Valcos Performance Management Accounting - Coursework Example

PERFORMANCE MANAGEMENT ACCOUNTING VALCO’S PERFORMANCE MANAGEMENT ACCOUNTING REPORT By 0 The primarypurpose of this performance management accounting report is to help Valco’s company management in making decisions. The main decisions in this case are in relation to budgeting for the modernisation process and the significance of budgeting to the management. This report identified budgeting as an efficient tool in the management. 2.0 Table of Contents Contents VALCO’S PERFORMANCE MANAGEMENT ACCOUNTING REPORT 2 2.0 Table of Contents 4 Contents 4 3.0 Introduction 5 4. Main Body 5 4.1 .Valco’s Monthly Cash Budget for the Six Month Period 5 4.2 Cash Deficit Management in Both Long and Short Run 7 7.0 Recommendations 14 Bibliography 15 3.0 Introduction Initially management did not consider budgeting as an essential tool for decision-making and failed to include it. Previous studies have found budgeting to be the most effective tool in the management of an organisation’s resources. Budgeting controls a corporate’s resources through the process of estimating and controlling relative usage. With regard to Valco’s modernisation plans, budgeting has been identified as a significant tool in planning. This is through allocating correct amounts of resources in terms of quality and quantity. With respect to the above, The Company’s budget is prepared for the next six months with the appropriate requirements in terms of financial costs and duration. This information is essential to the company’s management for use in making sound management decisions. Furthermore, budgeting is an effective tool in the management of cash flow deficits on both short and long-term basis. In the management of cash flow deficits, several managerial aspects have been discussed. These entail both the internal and external control processes. Examples of internal processes include increase in prices while external is issuance of bonds and certificates. The different functionalities of budgeting as a managerial tool have also been highlighted in the report. These include motivation, evaluation, and control, forecasting and communicating. 4. Main Body 4.1 .Valco’s Monthly Cash Budget for the Six Month Period Item 1st month 2nd month 3rd Month 4th Month 5th month 6th Month Beginning Cash balance £ -78,000 £296,000 £ 664,750 £1,013,500 £1,356,500 £1,854,500 Expected Cash Receipts Cash sale/Debtors £320,000 £280,000 £280, 000 £360,000 £ 360,000 £ 360,000 Finished goods stock £480,000 £480,000 £ 480,000 £ 480,000 £ 540,000 £ 540, 000 Total Cash Collected £800,000 £760,000 £760,000 £ 840,000 £ 900,000 £900,000 Total available cash £722,000 £1056,000 £1,424,750 £1,853,500 £2,256,500 £2,754,500 Expected Cash Payments Payments £ 54,000 £ 47,250 £ 47,250 Costs £ 208,000 £ 252,000 £ 252,000 £ 324,000 234,000 £ 234,000 Raw material stock £ 72,000 £ 80,000 £ 20,000 £ 81,000 £ 76,000 £ 70,000 Overheads 80,000 80,000 80,000 £ 80,000 80,000 £ 80,000 Depreciation 12,000 12,000 12,000 £ 12,000 12,000 £ 12,000 Total Cash expenses £ 426,000 £ 391,250 £ 411,250 £ 497,000 £ 402,000 £ 396,000 Ending Cash Balance £ 296,000 £ 664,750 £ 1,013,500 1,356,500 £ 1,854,500 £ 2,358,500 4.2 Cash Deficit Management in Both Long and Short Run With reference to financial terminologies, deficiency has three significant interpretations in the financial, fiscal processes. All the three definitions relate to with shortage or insufficiency and provide various solutions depending on the effect of the cash deficit. The three basic types of deficiencies are lack of cash in a fund, lack of expenditure authority and lack of appropriation authority. The probable solutions to the capital deficiency in a corporate entity in the short run include the following: Reduction in the overall corporate expenses through the use of cost-effective processes in a company’s expenditure processes. Effective Cost reduction processes include identification of activities that require more costs than the generated revenue. Financial activities or processes that are non-profitable are either reduced or cut outright. The second method of managing cash deficiency is through liquidation of part of corporate assets. With regard to this method, an organisation issues bonds, stocks or certificates of deposit which are later reimbursed with interest. Should a company’s financial managerial department project future fiscal deficits, plans are set down to facilitate faster maturity of bonds and issuance of shares. Other such-like initiatives include liaison with a local financial institution or bank to restructure the maturity period of certificates of deposit for incoming cash needs (Margaret, 2011). A corporate can consider planning and scheduling a fundraiser to cater for its significant cash flow requirements. Corporate heads and several other stakeholders are involved in the fundraiser to improve the firm’s liquid cash flow. Stakeholders are notified through newsletters and emails of the company’s financial situation. As a result of the notification, cash is raised through social corporate events like dinner and fun days. Since this method involves other stakeholders, customers feel as part of the organization. This goes along in enhancing customer loyalty which serves as a competitive strategy. Collection of owned receivables may also turn out to be useful in managing cash flow deficits. Corporate debts owed to the company should be collected, or debtors given an early notice of the necessity of the cash. On the other hand, disbursement schedules may have to be re-arranged in anticipation of a cash flow deficit. When a company consider obtaining a loan or credit to fund short term capital requirements such as rent to other expenses issuance of shares is a better option. The primary considerations in this method of capital acquisition are the closing costs and interest expense. Other costly programs and unnecessary expenses are also minimized in order to lower the overall budget costs. This financial step ensures presence of cash flow is in the organisation is maintained and resulting deficits minimised. With regard to long term financial cash flow requirements, capital deficiency can be managed through the following ways: The issuance of securities to the relevant stakeholders. This is one of the most efficient methods of relieving cash deficiency in both short and long runs. The issued securities are used to generate liquid capital to a firm which is invested while shareholders are repaid at a low interest rate. The increment of fees and prices is also another method of cash flow deficit and is considered a positive initiative towards long term management of cash deficiency. This is because prices and rates increase the income generation margins and the relative available income for investing. As a result of increased investment, the firm benefits from economies of scale and lowers its prices (Margaret, 2011). Excessive resources are sold out, rented or leased to other parties. This ensures that there is a constant flow of cash through minimization of expenses such as land rates based on owned area. Rented or leased property, plant or equipment ensures a firm receives payment in the form of rent within a given period. Underutilized assets are so as to generate liquid cash that is later used in investing. The preferred investments, in this case, are meant to increase income generating services (Linzer, 2006). Developing realistic and relatively significant budgets on an annual basis is also considered a long term solution in the management of cash deficits. With regard to the above, the primary resources are able to consistently produce surplus income over expenses incurred. This is through a reduction of staff salaries, man hours or staff layoff. Other measures include delayed hiring of new staff. Furthermore new programmes and events with high costs of implementation are avoided with preference to small cost programs and events with a high-level profitability. A decrease in the levels of corporate social responsibility and charitable work is also considered a long term solution towards the management of cash deficits. This increases the level of liquidity in the business firm through reduction of unnecessary expenses. With reference to this, a company may engage in corporate social responsibility through the provision of services and other low-cost commodities. The aim of corporate social responsibility to a firm in this case is solving of community based problems. Delayed payment to the supplier is also another strategy towards management of cash deficit, in the long run. The process of making local arrangements with local banks to arrange for the enhancement of an overdraft is also a good alternative. An overdraft helps a firm in times of economic downward trends or recession (Linzer, 2006). 4.3. The Importance of Budgeting Budgeting refers to the process of developing a future plan in terms of income and expenditure that can be used as a control for expenditure evaluation. Budgeting is from the planning process to evaluation and control action by allocating resources respectively. The primary objective of developing a budget is to spend within a firm’s financial means. The benefits of developing a financial budget include the following: A budget is as a tool for managing ones finances through control over his/her finances. Problems such as unprepared for cash deficits can be avoided through budgeting since a corporate firm initially plans how to spend its funds. On the other hand, budgeting helps one decide between short and long term investment schemes. The firm’s activities in a given period are maintained within a given budget as guideline and measures taken to correct or improve any financial situations. Overspending in enterprises can also be pointed out through a budget by the financial auditors. A budget is indispensable in determining what is important to a company based on its allocation of funds and the level a firm has to go towards achieving set down financial targets (Wildavsky, 2006). A budget has also been found to be pertinent to a firm in the organization of expenditures, savings, and costs. Budget serves as a reference for controlling bills, cash receipts, and financial statements. With regard to the above, the relative amount of tax can be pre-determined, and this saves time and effort on auditing and during filing of tax returns. On the other hand, budgets help in establishing financial goals. In any corporate setting, the setting down of a budget helps in communicating with the significant stakeholders. In a firm’s books of account, budget express how financial assets are going to be and the given time frame. Budgeting in a business entity promotes ethics through the promotion of responsibility and accountability. Responsibility and accountability, in the long run, improve corporate social responsiveness and corporate standards (Du Toit, 2007). Budgeting gives a firm’s management the ability to foresee potential problems arising from a particular financial goal or project. This prediction ability is very crucial in helping one make appropriate control mechanisms so as to prevent the problem from happening. In the circumstances whereby a problem cannot be prevented, damage control and risk mitigating factors may be employed. These are essential to restoring a company to its former position and minimizing the risk effects (Du Toit, 2007). Budgeting is pertinent in determining the amount of capital needed if a firm is supposed to take debts and by how much. A company gets to identify and eliminate unnecessary expenditures like lateness penalties and high-interest rates among others. The budget through its plan schedule determines the correct allocation in terms of time and resources. (Du Toit, 2007). 4.4.0 The function of Budgeting as a tool in the Management Control and Factors That Affect Its Success. Research has over the past few years has proved that an efficient management control system through its relative ability to develop and generate competitive advantage is on integrating budgeting into strategic management. Budgeting has been able to facilitate different management based actions such as forecast and planning, coordinated communication, performance evaluation and control, motivation and decision-making. The entire above if combined in an appropriate and effective way leads to perfect cumulative managerial output. 4.41. Forecasting and Planning The Company’s expenditure plans are made using the budgeted control system. The system facilitates the planning through preparing fixed and variable cost expenditure, sales and working capital estimations. Individual product evaluations are through previous market surveys and sales department projections. These assessments are and submitted to the top management for the creation of budgets. Future costs, capital requirements, and financial liquidity are obtained to facilitate the project. Through the increase in technological advancement, data planning and forecasting has been made easier through the use of computer applications and soft wares. Soft goods relative to the process of planning and simulation only require data and existing market conditions for them to deliver results. The results are as a result of simulation and drawing models. All this is through multiple soft wares’ working in synchronization to provide a cumulative effect. The required optimal levels that can are utilized for financial budgeting and forecasting has been a very controversial issue over time. There are several controversies surrounding this budgetary role. This is so since data analysis and determination of set down standards has been a major setback hence leading to the setting up of irrelevant budgets. (weygandt, Kieso and Kimmel, 2010). 4.4.2 Channel of Communication and Coordination In the budget setting process, the responsible budget committee reviews different proposals from various departments and relates them to the strategic management frameworks. They are also incorporating the executive management. It ensures that the budgeting process enhances the link between a company’s executive management and its front-office management. This is facilitated by engaging the supposed control levers. The control levers, in this case, are diagnostic and interactive systems with the integration of the boundary and belief system. In the collection of the relevant data for projection of sales, costs and expenditures, all significant participants are involved. There are communication and information flow in both a horizontal and vertical perspective for the effectiveness and accuracy of the budget (weygandt, Kieso and Kimmel, 2010). 4.4.3. Motivational instrument Budgeting as a motivational tool provides the required standards for performance measurement. Managerial as well as other lower level employee output can thus be against the budget. The analysis and appraisal of employees based on their performance against the budgets offers motivation since employees have to show prowess in terms of results. Another significant aspect of the budgetary control is the use of the cost control system. The cost control system ensures that the actual costs are conformed to initially planned costs and in case of any deviation action is set up to restore the costs to the scheme. Tight budgetary targets are important to an organization since management gets committed to the use of accounting control systems to attain corporate objectives. This goes along in ensuring high conformance to budgetary performance by the Directorate and subordinates hence difficulty in creating slack and laziness tendencies (weygandt, Kieso and Kimmel, 2010). . 5.4.4. Evaluation and Control Since the budget is as a standard measure of organizational performance, companies tend to keep costs minimum so as to contribute to the strategy goals. Through an evaluation of the budget as the standard measure, feedback is attained. This feedback process is essential since it is analyzed and evaluated before implementation of corrective action. Control activities are usually done to improve the performance level. In the case of poor performance, corrective action is taken by setting up steps to minimize costs. In the event of high performance, management sets up steps to improve the financial performance of the company (Lalli, 2012). 5.4.5. As an information Source for Decision Making An analysis of an organization’s performance through its budget gives the executive management information needed for decision-making. With the integrated use of informatics, companies can estimate and make projections about a firm’s future performance. A significant budgeting application can measure an investment’s projected return with reference to time and capital inputs. The implemented information system in the workplace has got a lot to do with measuring and evaluating a business performance hence making budgeting very crucial in facilitating decision-making (Lalli, 2012). 6.0 Conclusions From the report findings, budgeting has been found to be a very critical and crucial management tool in the management process. Through the determination of required resources and evaluation, management acts as both a planning and control tool. Another significant challenge solved through the use of an effective budget includes the management of cash deficiency. It has thus been found that Management plays a crucial role in decision making in the organization in different aspects. It can also further be deduced that budget plays very crucial roles in the management process for both cohesion and organizational objectivity between different parties. These roles include communication, motivation and evaluation amongst others. 7.0 Recommendations Through the effectiveness and convenience of using a budget in decision-making, all financial activities in a firm should be regulated through a budget. This is because it helps in setting standards through acting as a reference. Management should adopt the use of budgets for its activities since it helps in several managerial activities. Different managerial activities such as planning, control, and resource acquisition are facilitated by the use of a budget. Development of realistic and relatively significant budgets on an annual basis is considered a long term solution to several management problems. This is through determination of unnecessary expenses and maximizing of revenue on an annual basis. The selection of cheap and effective strategies is preferred with respect to expensive to expensive and short term strategies. With the integrated use of informatics, companies can estimate and make projections about a firm’s future performance. Bibliography Du Toit, E. (2007). Cost and management accounting. Cape Town, Pearson Maskew Miller Longman. Lalli, W. R. (2012). Handbook of budgeting. Hoboken, N.J., Wiley. http://site.ebrary.com/id/10521355. Linzer, R. (2006). The Cash Flow Solution the Nonprofits Board Members Guide to Financial Success. Hoboken, John Wiley & Sons. Http://www.123library.org/book_details/?id=8582. Margret, J. E. (2011). Solvency in Financial Accounting. Hoboken, Taylor & amp; Francis.http://public.eblib.com/choice/publicfullrecord.aspx?p=958360. weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2010). Managerial accounting: tools for business decision making. Hoboken, NJ, Wiley Wildavsky, A. B. (2006). Budgeting: a comparative theory of budgetary processes. New Brunswick, N.J., Transaction Publishers. Read More