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hi everybody and welcome I'm Mike Werner and today we're going to be talking about the preparation of the operating budget we're gonna be doing a budget for a company called ABC Manufacturing Inc for the first quarter of 2021 so in order to do that we're gonna need to get some information we're gonna need the the sales forecast we're gonna need the selling price of the product we're also gonna do a cash collections budget so we're gonna need to know the pattern that they expect we're collecting their funds we're gonna need other information as well so let's go ahead go into the office and take a look at all this data then we'll come right back okay so here's the information about our company it's a ABC manufacturing Inc and the budget period is the quarter ended March 31st 2021 so they're trying to put a budget together for next year so that means the first quarter January February and March of 2021 they're forecasted sales are on Etsy in units we've got for November 280 December 310 it seems a little strange that they are including a prior year sales but as we'll find out when we're trying to do the various budgets for January February and March we're going to need from time to time sales information from the prior year oddly enough we're also going to need sales information to do the production budget and direct material purchases budget we're going to need information from the next quarter as well and then not really the start of the show here especially for our sales budget is going to be these three months because this is our budget period we've got January of 200 units February of 250 units and in March of 300 units the selling price per unit for product X is 500 dollars per unit with respect to cash collections when they sell these units some of the sales are on account and as it turns out they collect 70% of the sales revenue in the month of the sale they collect 20% in the month following the sale in the remaining 10% in the second month following the sale so when we put together the cash collections budget sometimes called the cash receipts budget we're gonna have to keep this pattern that in mind in this first video on budgeting we're gonna be doing the sales budget and we're gonna do the cash collections budget so we've got enough information here to do those two budgets it's probably a good idea to take a screenshot of this information so you can print it out and have it available as you're viewing the video so now let's get back to the classroom okay we're back I'm gonna give this a try see how it goes let me find my marker here we go here we go so the first thing I want to do is give this document a heading so we're gonna do the sales budget first so again this is ABC manufacturing and this is the sales budget and it's for the quarter ended March 31st 2021 the next thing I want to do is try to figure out in my mind I'm gonna you know put this on the board and I think what I'll do is that January February March and maybe I'll put the total on this other board and then put the descriptions of each line on this board so let's see we're gonna have January February and March on this board I'll enter the total total for the quarter and for the sales budget we're going to start with budgeted unit sales abbreviating it a little bit just save some time and some space here so for January the budgeted sales are 200 units and for February the budgeted sales are 250 units and for March the budgeted sales are 300 units and the total will fill in in just a couple of minutes now we're going to need the budgeted selling price budgeted selling price in our example selling price doesn't change the month to month month but it could it could and so if it did we would change it every month but in our case the selling price remains constant let me go ahead and enter the $500 selling price per unit and then I'm gonna simply multiply a selling price times the number of units to arrive at the budgeted sales in multiplying you could go ahead and multiply this yourself and you know so that you're practicing working along with me and if you do you're gonna find out that the budgeted sales for January are $100,000 for February the sales are $125,000 for March 300 units times the $500 per unit it's 150 thousand dollars so there we go and now we can go ahead and put double underlines under these final amounts because this is sort of the end of our schedule here we go to that and now let's go ahead and complete the Paley column so I'm going to add the unit sales across 200 250 300 and I get 750 units and now the selling price let me add that across 500 plus 500 plus 500 I can do that in my head 1000 hundred dollars $1,500 what oh yeah that is crazy to do that's so dumb what am I thinking what am I thinking you don't add every row across like that every bro admit it's ridiculous - oh my god I should have just said okay hold on hold on the selling price per unit is $500 $500 sorry about that sorry yeah we just can't add every row across buzz because it doesn't make sense to do so so now let me go ahead and done line there 750 times 500 gives me three hundred and seventy five thousand dollars and then what I can also do is add these across a hundred thousand this gets us up to two and then sure enough three seventy-five so yeah it adds across and now it looks okay so there we have it the sales budget it's pretty easy to do now if you had multiple proper just do this calculation for every one of your products and then total it up to get your sales budget for the entire company for all of the products okay so there you go the next thing we want to do is a budget that's quite a bit more challenging its cash receipts budget we're sometimes called collections budget what we want to know is during January February and March how much how much cash are we gonna collect it would appear that we're gonna get a hundred thousand one hundred and twenty five thousand one hundred and fifty thousand for a total of three hundred and seventy five thousand dollars that's what it would appear that's not exactly the way it's gonna work out and let me tell you why this company sales for cash and sales on account and although we can separate them into two different groups and say okay all the cash sales we collect end the month of the sale and the sale we collect in ance with you know when we think the customer will pay in this example to keep it a little simpler I'm assuming that we're going to estimate our cash collections based on the total sales figure if we go back to the data here what we're gonna see is that 70% of the sale is collected in the month and then another 20% of the sales following the sale and then finally the remaining 10% is collect in the second month following the sale so let me go ahead and make some notations here I mean if you don't mind that we're pretty much done with this I'm gonna erase at least this part so that have some area to work and then I'm gonna sneak in these numbers and take a look at a sales figure let me see you know members the November is the first month I see here in the list so with November we had sales of how many 280 units in that times the selling price of $500 would give us sales of you know multiplying it out one hundred and forty thousand dollars one hundred forty thousand dollars we don't collect the entire amount in November so let's go ahead and prepare a little schedule to work out when we're collecting these funds so the collections in November we get one hundred and forty thousand times 70% for the amount we collect would be 98 thousand dollars so of the November sales in November we collect 98 thousand just ninety eight thousand not not the whole amount enough and then in December 140 thousand will collect another twenty percent of it $28,000 $28,000 more then in January of that hundred and forty thousand dollars we collect the remaining ten percent so in this case this company's bad debt is negligible so we're not gonna be worrying about it we're gonna keep the example a little simpler but January we collect one hundred and forty thousand times ten percent or fourteen thousand dollars now preparing a budget for the first quarter of 2021 this is November of 2020 so why do they supply us with the signature last year if we're preparing a budget for 2021 well the reason is this is this right here is this here part of the collections from November will appear on our cash collection budget 21 with respect to December in December we get 70% January we'd collect another 20% and finally in February we'd collect the remaining 10% so when we prepare the cash collection budget for the first quarter of 2021 we'll need to show these two months collections of December sales and then we get into like January cells February sales in March assists so let's go ahead and do that next I'm gonna go ahead and race the board and we'll get to it okay so I think we're ready to do the cash collections budget or some packs called cash receipts budget and I've already headed it up to save a little bit of time we're gonna need we need calm important January 1 for February and one for March and then out here we'll have a column for the total just like we did with the sales budget and with this budget we're gonna start with the earliest cash collection first which would be November sales so let's go ahead and list November sales first so we get November sales of 140,000 dollars times 10 percent the percentage that's going to be collected in January and that of course is the thousand dollars so that's the final collection for November and then we need to collect some of December sales in January we will collect 20% of December sales so December sales of 155 thousand dollars times the 20% and that gives us $31,000 that we will collect in January next December sales of 155 thousand we will collect 10% of those sales and febuary so we go over to February we're gonna collect fifteen thousand five hundred dollars in now let's move on to January sales January sales which from our budget remember our budget they were one hundred thousand dollars and of that we will collect 70% in January $70,000 and then also on January sales of $100,000 we will collect 20% in so how much is that $20,000 20,000 in February and then of the January sales of 100,000 we will collect the remaining 10% in March so that would be the remaining $10,000 so there we go and now let's look at February sales February sales February sales from our budget were a hundred and twenty five thousand dollars and we will collect in 70% of 125,000 you can get your calculator out and calculate along with me I believe it's eighty seven thousand five hundred dollars and then still with these February sales of 125 thousand we will collect another 20% of them in March twenty percent in March which is calculator along with me 2,000 25,000 25,000 we don't need the list the third collection for February because it would it would happen in April which is in the next budget period so we'll list to the February collection will list the March collection and the April collection will say for the next quarters budget so now let's look at March of sales of one hundred and fifty thousand dollars and we'll collect 70% in March which is one hundred and five thousand dollars now the rest of March is fails we will collect in April and May so we don't need to list those lines here because we're only doing the first quarter of 2011 total these up let's see let's total the first column and if you total it up you should get one hundred and fifteen thousand dollars I believe 115,000 there we go put some double underlines there make it try to do it as neatly as I can and then pour all for February the total for February is 123 thousand and then for March we've got 140,000 and then we're putting a dollar sign at the bottom of the column one at the top of each column to let everybody know these are dollars and there we go there we go pretty much got it done but the exception of this total column check to make sure it's okay each month sales takes three minutes to collect and if that's the case in every one of our months we've got three collections one two three one two three one two three each three months to collect and we have you know one or two collections instead of three or four instead of three we know we've done something wrong so it looks like we're okay okay it's three months to collect the funds and we have three collections per month so now let's go ahead and fill in this total column it's a little bit tedious but trying to write very quickly here so if we add it all up it's three hundred and seventy eight thousand dollars and if you add across it should also be the three hundred and seventy eight thousand dollars if they don't add across and down in other words if they don't cross split that means we've done something wrong so there you have it the cash collections budget a few minutes ago we did these sales budget and you'll notice that the sales amount does not equal the amount that we collected for January the sales were $100,000 but we're collecting one hundred and fifty thousand dollars and that's because there's a lag between the time the sale takes place and when we collect the funds and what we're collecting in general is a lot of last year's November and December sales dollars the sales budget reflected one hundred and twenty five thousand dollars but we only collected one hundred twenty three thousand dollars so again the amount collected does not eat then finally in March the sales budget through March reflected sales of a hundred and fifty thousand and yet we will only collect one hundred and forty thousand dollars because of the lag between the time the sale is made and the time the collection has made the sales amount and the collection amounts will differ okay so we've done the sales budget we've done the cash collections budget we have three more budgets to do we have the production budget the direct material budget and direct labor budget that we're going to do for this series of videos what I'd like to do now is end this video at this time so thank you for tuning in and if you found the video informative please give it a thumbs up