Introduction
Budgeting is a very vital process in any type of business. It is creating an organized measure of
expenditures which are normally very thorough. It facilitates in the knowledge of how one
spends their money and determines how one will have money to execute one’s needs.
Budgeting in simpler terms is balancing one’s payments and income. If they do not balance it
leads in losing money which becomes a problem to the individual. It is a problem that most
people experience at one stage or the other and is one cause of how people end up in huge debt.
Budgeting comes in to facilitate he management of funds when they are not enough to pursue
everything the individual desires. It aids in setting out and focusing the money on activities that
are the most fundamental (Dudi, Kucuri, Fedorova, Dzusova & Namitulina., 2015).
1.1 Important financial budgets prepared by the business
Businesses use various methods in establishing their budgets. Businesses have individual
financial budgets for their plan of income and expenditures. Some of the financial budgets that
businesses would undertake would include; raw materials, salaries and commissions, marketing,
maintenance of equipment, utilities like gas, water, electricity and shipping and delivery budgets
(Negash & Gray., 2008).
The raw materials budget would determine how much material was needed so that it would reach
the budgeted production. It is constructed comparably to the production budget as the business
determines the amount of raw materials required at a specified time in meeting their set goals.
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Salaries and commissions budget involves funds that are assigned to pay salaries in a given
amount of time. It varies when individual employees or structure adjustments are being executed
hence are taken to deliberation.
Marketing budget is a fundamental part of the all-inclusive budget plan of the company. It
defines the amount of money that will be used in marketing in a given time period. Maintenance
of equipment budget involves expenditure like needed parts, Labor and other costs so that
maintenance takes place.
Utilities budgets involve the planning of payments of utilities used such as water or electricity
that are normally paid monthly. If the company makes shipment or delivery then they have to set
aside funds that will accommodate this. It involves budgeting for the expenses that will be used
for shipping be it by air, road or water; including this also entails that at the end of the day a
profit is met.
1.2 Analysis of selected income statement for the estimation of changes
An income statement is a form of a budget that exhibit revenues and expenses of a business. The
statements also may be an indication whether the businesses are profitable in a given period of
time. Income statements are usually used with cash flow statements and balance sheets track the
financial state of the business (Bartov & Mohanram 2014).
The selected company I used from UAE is the Gulf international bank (GIB). It was founded in
the year 1975 in Bahrain and became fully function in 1976. Gulf international bank offers one
Budgeting 5
of the best financial services in the Arabian countries, it delivers remarkable bank solutions.
Their income statement of 2015-2017 is shown below:-
Increase /Decrease (%)
2017 2016 2015 2014-
2015
2015-
2016
2016-2017
Earnings (US$ millions)
Net income after tax 70.0 37.3 90.4 5.6 -58.7 87.7
Net interest income 253.1 190.0 188.2 19.1 1 33.2
Fee and commission income 72.6 66.2 70.2 11.6 -5.7 9.7
Operating expenses 240.0 219.0 192.1 16.5 14 9.6
Financial position(Us$
millions)
Total assets 25,471.3 22,905.8 24,192.4 13.8 -5.3 11.2
Loans 10,043.1 9,745.1 9,161.4 15.4 6.4 3.1
Investment securities 3,993.8 4,066.4 3,884.5 -1.5 4.7 -1.8
Senior term financing 3,263.6 2761.6 2,420.0 -28.3 14.1 18.2
Equity 2,410.9 2357.4 2,431.0 3.4 3 2.3
Total 45,182.7 41,836.3 42,089.30 -0.6 8.0
Ratios(per cent)
Profitability
Return on average equity 2.9 1.6 3.8 2.7 57.9 81.3
Return on average assets 0.3 0.2 0.4 0 -50 2
Capital
Risk asset ratio(Basel 2)
– Total 15.6 16.8 17.8 -9.2 -5.6 -7.1
– Tier 1 14.7 15.7 16.8 -7.2 -6.54 -6.4
Equity as % of total assets 9.5 10.3 10.0 -9.1 3 -7.8
Asset quality
Security as % of total assets 16.4 18.4 16.2 13.2 13.6 -10.9
Loans as % of total assets 39.4 42.5 37.9 1.9 12.1
Liquidity
Liquid assets ratio 58.3 55.0 60.0 -1.5 -8.3 6
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Deposits to loan cover
(times) 1
2.0 1.9 2.1 -4.8 -9.5 5.3
1.3 Preparation of budgeted income statement
A budgeted income statement estimates the margins that the company is targeting in the coming
years (Cox 2010). It is quite comparably to an income statement only that it is a forecasted one
that The Budgeted income statement of the Gulf International Bank from the figures of 2015-
2017 is as follows:-
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2020 2019 2018
Earnings (US$ millions)
Net income after tax 72 78 92
Net interest income 195 251 260
Fee and commission income 73 75 74
Operating expenses 241 235 245
Financial position(Us$ millions)
Total assets 31241.4 29668.9 28,527.8
Loans 12276.3 10546.7 10515.2
Investment securities 4350 4311.2 4121.6
Senior term financing 3345.8 3306.2 3280
Equity 3286.6 3209.6 3110.1
Total 54500.1 51042.5 49554.5
Ratios(per cent)
Profitability
Return on average equity 3.1 2.6 3.5
Return on average assets 0.2 0.3 0.4
Capital
Risk asset ratio(Basel 2) 15.8 15.2 16.1
– Total 14.9 15.6 16.8
– Tier 1 9.7 9.9 10.5
Equity as % of total assets
Asset quality
Security as % of total assets 17.1 17.6 18.3
Loans as % of total assets 38.2 39.6 41.5
Liquidity
Liquid assets ratio 60.2 57.1 63.5
Deposits to loan cover (times) 1 1.8 2.1 2.2
Conclusion
Budgeting is of the utmost important and should be seriously. It is a part of the process of having
a successful business and knowing how to spend your funds. It aids the business to meets its
targeted objectives. Budgeting also helps in establishing the future. It facilitates the monitoring
of the business performances.
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References
Dudin, M., Kucuri, G., Fedorova, I., Dzusova, S., & Namitulina, A. (2015). The
innovative business model canvas in the system of effective budgeting. Asian Social
Science, 11(7), 290-296.
Negash, S., & Gray, P. (2008). Business intelligence. In Handbook on decision support
systems 2 (pp. 175-193). Springer, Berlin, Heidelberg.
Bartov, E., & Mohanram, P. S. (2014). Does income statement placement matter to
investors? The case of gains/losses from early debt extinguishment. The Accounting
Review, 89(6), 2021-2055.
Cox, P. (2010). Master budget project: Analyzing the pro forma statements. Strategic
Finance, 92(5), 56.
https://www.gib.com/sites/default/files/gib_annual_report_2017_full_eng.pdf