a) Stages in the preparation of the annual budget:

•  Identify the key factor– the principal budget factor is often described as the key
  factor that may constraint output. The sales budget is considered a key factor that
  may limit the organization’s ability to achieve a greater output. As a result, the
  manufacturing organization must determine the amount of goods to be sold in
  each financial year in terms of unit and value. This would culminate in the
  preparation of the sales budget and other functional budgets.
• Prepare the functional budget – after the determination of the key factor which
  ought to be the sale unit and value, the next stage in the annual budgeting process
  is to prepare the functional budgets. The functional budgets must be prepared
  within the constraints set up by the key budget factor. In addition to the sales
  budget, the organization should prepare the production budget, material usage
  budget, material purchase budget and cost of goods sold budget within the ambit
  of the constraint.
• Submit functional budgets for approval – the functional budgets are usually
  coordinated by the budget committee which must make sure that they are both
  realistic and consistent with the objectives of the budget. The budget committee is
  a group of people responsible for the coordination of the annual budget and one
  of such duties is to review and approve the functional budgets submitted by the
  functional managers.
• Prepare the master budget – after the approval of the functional budgets by the
  budget committee, these budgets are summarized into one single financial
  estimate called, the master budget. The master budget is presented in the form of
  budgeted income statement; budgeted financial position and cash budget for the
  planned financial year.
• Review and approval by the Governing Board – the master budget and the
  supporting functional supply estimates should be submitted to the board of
  directors for approval. The board after it has approved of the master budget then
  the budget becomes an executive order that authorizes functional managers to
  spend according to the expenditure limit.
• Communicate the approved budget – after the approval of the master budget by
  the governing board, such decision by the board is then communicated to the
  functional managers responsible for implementation of the annual budget.
  (5 points @ 2 marks each = 10 marks)

b) Conditions for a successful implementation of a budgeting process

• Set Clear Goals and Priorities: A successful budgeting strategy begins with setting
  clear and achievable financial goals. Determine where you want your business to
  be in the short and long term. Whether it’s increasing revenue, expanding to new
  markets, or launching a new product, your budget should align with these
  objectives. Prioritize your goals to allocate resources appropriately, ensuring each
  expenditure supports your growth trajectory.
• Create a Comprehensive Budget: Developing a comprehensive budget is the
  cornerstone of effective financial management. Start by analyzing historical
  financial data to understand your revenue streams and expenses. Categorize
  expenses into fixed (rent, utilities) and variable (marketing, inventory) costs.
  Consider creating a master budget that includes operating, capital, and cash
  budgets. A master budget provides a holistic view of your financial position and
  guides your spending decisions across all aspects of your business.
• Embrace Zero-Based Budgeting: Zero-based budgeting (ZBB) is a proactive
  approach where you allocate funds based on the needs of each budgeting period
  rather than relying on previous budgets. With ZBB, every expense must be
  justified from scratch, promoting resource efficiency and cost optimization. This
  method encourages regular review and scrutiny of expenses, helping you identify
  areas where you can cut costs or reallocate funds to more strategic initiatives.
• Monitor and Adjust Regularly: Creating a budget is the first step; consistently
  monitoring and adjusting it is crucial for success. Set up regular intervals to review
  your actual financial performance against the budgeted figures. If you find
  discrepancies, dig deeper to understand the reasons behind them. Were your
  assumptions accurate? Did unexpected expenses arise? Adjust your budget to
  reflect these insights and align your financial strategy with reality.
•  Foster a Culture of Accountability: Budgeting is a team effort. Involve key
  stakeholders and departments in the budgeting process to gather insights and
  build a sense of ownership. Encourage department heads to manage their budgets,
  providing them with tools to track spending and stay within their allocated
  amounts. Regularly communicate financial updates to your team, showcasing
  progress towards goals and addressing challenges. An accountable culture ensures
  that everyone is aligned with the budget’s objectives and actively contributes to
  the company’s financial health.
  A successful budgeting strategy isn’t just about numbers; it’s a roadmap to
  sustainable business growth. By setting clear goals, creating a comprehensive
  budget, embracing innovative budgeting techniques like zero-based budgeting,
  monitoring and adjusting regularly, and fostering a culture of accountability,
  you’ll manage your finances effectively and position your business for long-term
  success. Remember, a well-implemented budget isn’t a constraint; it’s a tool that
  empowers you to make strategic decisions that fuel your business’s growth
  journey.      (5 points @ 1 mark each = 5 marks)

c) Short term investments:

• Savings accounts and interest earnings deposits–banks might allow a business
  to place short-term cash in a savings account. In the same way, banks do not allow
  companies to use a savings account as a normal current account with frequent
  deposits and withdrawals for the purpose of investment this is so because this will
  disrupt the cashflow projections of the bank for further investment purposes.
•  Money market investment–it is also possible for companies or individuals to
  purchase treasury bills and certificates of deposit. Treasury bills are short term
  debt instruments issued by the government. They are usually issued by the
  government for a fixed period of time, say three months or 91 days or possible six
  months and redeemed at the end of the period/maturity. They are a risk-free
  instrument since the central government has credibility and capacity to redeem its
  short-term obligations when due. CDs are issued by banks and a certificate of
  investment issued to the holder of the investment – as a right to ownership of a
  deposit of cash with the bank plus interest redeemable at a fixed future date.
• Long term investment traded as short-term securities – bonds traded in the bond
  markets often have a higher return than short term investments, because there is a
  greater risk for the investor. Bondholders can sell their investment in the secondary
  bond market if they need to convert the investment back to cash. However, risk is
  pervasive in the market, bond proceeds can fall if bond yields in the market rise.
  Bond proceeds can also fall if the credit rating of issuer falls.
  (Any 2points @ 2.5 marks each = 5marks)