES BETWEEN BRAND
MATRIX AND MEDIA MATRIX
REFERENCES
https://efinancemanagement.com/budgeting
https://saylordotorg.github.io/text_launch-advertising-and-promotion-in-real-time/index.html
https://corporatefinanceinstitute.com/resources/knowledge/accounting/types-of-budgets-budgeting-methods/
https://samples.jblearning.com/0763746681/31293_ch03_lee.pdf
https://efinancemanagement.com/budgeting/sales-quantity-variance
https://efinancemanagement.com/budgeting/fixed-overhead-spending-variance
https://efinancemanagement.com/budgeting/labor-efficiency-variance
https://www.inc.com/encyclopedia/advertising-budget.html
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https://www.inc.com/encyclopedia/advertising-budget.html
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https://obicreative.com/media-buying-and-planning/
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