Lecture No.

1
PROJECT MANAGEMENT

I. Project Definition : (Projects are for development )

Key word or Phrase, used to define Project:

a) One -time -only set activities
b) Specific objectives
c) Definite starting and ending point
d) Life cycle
e) Unique product or service as an output
f) Specific group of benificeries
g) Operates within the constraints of time, cost and quality performance
1. As per (Gittimager, 1985) :
A project is as investment activity in which financial resources are extended to create capital assets
that produce benifits over extended period of time.
2. According to Project Management Institute of USA:
A project is a temporary end over undertaken to create a unique Product or Service.
3. According to Harold Kerzner :
A project is any series of activities or tasks that;
i) have specific objectives to be completed within certain specifications
ii) have defined start and end task
iii) have funding limits
iv) consume resources
4. According to S. Chaudhary:
A project starts from scratch with a definite mission, generates activities involving a variety of
human and non-human resources all directed towards fulfillment of the mission and stops once the
mission is fulfilled.
5. According to Trevor L. Young :
A Project is a collection of linked activities, carried out in an organized manner with a clearly
defined start point and finish point to achieve some specific results, that satisfy the needs of an
organization as derived from the current business plan.

Based on the above definitions of different writers we can define the project as below :

A project is an one-time-only set activities designed to attain:

 specific objectives within the constraints of time, cost and quality performance in dynamic
environment
 through the planning use and control of a variety of resources
 To create a unique product or service within temporary life span

A project is an one-time-only set development activity which has

 Specific objectives
 Constraints of time, cost and quality performance
 Unique products or service as an output
 Life cycle (born and die)
 Specific group of beneficiaries
Component of the Project

People are the one, who set objectives, prepare plan of action with cost, and time frame and finalize end
over results i.e. outputs of the Project.

Types of Project:

Projects are of different types:

a) Research and Development Projects
b) Construction Projects i.e. Engineering Project
c) Manufacturing of Aeroplanes, Vehicles etc.
d) Software and website development Project
e) Production of movies
f) Advertisement Campaign
g) Education and Awareness Campaign
h) Training Programs
i) Book Writing
j) Course Manuals
k) Developing new services etc.

Characteristics of the Project:

1. Specific Objectives:

Project must clearly define its objectives. Without objectives the Project can not be thinked out.
2. Life Span:

Each Project has its own life span. As we said before, the Project is an one-time-only set activities.
It has beginning and end. The life span of the Project depends upon the nature. Based on the nature
of the Projects, some has long life span and some has short.
3. Constraints:
All Projects have constraints. Project operates within the constraints of time, cost, and quality
performance.

Project Schedule constraints time i.e. it sets deadline

Project Budget sets cost limits
Project Specification sets quality performance

4. Unique:
Each Project is different
5. Team Work:
Project is implemented through team members from different discipline and experiences. The
Project Manager is the leader of the team.

6. Flexibility:
The Project operates in dynamic environment. And so it needs flexibility to response changing
environment.

7. Resources Integration:
Integration of physical, financial, human and information resources is the must in Project. Project
Manager is one who integrates these resources with minimum waste in the Project.

8. Planning and Control:

Project requires effective and efficient planning and control systems. Standards of the project
activities are set through Planning. These standards are the yardsticks to measure project
performance.
9. Contracting, Sub-Contracting
Most Projects are contract based.
10. Beneficeries:
All projects have beneficeries. Benificeries are those, who use the Project out put.

Formulating Vission/ Mission/Goal:

Vision is the dream, an ideal end- result.
Mission is a means to attain the vision
Goals are means to attain the mission

Definition of Objectives:
Objectives are the desired outcomes or end result of the Project.
Objectives are the results to be achieved. They are the end result.

Goals: General statement of desired outcome, common to the whole system/ subsystem of an
organization.
Objectives: Specific and goal-oriented may be different for various Projects of the organization.

Project goals and Objectives should be smart:

S- pecific
M-easurable
A-ttainable
R-ealistic/ esult – oriented / resource-based
T-ime - bounded

1. The overall goal of the Complex Development Project of Acme Engineering College is to provide
minimum physical facilities required in teaching-learning process.
2. The objectives of the Complex Development Project of Acme Engineering College is to

i) Construct about 25,000 sq/ft floor area of main building , where required class rooms,
laboratories, library and room for management will be managed.

ii) Construct Laboratory sheds of about 3000 sq/ft floor area

iii) Construct Basket ball court, Volley ball court etc.

 Lecture No. 2

Project Life Cycle:

We have already mentioned that the project has its own life. It has beginning and end points. It has
fixed life span. The life span of the Project is divided into different phases.

Cleland divides the Project life cycle into following five different phases:

i) Conceptual : Preliminary evaluation of Project Idea, identification of needs.

ii) Definitions : Identification of the resources requirement and the establishment of
time, cost, performance parameters
iii) Production : standardization of efforts and completion of documentation, for
operations; Project Implementation
iv) Operational: Evaluation of the Project and its integration into another organization
v) Divestment : Reallocation of resources to other Project

Most commonly, the following four phases are described in the life cycle of the Project.
a) Formulation Phase
b) Planning Phase
c) Implementation Phase
d) Termination Phase
1) Project Formulation Phase:
This is conception phase. The basic task in this phase consists of the following:
i) Project Identification:
Project are born with creative ideas. The creative ideas come from different situation :
 Environment : what is the political situation, socio cultural, economic, legal and technological
forces in the respective environment are analysed.
 Internal Resources of the Organization: VMG of the organization, plan & strategy adopted by the
organization and SWOT analysis etc. provide new Project idea.
 External Resources: Market demand, donors priority, legal provision, Competators' activities and
vested interest of the politician provide Project idea.

ii) Project Formulation:
Two major activities are implemented during Project Formulation:
a) Statement of work: Different parameters like scope & objectives of the project, role &
responsibilities of project implementers; schedule, cost and quality of the Project etc are
incorporated in statement of work.
b) Project Proposal: Technical & Financial Proposal used for the bidding are the product of
project proposal. Project proposal is an initial stage of project document which is formed
after conducting prefeasibility study and preliminary design of the Project.

2) Planning Phase (Project Development Phase) : Preparing of detailed plan, with,

time, cost, and quality. The following are the three major activities, that are implemented during
this phase:
 Feasibility study:
Implemenatalility of the Project is analysed in this study. The areas of analysis could be:

i) Market analysis
ii) Technical Analysis - Technically viable or not
iii) Financial Analysis
iv) Management Analysis
v) Economic Analysis
 vi) Environment Analysis
 Appraisal:
· Ability of the project to achieve its objectives.
· Comparability of the Project with other project in term of investment, cost/benefits , job
creation profit etc.
Project Approval
· Finalization of funding proposals, agreement and contract document
· Allocation of the resources to the Project, introduction of appropriate rule & regulation for
the Project
 Design:
· Preparation of blue prints and specification
· Preparation of detail implementation plan
3) Implementation Phase:
® Implementation ® Mobilization
· Project organization is set
· Project team is formed and implementation is carried out through this team
· Project manager is the team leader and is responsible to mobilize the Project activities
· MIS is developed
 Control:
CPM
PERT ® Program Evaluation and Review Technique
4) Termination Phase
· Project Evaluation
· Project Handover
 Lecture No. 3
1. Project Environment
2. Internal Environment
3. - Project Objectives
3a. - Constraints
- Structure
- Resources
Task Environment: Surrounds the
Project and consists of different stake
3b. holders, who affects the Project
activities. The elements are:
- Customer
- Contractors
- Consultants
- Suppliers
- Government
- Financiers
- Competitors
- Labour Union

External Environment (PEST)

- Political - Legal (P)
3c. - Economic (E)
- Socio - Cultural (S)
- Technological (T)

 Political Environment Economic Technological

- Political System - Economic System - Level of Technology
- Political Institutions - Economic Policies -Technological Change
- Political Philosophy - Economic Conditions - Technology Transfer
- Legal Environment - Regional economic group
- Law
- Courts of law
- Law administrators

Socio - Cultural, Social

- Demographics
- Social Institutional
- Pressure group
- Social Change
- Cultural Environment
 Lecture No. 4
Topics : Goal Oriented Project Planning

S.N. Description Method Time

1. General Tips on communication
2. R
;/nfO{ ;f]Wg]

Actual Project Planning Phase :

1. Project Planning Matrix:

- Why(Goal); What (Objectives); How (Strategy); Which; How; Where
- Goal; Project Purpose; Output/ Result; OVIS (Quality, Quality, Time & Place); MOV; Important
Assumption
- Project plan of operation

General Tips on Communication

1. You are a medium
2. Be natural
3. Avoid distracting mannerism
4. Your classroom is a stage
5. Strong areas : Stage can be divided in six sections; Front is stronger than back and centre is
stronger than side. Left side (from audience) is stronger than right.
6. Body Position: Facing the full front is stronger
7. Movement
8. Keep it light
9. Keep a surprise in store
10. Control attention , Eye contact
11. Keep sight & sound synchronized
Capital Planning and Budgeting

1. Nature of Investment Decision:

The Investment Decision of an organization is generally known as the Capital Budgeting or Capital
Expenditure decisions. A capital budgeting decision may be defined as the organization ' decision to invest
its current fund( budget) in long term assets in anticipation of an expected flow of benefits over a series of
years.

The firm's investment decision would generally include establishment expansion, acquisition,
modernization, and replacement of long- term assets. Advertisement campaign, and Research &
Development activities have also long- term implication for the form's benifits and so, they are also be
taken as investment decision. Thus the following are the feature of Investment decision or Capital
Budgeting:
a) The exchange of current fund for future benifits
b) The funds are invested in long term assets
c) The future benifit will occur to the firm over the series of years
The expenditure and benifits should be measured in cash. In the investment analysis it is cash flow rather
than accounting profit.

2. Importance of Investment Decision:

Due to the following reasons, Investment decision requires special attention:
· They influence the firm's growth in the long run
· They affect the risk of the firm
· They involve commitement of large amount of fund
· They are irreversible or reversible at substantial loss
· They are among the most difficult decision to make
3. Type of Capital Investment:
The Capital Budgeting can be classified in different ways: The simple way of classification is:
a) Physical assets b) Monetary c) intangible
a) Physical assets are tangible such as : Land, building, vehicle, lab equipments, furniture,
office equipment
b) Monetary assets are financial claims against some parties, Like Deposits (TU & CTEVT).
Equity shares are the examples of monetary assets.
c) Intangible assets are investment in R&D activities, training, advertisement etc, which in
long run generate benifit to the organization.

Similarly it can be classified as below:

a) Mandatory Investment: Basic statutory equipments required to run the firm or organization,
b) Replacement Investment : Replacement of old equipment by new with an aim to reduce
operating cost.
b) Expansion Investment : It is to increase the capacity to cater to a growing demand.
c) R&D Investment : It is to develop new products and process as well as market demand.
d) Miscellaneous : Interior decoration, landscaped , gardens etc.

4. Phases of Capital Budgeting

a) Planning : broad investment strategy and preliminary screening of project proposals

b) Analysis : If project seems to be preliminary fesible than marketing, technical,economic and

ecological analysis is carried out.
c). Selection ( Investment Evaluation Criteria) :
Selection follows and often overlaps analysis.A wide round Apraisal Criteria have been
suggested to judge the worthfuillnes of a project. They are divided into two board areas:

i) Non-discounting Criteria:

* Pay-Back Period (PBP): Which should be less than target period.

* Accounting rate of return (ARR): Which should be greater than target rate.
ii) Discounting Criteria:

* Net Present Value (NPV): Which should be greater than zero(o).

* Internal Rate of Return (IRR): Which should be greater than the cost of capital.
* Benifit Cost Ratio (BCR)
6. Financing : Once the project is selected, financing arrangement has to be done. Two major
source of financing are equity and dept.
i) Equity: Shareholders fund, or retained earnings.
ii) Debt: Loan funds
7. Implementation
8. Review
 Investment Criteria
Technique of CB

The main aim of Investment Criteria is to facilitate an easier understanding of costs & benifits, risk
analysis and cost of capital. More than 30 criteria have been proposed, but the most popular and important
Investment Criteria are classified into two major categories they are:

I. Discounting Criteria II.  Non-discounting Criteria

- Net Present Value (NPV) - Payback Period (PP)
- Benifit cost ratio (BCR) - Accounting Rate of Return (RR)
- Internal Rate of Return (IRR)

Ct
∑ ¿n ¿
1. NPV of a Project = ¿ (1+r)t - Initial Investment
t=1
Where: Ct - Cash flow at the end of t year
n - Life of Project
r - discount rate/ the cost of capitalor rate of return, which is assumed in
the beginning of the project based on the risk of Project
Example : The initial Investment of the Project is 1,800,000/-. Cash flow for 5 yrs period are
400,000/-; 450,000/-; 500,000/-; 550,000/-; 600,000/- and cost of capital is 10% ; Calculate NPV;
400000 450000 500000 55000000 600000
1
+ 2
+ 3
+ 4
+
NPV = (1+ 0 .1 ) (1. 1) (1 .1 ) (1 .1 ) (1. 1) 5 - 1,800,000/-

= 363636.36+371900.02+375657.4+372555.1
= 21859407/- -1800000/- =59407 > 0. So accepted.
The NPV represents the net benifit over and above compensation for time & risk.
2. Benifit Cost Ratio (BCR)
PVB
BCR = I ____________ (1)

PVB−I
Net Benifit Cost Ratio (NBCR) = I = BCR-1 _________(2)
Where, PVB - Present value of benifit
I - Initial Investment
Ct
∑ ¿n ¿
Present Value (PVB) = ¿ (1+r)t
t=1

If Initial Investment = 5,00000/-

and rate of return (Cost of Capital)= 10%
and cash flow by year for 4 yrs are 15,000; 20,000; 20,000; 25,000 then
15 , 000 20000 20000 25000
+ + +
(1. 1) 1 (1. 1) 2 (1 .1 ) 3 (1 .1 ) 4
BCR =
5,00000/-
62266 . 92
=0 . 124 ∠1
= 500000 reject
BCR > 1 - accept NBCR > 0
BCR = 1 - indifferent NBCR = 0
BCR < 1 - Reject NBCR < 0

1RR : Very simple to understand in the case of one- period project

Example :
If you deposit 10,000 and get 10800 after one year then the Rate of Return would be :
10800−10000
=0 . 08
RR = 10000 or 8%
3. Internal Rate of Return
The 1RR is the discount Rate which makes its NPV = 0;
Ct
∑ ¿n ¿
As me know; NPV = ¿ (1+r)t - Investment
t =1
Ct
∑ ¿n ¿
As per deffinition ; OCO Investment = ¿ (1+r)t
t =1

Given: Investment = Rs. 100,000: cash flows for four years are 30,000/-; 30,000/-; 40,000/-; 45,000 and
discount rate is 15%. Calculate IRR.

IRR is calculated by the process of trial & error by assuming yhe value of r

i) say r = 15 %
30000 30000 40000 45000
+ + +
Then : 1. 15 (1 .15 ) 2
(1. 15 ) 3
(1. 15) 4 =100802
Which is > 100000/- ; so r> 15%

ii) say r = 16%

30000 30000 40000 45000
+ + +
Then:
1. 16 (1 .16 ) 2 (1. 16 ) 3 (1. 16 ) 4 = 98641; By interpolating these two numbers actual value of r
can be identified.

If IRR > cost of capital (discount rate ) accept

If IRR < ,, reject

Non discounting criteria:

4. Pay Back Period

PBP is the length of time required to recover the initial cash outlay on the project. Say the initial
Cash out lay of the project is 1,000,000/-; The cash in flows are 200,000; 300,000;300,000 &
400,000 by the end of each four years then PBP is 4 yrs.

If PBP > Target period of project - reject

If PBP < ,, ,, ,, - accept

5. Accounting Rate of Return (ARR)

 ARR is also known as Return On Investment (ROI) uses to measure the profitability of an
Investment. This is average income after tax, profit by average Investment.

AverageInvestment¿
AverageIncome¿ ¿
ARR = ¿

ARR =
[ n
¿ ∑ ¿t=1¿
∑ EBIT (1−T)/n ]
¿ t

(Io+In/2
¿

A Project will cost Rs.40,000/- ; Its stream of equations before depreciation, interest and tases
EBDIT during 1st yr. through 4 years is expected to be 15,000 ; 20,000 ; 25,000 ; 30,000. Assume 50% tax
rate and 10,000 depreciation in straight line.

Period 1 2 3 4 Average

1.Earning before depreciation 15000 20000 25000 30000 22500

interest & taxes (EBDIT)
2. Depreciation 10000 10000 10000 10000 10000
3. Earning before
Interest (EBIT) 5000 10000 15000 20000 12500
4. Taxes 50% 2500 5000 7500 10000
5. Earning before interest & after
Tax [EBIT (1-T)] 2500 5000 7500 10000 6250
6. Book Value Investment
Beginning 40000 30000 20000 10000
Ending 30000 20000 10000
Average 35000 25000 15000 18750

AverageInvestment¿
AverageIncome¿ ¿ 6250
ARR = ¿ = 18750 x 100 = 33.33%
ARR > target rate - accept
< ,, - reject
 Operational & Capital Budget

· Budgeting or profit planning is a detailed action plan during a period of one year or less.
· Firm or organization should achieve its objectives by minimizing the use of resources.
· Financial planning indicates a firm 's growth, Performance, investment and requirement of funds
during a given period of time usually 3 or 5 years.

1. Financial Planning
· Growth in sales is an important objective of any firm
· Increase in firm's market share lead to higher growth.
· Firm needs assets for higher growth.
· It requires to increase production capacity for which additional plant and machinery has to be
added.
· When internally generated fund of the firm will not be sufficient to meet above mentioned needs,
then firm needs to manage external fund i.e. by in using equity or debt or both

The process of estimating the funds requirement of a firm and determining the sources of the fund
is known as financial planning.

Financial forcasting is the basis of financial planning and financial forcasting is the estimate of
future fund based on past data.

2. Steps of Financial Planning

1. Past Performance : Analysis of past performance of the firms financial strength &
weakness

2. Operating Characteristics : Analysis of firm' s operating characteristics like product,

market, competition, production & marketing policies,
control system, operating risk.

3. Corporate Strategy and Investment Needs: Determining the firm's investment needs and
overall strategy.

4. Cash flow from operation : For casting firm's revenue and expenses based on its
investment and dividend policies.

5. Financing Alternatives : Analysis of financial alternatives and dividing appropriate means

of raising fund.

6. Consequences of financial plans : Analysis the consequences of its financial plans for the
long term health and survival to firm.

7. Consistency : Evaluating the consistency of financial policies with each other and with the
corporate strategy.

Financial planning is long-term plan of the firm which includes long-term growth and
profitability, investment and financing decision.
3. Profit Planning (Budget)

Profit planning or Budget is short-term financial plan. It is an action-plan to guide managers in

achieving the firm's objectives. A budget is a comprehensive and coordinate plan, expressed in
financial term.

The basic elements of budget are:

· It is comprehensive & coordinated plan

· It is expressed in financial term
· It is a plan for the firm's operation and resources
· It is a future plan for specified periods.
A Budget is :
· Integrated plan
· Financial Qualification
· Operations & Resources
· Time Element

The major objectives of Budget are:

· the firm's expectations (goals) in clear and formal terms to avoid confusion and to facilitate
their attaintability.( Statement of expectation)
· to communicate expectations of the firm to all concerned staff of the firm, so that they can
understand, support & implement (communications).
· to provide detail action plan (planning).
· to coordinate the activities and efforts in such a way that the use of resources is maximized.
(Coordination)
· to provide a means of measuring, controlling the performance of individuals and units and
to supply information on the basis of which the necessary corrective action can be taken
(Control).
 Preparation of profit plan (Budget)

A comprehensive planning and budgeting system generally includes.

a) A sales budget
b) A production budget
c) A purchasing budget
d) A cash budget
e) Performa financial statement
f) Capital expenditure budget

a) Sales Budget
h) The area wise sales of products A & B are as follow:

Sales Area product %

A B

X 10 50
Y 20 30
Z 70 20

ii) The selling price of product A is Rs.10, & B is Rs. 20.

iii) Sales forcast in monthly basis are as follow:

Product Jan Feb March Total

(No) (No) (No) (No)
A 500 1000 1500 3000
B 1000 2000 3000 6000

1. Sales Budget
Month
Area of Product Jan Feb March Total (Rs)
Sales Area X
Product A 500 1000 1500 3000
Product B 10000 20000 30000 600000
Total of Area : 10500 30000 31500 63000

Sales Area Y
Product A 1000 2000 3000 6000
Product B 6000 12000 18000 36000
Total of Area : 7000 14000 21000 42000

Sales Area Y
Product A 3500 7000 10500 21000
Product B 4000 8000 12000 24000
Total of Area : 7500 15000 22500 45000

Total for all areas 25000 59000 75000 159000

2. Production Budget

Budgeted Production (units) = (Sales estimate + Desired / Expected closing stock) - opening stock

Jan Feb March

I. Estimate sales of A: 500 units 1000 15000
Desired closing stock 200 500 700
Total: 700 1500 2200
(-)Opening stock: 400 500 800
Unit A to be produced : 300 1000 1400

II. Estimate sales of B: 1000 2000 3000

Desired closing stock 500 1000 1500
Total: 1500 3000 4500
(-)Opening stock: 500 1000 1500
Unit B to be produced : 1000 2000 3000

3. Purchasing Budget

In the production of each product A and B needs one common material. Say to produce A need 2
units of materials and to produce B 4 units of materials. The cost of one unit of materials is Rs 2/-
Labour cost is Rs5/- per hour in which one can produce 1 unit of materials.

Then Purchasing Budget is as follow:

Jan Feb March

a) Material needed to Produce A

(1 unit x 2 unit of materials) 600 2000 2800
b) Materials needed to produce B
(1 unit x 4 unit of materials) 4000 8000 12000
Total production needed 4600 10000 14800
(+) Desired closing balance 2000 5000 8000
6600 15000 22800
(-) Opening balance 3000 8000 10000
Purchase (units) 3600 7000 12800

Cost of purchase @
Rs.2/- per unit 7200 14000 25600

4. Labour Budget

Jan Feb March

Units of A to be produced 3000 1000 1400
,, ,, B ,, ,, ,, 1000 2000 3000
Total Units 4000 3000 4400
Total hours at 1 hr per unit 4000 3000 4400
Total labour cost @ Rs.5/- per hr (Rs)20000 15000 22000
4. Cash Budget
Jan Feb March
Description
a) Opening cash balance
b) Add cash collection
From sales + debtor collection
c) Less cash disburshment, Raw materials purchase
d) Total cash disburshment
e) Cash surplus or deficit
f) Min-cash balance (ending)
g) Borrowing (repayment)
h) Interest
i) Cash balance ending

5. Performa Income Statement

Rs Rs
Sales Revenue *
Cost of goods sold
Product A *
Product B *
**
Gross Profit (*-**)
Operating expenses
Salaries -
Rent -
Sales Commission -
Interest -
Depreciation -
Net Profit
X (*-**)-X

5. Performa balance Sheet

Capital & Liabilities:

Creditors -
Loan -
Interest payable -
Share Capital -
Profit -
£

Assets:

Cash
Debtors
Stock
Raw Materials
- Product A
- Product B
Plant & machinery
Less depreciation _________
£
Advantage of Budgeting
· Forced planning – The budgeting process forces mgmt to plan
· Coordinated operations
· Performance evaluation and control
· Effective communication
· Optimum utilization
· Productivity improvement
 Types of Budgets:

- All enterprises make plans.

- Some in systematic and formal way, while some in an informal manner.
- Large and medium firms have comprehensive system of budgeting – Prepares budgets for all their
important operations.
- A master budget with a complete package of the components budget is prepared in comprehensive
budgeting.
- Three important components of master budget are:
1) Operating budgets.
2) Financial budget
3) Capital budget.

1) Operating Budgets

Planning of the activities or operations such as production, sales and purchase is operating budget.
Operating budget is composed of two parts: a program/Activity Budget and Responsibility budget.
These are the two different ways of working at the operations of the enterprises but arriving at the
same result.

1.a) Program or Activity budget:

This specifies the operations or function to be preformed during the year, in which budget is
prepared and past financial statements indicates the direction of change in the financial position
and performance of the enterprises. Manager takes it as a guideline for future budgeting.

1.b) Responsibility budget:

Responsibility budget specifies plans in terms of individual responsibilities. The focus is on

individuals. The basic purpose of this budget is to control by comparing the actual performance of
a responsible individual with the expected performance. Program budget is planning process while
responsibility budget is control devices. Program budget need not to tailored to the organizational
structure, of the enterprises, but responsibility budget must be. Therefore, the plan (program
budget) must be converted into the control (Responsibility budge).

There are two ways in which the operating budget may be prepared. i) Periodic budgeting.
ii) Continuous budgeting .

In periodic budgeting comprehensive revision is not provided while in continuous budgeting

revision of budget for changing condition is provided.
In case of the stable firms, which can forecast with reasonable precision, periodic budget can be
used whereas in case of those firms, which operate in the condition of uncertainties, Continuous
Budgeting is used.

2. Financial Budget:

The expected cash inflow and cash outflow, financial position and operating results are the basic
concern of financial budget. The important component of the financial budget is cash budget and
Performa Financial Statements.
 2.1. Cash Budget

This is the most important component of financial budget. A good management always
keeps its cash balance at optimum level: too little cash endangers the liquidity of the
company, and much cash tends to impair profitability. The major objectives of cash budget
is to plan cash balance in such a way that the company always maintains sufficient cash
balance to meet its needs and uses the idle cash in the most profitable manner.

2.2 Performa Financial Statements:

Performa Financial Statements in the form of Balance sheet and income statements show
the end result of the budgeted operations. Performa Financial Statement provides
information about future assets, liabilities and revenue and expenses items. The analysis of
the present and past financial statements indicate the direction of change in the financial
position and performance of the enterprises. Manager takes as guide line for future
budgeting

3. Capital Budgets.

Capital budgets involve the planning to acquire worthwhile projects, together with the timing of
the estimated cost and cost flows of each project. Such project requires large amount of fund and
have longterm implication. It is very difficult to prepare capital Budget. ]

The capital budget is generally prepared separately from operating budget. Separate committee
within enterprises is formed to prepare capital budgets.
 Fixed and Flexible Budget

1) Fixed Budget is also known as static budget or master budget.

2) Flexible Budget, which is also known as variable budget is a budget that adjusts for
changes in sales volume and other cost- driver activities.
Flexible Budgets

Say the unit cost in sales is fixed and varry the quantity of product

Budget formula per unit Flexible Budget formula Flexible budget for various level
of sales / product
Units 7000 8000 9000
Sales Rs.30 210000 240000 270000
Variable cost expenses
- Variable manufactur cost Rs. 20 140000 160000 180000
- Shipping expenses Rs.0.8 5600 6400 7200
- Administrative Rs. 0.2 1400 1600 1800
21 .0 147000 168000 189000
Contribution margin 9.0 63000 72000 81000
Budget formula per month
Fixed Cost
Fixed manufacturing costs 36000 36000 36000 36000
Fixed selling &
administrative cost 34000 34000 34000 34000
70000 70000 70000 70000
Operating Income (9000) 2000 11000
 Audit

Accounting is more an art than a science. It is based on a set of principles on which there is general
agreement, not on rules that can be “proved”. An accounting system is a formal mechanism for gathering,
organizing and communicating information about an organization’s activities. Each and every organization
adopts generally accepted accounting principles (GAAP). GAAP includes broad concepts or guidelines
and detailed practices, including all conventions, rules, and procedures that together make up accepted
accounting practice at a given time. However internal accounting reports need not be restricted by GAAP.
But in each country, the government has made its own system of accounting. And based on the nature of
the organization, they are made responsible to adopt the particular accounting principles.

Audit is a controlling mechanism used in accounting system. In each country, the government has
its own independent body, which is responsible to control the account of all organizations inside the
country. The office of Auditors is the central independent body in our country for this purpose.

Audit is an examination or in depth inspection of financial statements and companies’ records that
is made in accordance with generally accepted auditing standards. It culminates with the accountant’s
testimony that management’s financial statements are in conformity with general accepted accounting
principles. Mostly two different types of audit are in practice. They are:

1. Internal Audit
2. External Audit