Microsoft Company Budget Plan Analysis - Essay Example

? Budget Plan Analysis Budget Plan Analysis This document provides a flexible budget for Microsoft Company and further studies growth rate, sales, interest and tax burden of the company. It further analyzes the performance of the company with its peers and competitors. In order to regulate the budget plans the company follows two major types of budget plan. The document studies differences between flexible and static budget and also provides information derived from these two budget plans (Stice, Stice, & Swain, 2010; Oliver, 2000). Microsoft Corporation is the largest manufacturer, service provider and developer of computer software. It has high profit margins and a turnover of 70 billion annually. Analyzing the financial information reflects that the business has rapidly expanded; expenses have been proportionately increased with the revenue. But the interest and tax expenses are significantly higher that has had an impact on profit margins (Callahan, Stetz, & Brooks, 2011). The other intervention, mergers and joint ventures (Skype, bingo etc) have increased the efficiency and reduced the costs. Revenue Growth Average growth rate of 8.5% in revenues of Microsoft is calculated based on the growth rates reported by the company in the last 3 years.   2012 2011 2010 Total Revenue 73,723,000 69,943,000 62,484,000  Change in $   3,780,000 7,459,000  Change in %   5% 12% Expenses Growth In comparison with revenues of the company the changes in cost of goods sold and expenses are provided in the following table;   2012 2011 2010 Total Revenue 100% 100% 100% Cost of Revenue 24% 22% 20%         Total Operating Expenses 47% 39% 42%         Operating Income or Loss 30% 39% 39%         Earnings Before Interest And Taxes 30% 40% 40% Interest Expense 0% 0% 0% Income Before Tax 30% 40% 40% Income Tax Expense 7% 7% 10% Net Income 23% 33% 30% From the above, it could be indicated that cost of goods is increasing not in proportion to the revenue. In 2010, it was 20% of revenues then 22% in 2011 and became 24% in 2012. Similarly, changes in total operating expenses were 42% of total revenues in 2011, 39% in 2011, and reached 47% of revenues in 2012. This implies that they were not in proportion to changes in revenues. The company’s does not use any external borrowing therefore it has not paid any interest charges during the last three years. The US GDP has grown by an average of 2.6% in 2012. However, since Microsoft is an international company, economic growth rate of different countries where it is operating applies. The tax burden of the company is calculated in the above table as a proportion of sales. It was 10% of total revenues in 2010 and then remained at 7% for both 2011 and 2012. Microsoft’s competitors include Apple Incorporation. It has recorded phenomenal growth in the last three years as calculated in the following;   2012 2011 2010 Revenue 156,508,000 108,249,000 65,225,000     48,259,000 43,024,000     45% 66% In 2012, Microsoft only reported a 5% growth in revenues whereas Apple has reported 45% in the same period. Flexible Budget of Microsoft For creating flexible budget of Microsoft three different growth rates are used for predicting future revenues and other elements of the income statement are presented on the basis of the average rate of each element as a proportion to revenues recorded in the last three years. Low: 3.5% Average: 8.5% High: 13.5%   2013 2013 2013   3.50% 8.50% 13.50% Total Revenue 76,303,305 82,789,086 93,965,613 Cost of Revenue 16,757,800 18,182,213 20,636,811         Gross Profit 59,545,505 64,606,873 73,328,801         Operating Expenses       Research Development 10,220,317 11,089,044 12,586,065 Selling General and Administrative 19,994,186 21,693,692 24,622,340 Non Recurring 2,136,585 2,318,195 2,631,151 Others               Total Operating Expenses 32,351,088 35,100,930 39,839,556         Operating Income or Loss 27,194,417 29,505,943 33,489,245         Income from Continuing Operations       Total Other Income/Expenses Net 877,253 951,819 1,080,315 Earnings Before Interest And Taxes 28,071,670 30,457,762 34,569,560 Interest Expense - - - Income Before Tax 28,071,670 30,457,762 34,569,560 Income Tax Expense 6,159,519 6,683,078 7,585,294 Minority Interest               Net Income From Continuing Ops 21,912,151 23,774,684 26,984,266 Net Income 21,912,151 23,774,684 26,984,266 Static budget and flexible budget Static budget is a set of assumption derived by a company in the beginning of its fiscal period. It is also known as fixed budget because it has fixed anticipated expenses and costs. The results of the static budget cannot be varied with the change in price, demand or activity level (Eugene Foster Brigham, 2009). Static budget associates with the anticipating values of input and output. These values are different from the actual results; this is because the static budget is an assumed or anticipated input and output values that a company sets before starting its fiscal year (Andrew, 2011). The figures of static budgets are fixed and invariable (Andrew, 2011). Static budget does not change with the change in the activity level of the company. Perhaps, flexible budget changes with the change in the activity level (Dayananda, 2002). As it can be noted from the case of Microsoft three different growth rates have been used for predicting future revenues, and other elements of the income statement are based on average proportional rates. With expected growth rate of 3.5%, the company can have net income of $21,912,151. Using average growth rate of 8.5%, the expected net income of $23,774,684 is achieved whereas an optimistic view with a rate of 13.5% the expected net income of $26,984,266 is derived. It revalues expenditures on the bases of revenue that is being generated by the company. It assesses the company’s chance to increase or decrease its expenditure having regard to the economical conditions. It also provides an understanding about future problems and opportunities for the company (Bhattacharyya, 2011). Whereas the static budget does not predict any problems and opportunities for the business as it does not evaluate the expenses and revenues (Callahan, Stetz, & Brooks, 2011). Flexible budget provides understanding about the current performance of the company with the stimulating economical condition (Callahan, Stetz, & Brooks, 2011). Economical problems greatly influence the profit margins of the business. Flexible budget provides time to time valuation of expenditure with the revenue and can assess costs of the production, as the static budget is prepared at the time of budget and does not consider the legislative changes in the taxes or expense (Stice, Stice, & Swain, 2010), whereas flexible budget assesses the legislative changes and controls the costs and expenses of the company. Budgets as a tool Companies prepare budgets and plans to monitor its inputs and output. These plans are primary tools to assess the performance of the company. Budgets can be used to compare the performance of the company from its past years, or to compare its performance from its competitors. Companies are more inclined to reduce their costs, these results in higher profit margins (Brigham & Ehrhardt, 2011). Therefore it is essential for a company to address change in its expenses. The main objective of a company is to earn profit, either by expanding the production or to reduce its costs (Pendlebury & Groves, 2004). In order to make new investment or to develop a new project a company prepares a budget. This budget provide planning for the number of labor employed, time period for production, technology, interest and tax regulations required to start a new project (Gibson, 2010). If a company does not plans before starting the project or investment it may cause several risks and loss. Whereas, the other use of the budget is to control its expenditures over its revenue. There are numbers of factors that influence revenues yielding through its activities (Gibson, 2010). Among them major factor is the global economical system. Any change in the economical condition of the country, region or world directly or indirectly influences the business. If petroleum price are raised, it increases the transportation expenses resulting in increases of costs. Flexible budget address the economical condition, it can assess the companies to control the costs over its revenues (Dayananda, 2002). Budget planning is an essential tool for a company to reduce the risks of losses. Flexible and static budgets both play an essential role to reduce the losses and risks to a company (Miller, 2005). Static Budget provides a feasibility that a company should undertake to begin a new project or investment. It provides a layout for the company for planning the input and expected output. Flexible budget evaluates stimulating change in the expenses over the revenue. It helps in controlling costs of the production with respect of change in its revenue. It also foresees the opportunities and risks that a company may face in times to come. Reference List Andrew, G. A. (2011). Financial Management; Principles and Practice. New york: Freeload Press. Apple Inc. (2012). Income Statement. Retrieved on May 27, 2013 from http://finance.yahoo.com/q/is?s=AAPL+Income+Statement&annual. Bhattacharyya, D. (2011). Mangement Accounting. New Delhi: Pearson Education India. Brigham, Eugene F. & Ehrhardt, Michael C. (2011). Financial Management: Theory and Practice. London: Cengage Learning. Callahan, Kevin R., Stetz, Gary S. & Brooks, Lynne M. (2011). Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability. New Jersey: John Wiley & Sons. Dayananda, D. (2002). Capital Budgeting: Financial Appraisal of Investment Projects (2 ed.). (D. Dayananda, Ed.) Canbridge: Cambridge University Press. Gibson, C. H. (2010). Financial Reporting and Analysis: Using Financial Accounting Information. Oxford: Cengage learning, . Microsoft. (2012). Income Statement. Retrieved on May 27, 2013 from http://finance.yahoo.com/q/is?s=MSFT+Income+Statement&annual Miller, I. L. (2005). Managing For The Long Run: Lessons In Competitive Advantage From Great Family Businesses. Boston: Harvard Business Press. Oliver, L. (New York). The Cost Management Toolbox: The Manager's Guide to Controlling Costs and Boosting Profits. 2000: AMACOM Div American Mgmt Assn. Pendlebury, Maurice W. & Groves, Roger E. V. (2004). Company Accounts: Analysis, Interpretation And Understanding. Oxford: Cengage Learning. Stice, Earl K., Stice, James D. & Swain, Monte R. (2010). Accounting: Concepts & Applications. London: Cengage Learning. Read More