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- 1 Concept Map
- 2 Objectives
- 3 Introduction
- 4 Activity
- 5 Uses of budget
- 6 Types of Budgeting
- 7 1.Estimation
- 8 Activity
- 9 2. Quotation
- 10 Activity
- 11 3.Cash Flow Statement
- 12 Uses of cash flow statement:
- 13 Costing:
- 14 Activity
- 15 How to make Profit & loss Statement
- 16 Activity
- 17 Summary
- 18 Assignments
This OER enables you to:
- prepare an Estimate
- prepare a budget
- maintain cash-flow statement
We experience following transactions in daily life
Exchanges of goods and services with money are happening in every business. An entrepreneur must be aware, if he has to make a profit. Maintaining accounts of all transactions is very important in daily business. We have to keep accurate account for calculating profit and taxes. Banks needs audited information for evaluating loan proposals. Therefore it is important to keep accounts to be a successful entrepreneur
Every business maintains account and through the accounts they are estimating budgets for the next year. The budget is at the soul of every business. Our state / central government also declared a budget for the next year. Our mother and father also prepare a budget for next week / month / year. We are also estimating time budget for our studies.
You want to throw a birthday party to your friends. You requested your mother to prepare pohe for ten people. She has agreed to make it but on one condition; You must prepare the budget for the party by estimating cost incurred for making pohe. Guidelines for completing this activity Which of things listed below will be used for making pohe? List of ingredients that may go in the preparation of pohe. You have to inquire market prices of these. Kadhipatta, salt lemon juice, onions, coconut, sugar, turmeric, chilies, coriander, asafetida, cumin seeds, mustard seeds, badishape, pohe, oil, shev, etc. (cost of every ingredient should be accounted for preparing budget. Cost of fuel required and rent of equipment used. Now since you have requested your mother to prepare budget you have to account for her services that go in preparing pohe. Find out how much a skilled and experienced chef charges for making pohe for ten people when everything is kept ready for him or her.
Uses of budget
- Activity wise provision for funds can be made.
- In case of availability of options, one may take into account availability of funds, quality of product or services that are provided, priorities etc.
- Areas of cost reduction can be found out and worked out.
- Budget helps to understand, deficit or surplus in income. Every year finance minister presents budget for the country. If there is deficit then taxes are raised to meet the deficit. Similarly every organization makes budget. It is advisable that every household should have its budget.
Types of Budgeting
There are three types of budgeting
When customer has not yet made up his mind for purchase and studying option, businessmen give him estimate. It is approximate calculation of raw material, labor and money required for a particular service or task or product manufacturing. The details are likely to change as per the material used, process performed or market situations. Estimate is to help customer to select appropriate option.
Your mother is going on a tour for a week. She is giving you 350 rupees and asking you take care of your food needed for a week. So prepare an estimate with the help of your mother.
A time-bound, written surety about the price of certain service or product, given to the customer based on the estimation of that particular service or production process. Sometimes, quotations assure a guaranteed sale for the seller and assure a guaranteed supply to the customer. Quotation helps customer to select best option for him.
Your neighbour Mr. Patil wants to buy a computer. He got two quotations from two different shops as given below. Help him to decide the best option. Best option will depend on the hardware and software that is being offered and after sell services.
3.Cash Flow Statement
While executing a job, customer generally pays at the time of delivery. To meet payment of supplier or for labour payment, entrepreneur has to spend money. A statement showing timetable of requirement of funds and receipt of funds is called as cash flow. It is a schedule showing cash received and paid over a certain period. We will study cash-flow statement using an example. e.g. A Poultry Farm owner needs to prepare a Cash Flow Statement, based on the following information -
- An order is placed for a batch of broiler birds, 2 months in advance. An advance is to be paid at time of placing order for assuring its fulfillment.
- The sale amount is received within 15 days from the day of sale.
- The order for the poultry food is to be place 15 days in advance.
- Medicines and cages are purchased as and when they are needed by paying cash.
- Hence, the owner prepared a Cash Flow Statement as follows
Table 1 – Monthly Cash Flow Statement
Uses of cash flow statement:
- Even though the transactions begin in January, the owner has to invest amount 2 months in advance, i.e. in November.
- Even though at the end of a session the business seems to be in profit, there are times of deficit (at the end of months February, April, June). Thus if some financial provision is not made for meeting these deficiencies, the progress is bound to halt.
- If this deficit is to be recovered from the initial investment, in small installments, then slowly it will be ceased.
- If the advance payments for food and birds are done in small installments, say, 25 % or so, and the remainder is paid at the time of receiving the food or birds, then this periodic deficit can be avoided.
- If all transactions are done through Bank account, due to assurance of repayment, this deficiency can be demanded from the bank on interest basis.
Thus, the Cash Flow Statement helps owner to make decisions about making payments. Thus cash flow statement supports the business and helps to explore various means to smoothen the ups-n-downs of the business.
Costing is a calculation of actual production expenses and revenues of a certain task. A Cost-Benefit Ratio is calculated to study whether the benefit is sufficient with respect to the cost of the product or service. The overall costing includes -
1. Pre-production expenses (Marketing Survey, advertisement etc.).
2. The production expenses (from raw material purchase to packing of finished product. depreciation of assets, running expenses etc.)
3. Expenditure incurred in sale of the product (including VAT or other taxes, advertisement, commissions, transportation etc.).
4. Profit (Manufacturer - 10%, Distributor - 1% -5%, Wholesaler - 10% -15%, Retailer - 10% -20%)
Have you completed the practical of welding? Now we wants to fabricate a table as per the following drawing, first Prepare a budget for making a coconut peeler, as per the contemporary rates. For this activity learners are expected to study PPT about costing by clicking on “costing”.<
- Sr.No. Description Rate
- 1 Flat 50 X 5 60.00 / mt.
- 2 Flat 25 X 5 35.00 / mt.
- 3 Flat 30 X 5 40.00 / mt
- 4 2" Square Pipe 50.00 / mt
- 5 Round Bar 20.00 / mt
- 6 Redoxide ( 200 Ml) 90.00 / lit.
- 7 Color ( 200 Ml) 180.00/ lit
Selling price of the coconut peeler is Rs.. 250/- After completing this activity you can refer the following link. http://www.learningwhiledoing.in/?page_id=251
How to make Profit & loss Statement
Balance sheet shows health of the organization. Income statement is also called as profit and loss statement (P&L). Gives company's financial statement for particular period. This shows if the organization has made profit or loss during particular period. Amount spent on fixed assets is not shown in the P&L statement. But interest on the capital invested is shown in the P&L statement.
Example; Mr Sunder Patil started poultry as a side business with 100 birds. He started business with his own saving of Rs..5000/-. In the first batch of 100 birds, he incurred following expenses –
- Birds (102 no.s) = Rs..520/-
- Transportation = Rs..20/-
- Feed 380 Kg. = Rs..1216/- (Rs.. 3.2 /Kg)
- Medicine / electricity = Rs..90/-
- Birds mortality = Rs..5
- Transportation cost to sale birds = Rs..30/-
- Labour charge = Rs..100/-
- Interest on capital = Rs..100/-
- Total expenses = Rs.. 2076/-
- Sales Amount of birds
- Total weight of birds = number of Birds × average weight × Rate
- = 95 × 1.6 × 14
- = 2128
- Therefore sell amount is Rs. 2128.
- Profit = 2128 – 2076 = 52/-
Visit to poultry shed and understand how the farmer keep poultry record. Then give him suggestion for keeping better record
What have you learnt? In this lesson, you have learnt about various types of budget. You learned about preparing estimate, choosing options by studying quotations, budgeting, and preparing profit loss statement.
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