Budgeting and Financial Planning - Assignment Example

Running header: Budgeting and Financial Planning Student’s name: Instructor’s name Subject code: Date of submission MANAGE BUDGET AND FINANCIAL PLANS How do budgets relate to the plans and objectives of an organization at both strategic and operational levels? A budget can be defined as an expressive expression of a plan for a company for a specified period of time. It is a document that is prepared to show the expected levels of operations of a company over a certain period of time for example a year. A budget can hence be stated to be a document which shows all the plans at all the strategic and operational levels of a company. Some of the contents of a budget are planned sales volumes, resource quantities, assets and liability levels and the expected costs and expenses of a business venture. It also expresses all the expected cash flows to be made by the business in its operations. By being a list of estimates of the expected levels of operations, a budget is the reference which the business uses when undertaking its operations and its day to day activities. As such, a budget expresses all the strategic plans of a business organization and the activities undertaken and all business events in measurable terms. The budget also enables the actual financial operation of the business to be easily and well measures against the forecast that has been earlier provided for. The budget is also very crucial to the operations of firms in that it helps establish the cost constraint for a particular project, program or operation of the business. The main function of the budget however is to provide a forecast of the revenues and the expenditures. This means that it shows an estimate of how the business is likely to perform financially if certain strategies, events and plans are carried out. Through this, it enables the businesses to know their expected rates of performance. What are the key operational budgets of an organization and what do they seek to achieve? There are different types of budgets. This is based on the contents they have. Different budgets have different functions they serve to the business. The operational budgets include among others; a. The sales budget- this represents an estimate of the expected future sales of the company. It is usually broken down into small units. It is also broken down into currency units. The main objective of the sales budget is to create the sales goals of a company. Through the creation of the sales goal and targets, the business is well able to calculate the expected returns to be received from the sales it makes. b. The production budget- this represents and shows the estimated number of units that must be manufactured by the company in order to meet the sales goals. It is also crucial in that it also estimates the various costs involved with manufacturing the units. These are referred to as the production costs. They are inclusive of the labor costs and the material acquisition costs. These budgets are common in only those companies that are product oriented. They are hence absent in those companies that do not deals with the production of goods. c. Cash/ cash flow budget- this is a budget which contains a prediction of the future cash receipts and expenditures for a company over a particular period of time. In most cases, it covers a period in the short term future. Through this, it is useful in businesses due to the fact that it helps the business to determine when income will be sufficient to cover the expenses and when the company will be need to seek financial support from the outside environment. This is through such things as loans and other forms of borrowing and financing. d. Marketing budget- this is an estimate of the funds needed for promotion, advertising and public relations in order to market the product or service. It takes into consideration the current market advertising charges and after a certain margin is places or put, the estimates are arrived at. It is crucial due to the fact that it reduces wastages that might arise when it comes to advertising the products of a company. As such, it is useful in control of the expenditure to be used in the case of such things as product promotion. e. Project budget- this is a prediction of the costs associated with a particular company project. These costs include labor, materials and other such related expenses that might arise. It is usually broken down into specific tasks, with respective task budgets assigned to each of the tasks. An estimate of the costs to be incurred is what is used to establish a project budget. How might financial plans of a team be accessed? The plans of a team can be assessed through the ability of the team to achieve some set goals. Analysis of the team work and its effectiveness to the goal attainment of a team can also be a means to access the team financial plans. The time used also in the completion of some set plans is alsoa way of accessing the plans of a team and their reliability and their relevance to the business. Key issues to be considered in developing any four operational budgets? Operational budgets are budgets developed to facilitate the operations of a certain business in a certain task. It is made up of the costs that are expected to be incurred in the operations of the business or organization. There are however some factors that need to be considered before the preparation of this budget. Examples of operational budgets are; a. Business startup budget- this is the budget that is prepared when starting up a small business. Some of its contents are the list of all the necessary purchases to be made by the starter of the business. Such includes the inventories and equipment to be used. It should also indicate the working capital to be used in the business. It should also give a clear description of the expected financial results of business activities. It should also have a list of other expenses of the business such as modelling, insurance and staff wages that will be incurred. It is important to consider the number of workers also so as to determine the amounts of wages to be paid to them. It is also important to consider and not ignore the interest rates and tax rates that are charged by the government in the startup of a business. This is because if ignored, it would result to the business incurring costs that were previously not catered for in the budget. b. Personal or family budget A personal budget is one which shows a personal or family incomes and the identified expenses that are expected to be incurred. This is usually in a bid to match the inflows of the business with the outflows expected to be made. This budget is made up of elements such as fixed expenses of the family or individual such as rent, entertainment expenditure, savings, monthly payments and such things as insurance. In such a budget, it is very crucial to consider such factors as emergency expenditure that may arise out of such things as illnesses. c. Government budget A government budget is usually a summary of the intended revenues or expenditures of that government. Government budgets are of three types. They are namely the current budget, the investment budget and the cash budget. They all have specific areas that they cover. In the preparation of government budgets, it is important to put into consideration the expected amounts of revenues to be received by the government. This is in order to know the estimated amount of borrowing to be made in order to meet the deficit that may arise. Lack of paying much attention to this may result to the government being in a situation where it spends more than it had budgeted for and this may result to the poor performance of some of its departments. d. Corporate budgets- this is the budget of a company that is always compiled on an annual basis. This is a plan for the short-term future of the company. It is usually the goal of the management to see to it that the results that are obtained in the budget period are equal to or closer to the budgeted estimates. This represents business success for the management. It must however put into consideration all the factors that affect the business environment. Such factors include technology, economic factors and political factors around the business among others. Three classifications of cost a. Fixed costs- these are costs that do not change or vary with output or sales. They are fixed over a certain period of time irrespective of the returns of the business. Returns may either be profits or losses. These amounts of fixed costs do not change. They include; rent payable for the factory premises, manager’s salaries and rates payable. b. Variable costs- these are costs that vary with the quantity of output produced or sold. As such unlike the fixed costs, the variable costs are subject to changes over time. The amount of variable costs for one period or day may be different from those on the other day. Examples of variable costs are costs of raw materials, factory water and electricity charges, sales staff commissions and transport charges. c. Total costs- this is the sum of the fixed and the variable costs of a business over a certain period of time. They denote the total expenses incurred by the business in the production process of its goods and services. What is phasing and how it applies to budgets Phasing refers to the process whereby the budgets are divided into phases. This is crucial in that it makes it easy to apportion the phases and the money payable or used in the different phases. It is crucial in that it provides the only real way of understanding spending within a budget. It is relevant to cost personnel. It enables a person to split out the budget and also gives a person the ability to control how one allocates the budget throughout the duration projects. FEES/ INCOME BUDGET JANUARY FEBRUARY MARCH Fees 36000 39600 45540 OPERATING EXPENSE BUDGET JANUARY $ FEBRUARY $ MARCH $ Salaries for managers 12833.3 12833.3 12833.3 Salaries for other employees 9000 9000 9000 Advertising 1080 1188 1366.2 Stationery and photocopying 625 625 625 Phone/ faxes 380 380 380 Rent 1500 1500 1500 Travel 2160 2376 2732.4 Electricity 225 225 225 depreciation 250 250 250 Bank charges 150 150 150 TOTAL 28203.3 28527.3 29061.9 Financial performance budget For the quarter ending 31 march 200X Revenue (36000+39600+45540) =121140 Less: operating expenses (28203.3+28527.3+29061.9) = (85792.5) Net profit/ surplus = 35347.5 Assumptions in development of a sales budget The assumptions made in a sales budget include the expectation that the customer needs will remain constant over the period of time. It is also assumed that the demand patterns from the consumers will remain the same so as not to necessitate any changes in the prices of the products goods and services. It is also assumed that the cost of raw materials will remain the same over the budget period so as not to change the amount received from the sales. Through this, the suppliers are expected to remain the same over the given period of time with no changes made in the cost of the supplies. It is also assumed that the competition will remain the same so as to retain the general prices of the goods and the services of the company. It is also assumed that the rates and taxes charged by the government on the production cost of goods and services will not change to an extent of the change in the selling prices of the goods and services. Assumptions in development of a cost of sales budget It is assumed that the level of purchases of the business will remain constant over the budget period. It is also assumed that the level of the opening stock of the business will remain the same over the period of time. It is also assumed that the average closing stock levels of the business remain the same so as not to necessitate any changes in the cost of sales. Assumptions in the development of an expense budget In the making of an expense budget, it is assumed that the expenses of the business will not change in the next foreseeable future of the business. Such expenses include the transportation costs and rent charges. It is also assumed that such things as the cost of electricity and water supply will not increase in the given time period. It is also assumed that the average business expenditure will remain constant over the time of the budget and no changes will be made whatsoever Assumptions in the development of a cash flow budget In the development of a cash flow budget, it is assumed that the inflows of the business will remain constant over the period of time. It is also assumed that the outflows of the business remain constant and not much different from the budgeted ones. It is also assumed that inflation will not occur so as to result to changes in the value of the cash and money held by the business. Issues to be considered when negotiating changes in a budget It is important to analyze some factors before making changes in budgets. Such factors include the customers. You should try to find out how the needs of the customers are likely to change over time. You should also analyze the competitors deeply. Through this, you should try to find out the likely strategies of the key competitors. You should also analyze the possible risks that might be present of entry or exitof a competitors from the market. You should also check on the staff of the business. In the staff, you should check on the recruitment sufficiency. You should also check on whether their salaries are reasonable for them. You should also check on the suppliers. This is in order to check for a possible change in the supply patterns of the suppliers. Through this also, you should also be able to analyze the possible changes in the prices of certain goods and services. Throughthe analysis of such factors as this, you will be able to predict the patterns that will be in themarket for the customers, the suppliers, the competitors and the staff of the organization. This will assist in the setting of a reasonable budget. Contingency plans and contingency strategies A contingency plan is a plan devised for an outcome other than the expected plan. It is used mostly for the purpose of risk management when an exceptional risk that though unlikely, its occurrence would have catastrophic effects to the business. They are crucial in planning for any eventuality. For example, the occurrence of high inflation to the currency of the country would have many far reaching consequences to the business. Due to this, the business can derive a policy whereby not all of its cash assets are stored in the local currency but rather through an internationally recognized currency such as the dollar or the Euro. Through this, occurrence of inflation would not necessarily have such a great impact on the operations of the business. Such plans are known as contingency strategies and they are very crucial for any business. Parties interested in budget There are many parties who are interested in the sales budget of a company. The first interested party to this is the management. The sales budget enables the management to have an idea of the amount of revenues to be gotten by the business from the sales which it makes. As such, they are able to align the goals of the business in line with this budget. It is hence very crucial in coming up with business targets for any company. Another interested party to the budget is the creditors of the business. This is because they are able to determine the amount to be received as revenues by the company which will in turn be used to repay the debts outstanding to them. The cost of sales budget will be crucial to the management and the other interested parties such as the creditors because it helps them to determine the estimated gross profits of the businesses. The expense budget will also be useful to the government due to the fact that it is through this that it can determine the budgeted amount of taxes to levy to the business. This is through the analysis of the budgets. Areas analyzed in budget reports Budget reports show the estimates expected to be attained by the business in the course of its operations. Budget reports show the actual and the estimated results of the business operations. This includes such factors as the sales levels, the cost of sales, the expenses and the other incomes made by the businesses. It also indicates the levels of taxes levied to the business by the government and other tax bodies. It also shows both the budgeted and the actual profits or losses the made. A variance is also given as to the difference in the actual and the budgeted results. An explanation to the results is also given showing the reason for the variance if any and what necessitated it in the first place. Such a reason that may necessitate a variance is occurrence of inflation to the currency of a country, entry of new competitors in the market and changes in the supply schedule. Purpose of variance analysis Variance analysis is a tool of budgetary control by the evaluation of performance by means of variances between the budgeted amounts, the standard amount and the actual amounts either incurred or sold. It is essential in explaining the difference between the actual and the standard costs allowed for the good products of output. It is also essential in that it helps the management to understand the present costs and then to control the future costs. ITEM EXPENSES MONTH BUDGET MONTH ACTUAL MONTH VARIANCE YEAR TO DATE BUDGET YEAR TO DATE ACTUAL YEAR TO DATE VARIANCE Travel 9000 5000 -4000 63000 63000 0 Repairs and maintenance 4000 2000 -2000 18000 18000 0 Consultants 30000 30000 0 100000 110000 10000 Motor vehicle expenses 16000 19000 3000 90000 95000 5000 Postage, stationery and telephone 1000 0 -1000 8000 2000 -6000 Rent 4000 4000 0 27000 27000 0 salaries 92000 52000 40000 522000 501000 -21000 ITEM EXPENSES MONTH $ BUDGET MONTH % ACTUAL YEAR $ BUDGET YEAR % ACTUAL Travel 9000 44.4 63000 100 Repairs 4000 50 18000 100 Consultants 30000 0 10000 10 Motor vehicle expenses 16000 18.75 90000 105 Postage, stationery and telephone 1000 1000 8000 75 Rent 4000 100 27000 100 Salaries 92000 43.4 52200 4.0 TOTAL EXPENSES 156000 268400 What variances need investigation? The variances which need much investigation are those which are 100% or more in their proportion. They include the travel expenses, repairs, the motor vehicle expenses and the rent expenses. This is because the estimation used to arrive at them is so high to be accurate. They ratios used in the budgeting process are hence very wrong in their applicability. Different estimation basis, assumptions and ratios need to be put in place. Reason for variance occurrence There are many reasons which might have caused the variances. These reasons include an increase in the fuel charges which will in turn result to higher travel costs. There might also have been an increase in the rent charged by the landlords which will also result to increase in the rent expenses which is paid. The cost of spare parts for the property and equipment might have risen in the business. This on the other hand will result to an increase in the repairs cost charged. The maintenance cost of the motor vehicles also might have risen and this gave a rise to high maintenance and motor vehicle costs. These are the main reasons that caused the variances in the budget made. They are the underlying factors for the differences witnessed. Critical accuracy check areas The recording of cash and cash items should be held with utmost accuracy and care. This is due to the fact that cash and other cash items changes result to changes in the business administration. Errors in the entry and recording may result to massive losses or over/understatement of the profits or losses of a business. Due to this, the cash of a business should be treated will utmost care and be free from any material errors or misrepresentations. Aspects of quality financial reports 1. Understandability Financial reports should at all times provide information that is understandable to all. Understandability in this case is in terms of the language used and the level of knowledge or intelligence of the users of such information. Failure of the reports to adhere to this will make not useful to the users. 2. Relevance The information must be relevant to the users. This is through being logically related to the decision to be made. As such, it must be capable of influencing the results if the decisions to be made and in the determination of present and future outcomes of the operations of the business. 3. Reliability Information provided in the reports should be reliable in that it should be free from any material error and bias of any kind. Through this, the information can be useful and trusted by the users of such. REFERENCES Budgets (2010). General Books. Hamilton (Ont.). (1991). Budgets. Hamilton, Ont: The Corporation. International Association for Financial Planning. (1984). Financial planning. Atlanta, GA: International Association for Financial Planning. Dallas (Tex.). (1900). Budgets. Dallas, Tex.: The City. Garnsworthy, D. (1992). Costs. Perth: Legal Aid Commission of Western Australia. Clark, J. M. (1923). Studies in the economics of overhead costs. Chicago, Ill: The University of Chicago Press. King, G. E., Thompson, R. B., & INTELECOM Intelligent Telecommunications (Firm). (2012). Types of budgets. (It all adds up.) Pasadena, Calif: INTELECOM. Scheffé, H. (1959). The analysis of variance. New York: Wiley. West, C., & Institute of Cost and Management Accountants. (1986). Variance analysis. London: Financial Training. National Association of Accountants, National Association of Accountants & National Association of Accountants. (1974). Standard costs and variance analysis. New York. Read More