Vitality of Budgeting Process and Financial Reporting - Coursework Example

Vitality of Budgeting Process and Financial Reporting Creating a detailed financial report and budgeting process is an important step in managing anyorganisation. Both public sector and private sector organizations can benefit enormously from developing a proper annual budget every year and sticking to it precisely. Structured planning of the fiancés in an organization covering the projected cash flow, costs incurred for administration, revenues generated and the taxes to be paid will help in meeting the objectives of the organization in a better way. It will increase staff motivation, keep the process transparent and help a lot in planning for the future precisely (Budgeting and Business Planning, 2009). Sticking to a solid budget plan will and cross checking whether the process follows it throughout the year helps a lot in identifying over expenditure problems before the issue gets out of hand. This study explores the basics of budgeting in the Thirds Eye security services firm. What Is A Budget? Budget is simply a process of translating all your plans for the fiscal year in monetary terms. It is a perceived estimate of how much monetary resource is necessary to make materialize your plan practically and how much profit you expect from the same. The key elements of a budget are projected expenses, projected income and the interaction of the both. What Is Not A Budget? A budget is not a stone carved commandment. It can be amended at any time to reflect the practical adjustments carried on throughout the year. For example, a department might have allocated certain amount to purchase ten computers. They might reduce the number of systems and spend that amount to train the employees in using them effectively when the plan is implemented. Budget is not a simple record of expenditure or a report necessary to submit to the donors who will fund those (Civicus, 2001). Some companies seldom refer to the annual budget or the financial reports throughout the year. It is a very erroneous approach. The very purpose of creating a budget is to use it as a guiding factor and plan the expenses around it. Budget is not something anyone and everyone in an organization can create. Senior staff in the organization like the project managers, finance managers and the donors who serve as the source for the money should sit together to draw an effective plan based on the quantitative as well as qualitative necessities. Every person in the organization should be made to understand the key points in the budget. Different departments in an organization might require fund allocations for various processes. The administration should check how much return on investment each necessity will actually provide before allocating money for them in the budget. Why Budget is Important? A clear budget will let the top management in the organization know exactly how much money they need to carry out their entire activities. “Efficient financial reporting assists in flawless profit planning” (Importance of Business Financial Reporting, 2010). Efficient budgeting and constant monitoring of the cash flow process will enable the organization head to identify any major problems beforehand and take the necessary steps to avoid the same. The transparency in sticking to such systems will allow every person in the organization to understand the operation strategies in a much better way and keep their expectances regarding appraisals realistic (Horizon Community Bank Newsletter Article, 2012). Difference between Public Sector Budgeting and Private Sector Budgeting Public sector budgeting requires strict compliance while it is not mandatory to follow the budget recommendations line by line in the private sector. The private sector company’s success is always measured in terms of cash profit, while the public sector organizations success is always measured based on performance (Corbett et al, 1996). Consider the police department for example. Their success is calculated based upon the expenditure and the level of improved security in their control area rather than the monetary benefits. Revenue for a private detective agency is based on the fees collected from its customers and the operation costs includes, salary of the employees, investment on equipments, rents, vehicle maintenance costs, office administrative costs and taxes. They have to maintain the expenditures within the income collected from their clients. Public sectors like police departments collect revenue through fines, false alarm fines and license fees. The government also allocates particular grants for them from the tax payer’s money. Their expenditure list is also more or less similar to the private sector security companies, only the government will pay them instead of the clients. Individual satisfaction of every client can be measured in the private sector security company while the overall safety of the area and the decrease in crime rate is measured in the public sector police department. Cost Estimation Estimating costs for the entire year is the key factor in preparing the financial report for the upcoming year. Every budget should focus on four categories of costs. Planning them properly is vital in developing a precise budget and controlling the difference between the actual costs predicted and the actual cost incurred (Roth, 2012). Third Eye security service’s financial management team draws a specific plan on the important operational and organizational costs every year and sticks to it throughout the year to avoid complexities. Operational costs: The money allocated for buying equipment, paying rent or establishing office, transport services and maintenance services fall under this category. Organisational costs: These are the core costs necessary to run your business. For example, if it s software company the organisational cost will cover the money necessary to develop the actual software. All the cost incurred to do the same during the course of the project will fall under this category. Operational costs are calculated based on single projects in private organisations and the cost is collected from the clients. Operational costs incurred in the public sector are funded by the government. The cost of installing and maintaining CCTV cameras in public places by the police department come under this section. Staffing costs: Staffing costs include the core workers salary, benefits, insurance coverage and the loan money which are to be granted to them. Staffing costs cover the major part of any organization because their man power is harvested directly for the well-being of the organization. Capital costs: Costs spend on repairing the building or purchasing a particular vehicle or a land for the organization, everything falls under this category. In simple terms we can say any investment made on assets for the company fall under this category. Paying back the loans, saving in the name of the company, expansion plans, everything comes under this category. How to Raise the Estimated Cost? The next important step in budgeting is to list the ways necessary to raise the cost estimated in the budget process. Third Eye security service uses various ways to do this. Public sector departments directly approach the federal or local government officials to allocate the necessary funds for them. Third Eye submits the financial reports to their donors or the banks from which they borrow money. Other funding sources like investment firms and regular financiers from private entities are also approached to raise the necessary amount. The owner of the company simply chooses to use the profits of the previous year to fulfil these expenditures too sometimes. Events like community fundraising including raffles, conducting huge concerts and earning through it etc are organized every year to increase the popularity of the company and raise fund at the same time (Rabinowitz, 2013). Many companies invite public investment into their company through media advertisement. Funds can also be raised by collecting the outstanding amount from the people who has to pay certain dues to the company. For example, Third Eye collects back the loan amount given to several employees or the interest for these debts, collecting the pending amount from clients who haven’t settled the outstanding amount yet. If capital investment is made on buildings, funds can be raised by renting the same. Businesses all over the world follow one or multiple ways mentioned above to raise fund for the estimated cost mentioned in their budget. An example of Third Eye Security service budget plan FTE-Full time employees The key priorities of the plan are to maximize the use of the available staff and bring down the crime rate in the area. The plan also aims in increasing the advanced training to the staffs to help them identify potential threats from criminals better. Funds are allocated in the respective way. The budget for the fiscal year 2009 is compared with the previous year’s budget to evaluate the change percentage in each sector. There is 3% increase in the total expenditure owning to effective training (Scott, 2009). Points to Consider while Preparing a Budget 1. Always lay out your figures in an easily understandable and useful format using simple software like spreadsheet. Do not make the graph or the tables too complex to understand. 2. If your budget is showing you will get a surplus amount, plan effective means of capital investing right away. 3. Sometimes the financial budgets might appear very balanced or the expenditure might exceed the total revenue. The budget should be revised in that case to reinforce some cost cutting measures and balance the expenditure and the income. Conclusion A good budget is the key to success of any business. Be it a public sector or a private sector office, the head of the organization should ensure an efficient finance management team works diligently for the companies well being. They should also ensure the recommendation given by them in the financial report is followed properly to achieve the promised profit in the mentioned time frame. Sometimes long term budgets are prepared by huge companies which cover a number of years. It is important to have at least an annual budget if not a long one for every company especially the SME’s to get substantial profits. References 1. 2001, Budgeting, CIVICUS: World Alliance for Citizen Participation, Retrieved January 2th, 2013 from http://www.civicus.org/new/media/Budgeting.pdf. 2. 2009,Budgeting and Business Planning, Board of Trade of Metropolitan Montreal, Retrieved January 2th, 2013 from http://www.infoentrepreneurs.org/en/guides/budgeting-and-business-planning/ 3. Rabinowitz, P, 2013, Planning and Writing an Annual Budget, University of Kansas, Retrieved January 2th, 2013 from http://ctb.ku.edu/en/tablecontents/sub_section_main_1303.aspx 4. Scott, D, 2009, Arlington Police Department Financial Report, Retrieved January 2th, 2013 from http://www.arlingtonva.us/departments/ManagementAndFinance/budget/fy09proposed/file62016.pdf 5. Roth, J.D., 2012, A Quick Guide to Crafting a Budget Plan, Enterpreneur.com, Retrieved January 2th, 2013 from http://www.entrepreneur.com/article/223838 6. Corbett, C, Debets, F, & Wassenhove, L, 1996, An efficient budget allocation policy for decentralisation of responsibility for site decontamination projects, Retrieved January 2th, 2013 from http://ideas.repec.org/a/kap/enreec/v7y1996i3p287-305.html 7. 2012, The Importance of Financial Reporting, Horizon Community Bank Newsletter Article, Retrieved January 2th, 2013 from http://www.horizoncommunitybank.com/download/HCB-NEWSLETTER-0512.pdf 8. 2010, Importance of Business Financial Reporting, Retrieved January 2th, 2013 from http://verofinancialblog.com/2010/06/importance-of-business-financial-reporting/ Read More