Managing Budgets and Financial Plans - Term Paper Example

Budget and Financial Plans 2006 Preserving of strategic planning and decision making and to present accountability by assisting managers to plan for the resources essential to issue a product or service is the rationale of the planning and budgeting of Swann Communication. Accordingly, the exercise of sound budgeting system is considered appropriately more prevailing. Furthermore, Swann Communication operation has resulted in a trend in the direction of putting the responsibility for budgeting at higher levels in the business. In former days it was typical to discover the budget function buried remarkably in the accounting operation. At present it is not unusual to have the budget function report to levels of management on top of the controller. Even though it is still accommodating for the budget director to report to the corporate controller, the approach toward reporting to a higher level is acknowledgment of the necessity to have the budget function commonly based in all operating areas of the business. Budget committee of Swann Communication is composed of representatives from most operating areas. This composition promotes synchronization. If correctly administered, the budget committee can achieve the exceptionally useful role of encompassing and reconciling the numerous diverse interests that make up a modern business. An effective budgeting system assists control. The budgeting system must fit the Swann Communication's operational control needs. The budget is considered as management's quantitative expression of plans for a forthcoming period. Budgets are prepared at different levels of the business. The Master budget is defined as the general financial plan for the period, which suggests the company's goals and objectives (Kemp, and Dunbar, 2003). Master budget of Swann Communication composes operating and financial budgets. The Operating budgets demonstrate the business' planned sales and operating expenses. The Financial budgets mirror financing plans such as borrowing, leasing, and cash management. Budgeting, when done correctly, can serve as a planning and controlling system. Swann Communication's goals and performance objectives are documented in financial terms. Once formulated, these plans are used all through the year. The monthly performance reports compare budgeted results with actual results. Management can inspect the performance reports and take required corrective actions to control operations. The role that successful budgeting plays in the management of Swann Communication is best understood when it is associated to the essentials of management. Numerous existing definitions of Swann Communication management can be expressed in terms of five key functions: planning, organizing, staffing, directing, and controlling. Planning and budgeting present a basis for assigning financial resources established on operational plans and objectives. For the reason of the intensifying complexity of business for the reason that of the movement in the direction of decentralization in big endeavors, augmented attention is being given to superior planning and control procedures. The management of Swann Communication must first plan. Plan is carried out by organizing, staffing, and directing operations. To control operations, management must institute proper techniques of observation and reporting to establish how actual results compare to plans. The budgeting is concerned mainly with the planning and controlling functions of management. Looking at how a budget is fabricated in the company will provide several insights into the fundamental aspects of budgeting. Primarily, the controller receives the operating plans of the line managers and other department heads and explains these plans into a comprehensive projection of financial condition and operating results. Final judgment should not be made until the outcome of the plans can be estimated by the CEO in terms of the impact on company resources and profits. Planning is considered to be future-oriented. The plan identifies in several forms what management wants to do. The management has certain variables that management can control. Several of these variables are financial resources, products, production methods, plant and equipment, and human resources. Planning embraces making forecasts and assumptions regarding the business' external environment, which is uncontrollable. Examples of uncontrollable factors in the external environment encountered by Swann Communication are consumer spending, interest rates, government actions, and actions of competitors. Since management cannot control external environmental variables, it must confine its plans to controllable factors. Consequently a plan consists of what management is going to do with the variables it can control. Swann Communication develops strategic and long-run plans covering five or more years. The company confines the formalized planning horizon to one year. The degree of accuracy of the projections and plans defends with the period covered. In view of the various uncertainties involved in projecting activities over a five-year period, the procedure is to prepare plans for the first year in considerable detail. On the contrary, summary projections are used for the remaining four years. As each year passes, new plans are prepared on the basis of recent experience and data, and a new fifth year is added. Whether or not operational and financial planning is done over a five-year period, the company follows this planning procedure on at least a one-year basis in order to lay a sound foundation for running the business and making the budget for the next year. Planning phase culminates in a wide operating plan. This plan comprises a statement of goals, sub goals, and broad performance objectives. It is sent to the operating departments for the development of department plans that are aimed at achieving company goals and objectives. Department plans are created to include specific, measurable performance objectives. These objectives might, for example, include scheduled production, a target output per labor hour, and a target for defective units. These objectives must then be converted into financial terms in the form of a budget. The annual planning process of Swann Communication starts with the establishment of goals. These goals may be stated in terms of profit, product leadership, market share, product diversification, return on investment, or merely survival. In practice, there are various levels of goals. General goals, which are directional in nature, typically are set first. An example of general goals includes growth of the business, quality leadership, being the lowest-cost producer, and maintenance of the current level of service to customers. Swann Communication develops a hierarchy of goals. The corporate goals are set by top management. The degree of participation in this development varies by Swann Communication. Goals then are set at sequentially lower levels in the organization. These sub goals are set in harmony with upper-level goals. They help lower-level managers picture how their. Efforts contribute to the accomplishment of corporate goals. Swann Communication has planned business activities to some degree even if the plan is not committed to paper. Nevertheless, getting it down in black and white formalizes the development and instills a discipline upon the corporation; it forces action and participation at all levels of the business. Preparing a financial forecast represents a distinctive opportunity for a business: the procedure articulates the vision of all levels of management, and adds real-world input from bankers, accountants, and outside advisors. A well-prepared forecast reflects the views, tempers it with reality, and tells where it is going and how to get there. There are two main types of financial forecasts used by Swann Communication, the strategic planning and operational. The Strategic planning is a consultative procedure that asks the questions regarding the direction Swann Communication will take in the future. The procedure helps define the corporate culture: asking for opinions and providing feedback is extremely empowering for workers. It encourages entrepreneurial spirit, endorses innovative thinking, and produces synergy which has an instantaneous, dramatic effect on the day-to-day operation of the business. Operational budgets attack the nuts and bolts of how to get where the company decided to go. The discipline of putting dollars against projects is the core of sensible management. Allocating working capital shines a ruthless light on the ideas. The operational budget comprises plans for people, marketing, production, capital expenses, sales revenues and expenses. The financial plan ties the whole thing together. Here the forecasted monthly balance sheets, departmental operating statements, overhead schedules, income statements, monthly cash flows, working capital, and available bank credit is reviewed. Supporting the financial plan should be details and commentary for sales, expenses and capital costs. The strategic plan for Swann Communication is the opening point in any budgeting process. Where is the company headed throughout the next five years The growth opportunities What products will be in demand Where are the markets What do you want to achieve between now and then This exercise involves creative thinking, but not wishful thinking the long range objectives must be rational. They serve as the foundation for the company's shorter range annual planning. Long-range goals, once set, should be examined and restated annually. What are the new factors to consider What happened throughout the last year What are the new opportunities and threats the company should be considering The next step in the planning procedure follows hard on the heels of long-range goal setting: An evaluation of the Swann Communication's current strengths and weaknesses. What are the things the Swann Communication does well, and what are the parts that necessitate improvement There is little point in building a plan on a weak foundation; weaknesses should be recognized and corrective action implemented. Several hard decisions may be necessary. In evaluating strengths and weaknesses of Swann Communication, a few key questions include: Profitability - compare the results to statistics provided by the company's trade association. What are the profit trends What are the profit objectives ; Market - where do the company stand What is the market Who are the competitors What does the company know regarding them Is the company highly dependent on a few customers How does the company sell ; Personnel - assess the strengths and weaknesses of the key people. Does the company have a staff development program What does the organization chart look like Is the right person in place ; Productivity - Is the company as competitive as the company should be How strong is the purchasing ; And Finances - does the company have the working capital to increase the business Does the company have a cash management program in place What are the accounts receivable days outstanding What are the banking policies Here's an exercise that will find useful in evaluating the organization. Ask yourself "If the sales doubled or tripled next week, what changes would I have to create in my organization" Consider the impact on the systems and staff in all areas of the company, and particularly the impact on managers own time. The operations manager of Swann Communication prepares the department's budget. Manager analyze what happened last year, set the objectives for the coming year, assess staff members, and prepare the operational budget together with requests for capital expenses. The most significant consideration at this point is getting started. The act of planning is more significant than the mechanics. Swann Communication estimated for about three years to have the planning process functioning smoothly. Implementing a planning system within the organization must take into consideration the capabilities of the managers involved and the time constraints imposed on each. Budget toolkit of Swann Communication involves a procedure to review and update the progress. The reviews take the form of quarterly meetings and comprise submissions from every manager comparing the actual with the budget to date and a recast for the remainder of the year, along with a full year variance. The meetings give a two-way flow of information and a sense of direction to the whole process of managing. In fact, the management is now driving the operation instead of reacting to it. These operational reviews should be improved by reviews with the board of directors or advisory board. The banker and other outside lenders may also necessitate updates on the plans. Either route taken, here is what Swann Communication is looking for in the forecast: embrace a narrative description of last year's performance along with a narrative description for the coming year. Consistency between dollars and descriptions; narrate the changes in the financial position. A financial statement to this effect should be integrated; stay away from pie-in-the-sky forecasts. Any knowledgeable person will spot undue optimism, mainly when opening and closing balance sheets are compared; Make sure the numbers are attainable. Budget failures don't sit well with stakeholders. It can make the advisors appear foolish for approving and accepting the numbers; present a full set of financial statements as well as the balance sheet and cash flows. Include a ratio analysis. Presenting merely the income statement won't cut it; when five-year forecasts are presented, embrace a summary comparing annual balance sheets, income statements, overhead schedules, cash flows and ratios. Have the supporting details available for analysis; and be ready to make revised submissions quickly. When the presentation is over and the approvals are in place, the financial plan will serve as a reminder of the direction the company has chosen to take. It is recommended for improvement of financial planning that draft should be assessed for financial impact, precisely costed and fed into the financial planning procedure Action plans should be thoroughly reflected in financial plans so that the organization can make sure that it has adequate funds to carry out the planned activities. Both the plans should be updated frequently to take account of new developments. The financial plan should embrace an assessment of the likely financial risks, their likely impact and how they can be mitigated. The effective budgeting systems assist the value creation process. They are an invaluable part of Swann Communication's planning and control efforts. The system forces managers to plan and promotes coordination. The system supports responsibility accounting and reporting. The master budget, accompanied by comprehensive plans, documents the Swann Communication's goals and objectives. Linking the master budget to the Swann Communication's long-range and strategic planning develops the overall planning effort. REFERENCE Kemp, S. and Dunbar, E. Budgeting for Managers. McGraw-Hill; 1 edition (2003). ISBN: 0071391339. Read More