Managing Budgets Assessment - Assignment Example

Assessment Part 1: Task 1 A Budget A budget is a specific financial document that is meant to record both actual and projected revenues as well as expenditures that will be incurred over a certain period of time for either and individual or an entire organisation. In essence, it is a quantitave expression of a given individual or organizational-based plans that is meant to cover a certain amount of time. Budgetary Control It is an approach that is employed by an individual or organisation to compare actual outcomes and the budget at hand. Cases of possible variances in the comparison of actual outcome and budget is deemed to be the fundamental responsibility of notable individuals that are tasked with the duty of exercising imminent control actions or in other cases, expected to review the original budgets. Factors Taken Into Consideration before Developing a Sales Budget The following factors should be taken under consideration before an organisation is allowed to formulate sales budget. First, it is important to review the sales results of the previous operational year. It is crucial to review the organisation’s sales for the past financial year and thereafter utilise them for establishing the manner for which sales will grow in the following year. Secondly, it will be important to forecast the industry as well as the immediate competitive operational environment of a company. The sales budget cannot be based on the sales projections but it must also reflect on the reality of the existing and expected future economic outcomes as well as the competitive threats that might be faced by the company in future operations. Third, it is crucial to formulate strategies as well as make a clear projection of the marketing costs involved. In this case, strategic decisions are deemed to be the appropriate actions that one should assume whenever embarking on a mission of realising the sales objectives that were set initially. These strategies include; advertising and promotional marketing campaigns, distribution channels as well as improving staff personnel. Fourth, it will also be important to develop distinctive revenue models. In fact, the accuracy of an organisational sales budget will be entirely focused on the effectiveness of revenue models. The initial step of developing a revenue model will be to formulate metrics that should be employed when devising sales assumptions. It can also be focused on the customer prospects of the business and thereafter, narrow these prospects to the projected number of customers’ visa vie the amount of units sold at given moment in time. Six (6) Internal and External Factors Taken Into Consideration When Planning and Preparing a Budget Internal Considerations: i) Wages and salaries ii) Numerous uses of expenses iii) Overhead and labour allocations External Influences i) Competition ii) Legal influences iii) Taxes imposed by governments Cash Budget It refers to the cash plan that is set to cover a certain period of time. It is developed to summarise the monthly receipts and payments and for that reason, it postulates the monthly surpluses as well as any possible deficits of a given amount of actual cash. Cash budgets are important since they help sustain a control over an organisational cash requirement. It also facilitates an organisation to assume certain precautionary measures as well as make prior arrangements for purposes related to investment or even borrowing in cases of deficits. In most cases, cash budgets are deemed important because they portray the feasibility of a management’s immediate plans in regards to cash terms. Cash flow assessment is a method that can be used to monitor cash budgets through evaluating the receipts or cash inflows that might emanate from cash sales, payments made by debtors or even sales of fixed assets. It also involves payments of cash resource due to purchasing of stock, payments of wages and salaries and even purchase made in regards to capital assets. The main causes of cash problems include; first, it is caused by low profits or even losses since there is a direct connection between low-level of profits and cash flow issues as it reduces the cash resource base. Secondly, it is overinvestment capacities especially whenever a business spends lots of cash towards production capacities. Third, it is caused by excessive levels of stock since intensive levels of stock ties up cash and there is increased risk of these inventories becoming outdated. Fourth, the cash problems might also be attributed to allowing existing customers excessive credit levels, which might lead to slow payment hence putting a strain in cash resources. Task 2 1. Revenue budgets These budgets are also known as sales budget and involve distinctive levels of sales forecast. The budget will used in the business to prepare in units each of the products sold as well as the sales value. The approaches that will be used for revenue forecasting will include; sales force opinions, marketing research as well as other unique mathematical model 2. Expense Budgets These budgets avail companies with an informative analysis of future as well as current proposed spending trends thus facilitating effective control mechanism by way of responding to imminent variances. The expense budget will assist the business to identify inappropriate costs that can thereafter eliminated in order to focus on funds that are value adding activities. 3. Production Budgets These budgets are portrayed only in quantitative levels and are subsequently geared towards sales budget. The budget provides detailed information on the analysis of equipment utilisation as well as work-in-progress. In the business setting, the budgets will help the production manager to subcontract or even formulate overtime in cases where immediate requirements surpass the capacity. 4. Purchase Budgets These budgets are expressed in regards to material consumption as well as those purchased. In a business setting, it influences production requirements as well as the immediate level of storage spaces. Assessment Part 2: Task 1 Tool Advantages Disadvantages Tool 1: Excel Spreadsheet It is free and easy to use. It is also easy to maintain since little time is used to analyse data -complex functions are sometimes an inhibiting factor to allowing effective data review and analysis - it also requires formal training and computer systems that might be expensive to purchase Tool 2: Mint -It allows one track their -money in real-time. -it allows default settings for adding customised functions. However, the built-in goal setting is considered to be robust and easier to utilise. -It requires a smart-phone for operational purposes hence it is expensive to operate. -It calls for advanced level of training to manage budgets under this platform. Tool 3: Budget Tracker -it is focuses on tracking individual and organisational-based transactions even without following the link to financial institutions. -it allows for customisation of functions so that an individual is allowed to display dates and titles and other specific details. -it lacks the ability to download necessary transactions from one’s bank since it fails to offer alternative files. - It does not operate on a real-time basis hence fails to provide a linkage of one’s account to the budget tool whenever it is required. Tool 4: Budget Pulse -it is a free tool and provides effective security features. -it allows users to formulate realisable and effective budgeting and saving objectives. It certainly incorporates the element of social networking aspect and thereby allows users to openly publicise their immediate objectives to close friends who are allowed to contribute to the goal in financial terms. -the tool is not perfectly secured because it fails to allow the user link their bank information whenever utilising its functionalities. Tool 5:MoneyStrands -it helps to display an individual’s bill payments as well as spending on its immediate calendars through graphs. -it allows users to track their respective expenses by way of connecting their spending patterns to their bank accounts - It is free application tool that is availed on the online platform for all iPhones. -it requires specific knowledge and training before an individual can utilise its features. Task 2 Identify the risk Probability of it occurring Very Likely (VL) Likely (L) Unlikely (UL) Impact of the Risk High (H), Medium (M) Low (L) Monitoring the Risk Strategic Risk Likely High -monitoring the company’s business environment like keeping an eye on supply and demand, competition as well as introduction of advanced technologies. -maintaining a positive investor relation framework as a way of providing effective communication with persons that have key interest with the company Financial Risk Very Likely (VL) High -Ensuring that the company’s cash resources and financial leverage ratios are favorably positioned in regards to the industry averages. -ensuring that management makes constant check-ups on financial performance of the firm. Operational Risk Likely Medium -management should ensure that there are effective performance structures put in place to oversee reliable and relevant operations. This might be in form of reviewing technological advancements Compliance Risk Unlikely High -management should set aside a legal team that will be tasked with the responsibility of overseeing possible changes in such legal frameworks like taxation as well as business operation policies. - Constant comparison of existing legal frameworks to the ever-changing environment. Reputation Risk Likely High -Putting in place relevant feedback platforms like social media and email. -conducting yearly marketing research to ascertain levels of consumer perspectives on products generated in the company. Task 3 1. Who is responsible for developing and documenting the budget? The person responsible for formulation and documentation of budgets is Mary Jones, who acts as the firm’s CFO. As her duties ascertain, she is supposed to set financial plans and budgets and thereafter, report her findings to Bill. A chief financial officer is deemed to be an expert in the field of preparing budget plans. 2. Who would the person developing the budgets need to consult and why? Mary Jones should consult with the Bill Smith in order to formulate sales or revenue budget for the period. Bill will avail necessary information like the marketing campaigns and the costs that will incurred in ensuring successful sales and marketing. She will also liaise with Gary Guest in order to come up with expense budgets on matters related to ascertaining and budgeting for expected wages and salaries of newer employees. She will consult with Hank Stevens, who happens to the production manager, in order to come up with effective production budgets. The consultation will help her establish whether additional resources will be used for ensuring sub-contracting as well as planning for overtime. Certainly, she will consult with Kate Flower for purposes of coming up with relevant labour budgets that tackle such elements as available-man hours for production. 3. Why is it important for a number of people to have an input into the budget process? It is important that all of the involved personnel are involved in the cash budgeting process in order to ensure that level of projections is maintained at a significant position. When these people are involved it means that sufficient information will be available upon which reliable and accurate projections can be made. 4. Who would have the final say over the financial plans? The executive management will always have the final say over the financial plans. The top-most executive management for this case is Bill Smith. As the CEO, Bill will either approve or disapprove the proposed budgeting plan depending on the availability of funds and other external influences. He is also the owner of the firm and thus, his decisions will be based on whether he wants to enjoy greater level of profits or reinvest back into the operations. 5. If Hank wanted additional money to replace equipment, who should he approach? He should approach Mary Jones, the CFO because she has all the information pertaining to whether there are enough funds available for purchasing the equipment. In case the funds are available, the CFO will be the one to alert the CEO of the need for newer equipment purchases who will either approve or disapprove the proposal. Assessment Part 3: Monitor and Control Finances Variance Report for the Year Ended 30 June 2014 Budget Actual Variance F/U Current assets $ $ $ Cash at bank 12000 11200 800 U Accounts receivable 6500 6350 (150) F Inventory 2600 3400 800 U Prepaid expenses 1000 950 (50) F 22100 21900 (200) F Non-current assets Land 30000 30000 0 F Building and equipment 90000 90000 0 F Accumulated depreciation -30000 -30000 0 F 90000 90000 0 F Total assets 112100 111900 (200) F less liabilities Current liabilities Accounts payable 5900 6850 950 U Accrued expenses 1100 1150 50 F 7000 8000 1000 U Non-current liabilities Loan - due 2005 57500 57500 0 F 64500 65500 1000 U Net assets 47600 46400 (1200) U Owner's equity Capital 30000 30000 0 F Accumulated profits or losses 17600 16800 (800) U 47600 46800 (800) U 1. Types of Variances that can occur. What could be the reasons why actual and planned results differed in the following instances. ACTIVITY POSSIBLE REASONS FOR VARIANCE Your petrol budget for the month was $130 but you spent $160. Unfavourable negative result. External and internal influences should be the likely causes of this variance. Possible influences can be increased demand for oil in comparison to the supply might have increased the price. The foreign exchange rates might have also resulted to the plummeting of the dollar value amongst major world currencies. You plan to spend $200 per month entertaining clients but you end up spending $180 per month. Favourable positive result. -The prices for commodities must have reduced significantly to allow for saving the $20. - The dollar value must have improved in comparison to other world currencies. You budget for new plant and equipment in your restaurant for $140,000. Your overall cost for the P&E is $183,000. Unfavourable negative result The variance might have been caused by poor information pertaining to the market price for the P&E. The variance should have also been caused by other additional costs like transportation costs, which were not taken into consideration in the first place. A Haulage contractor plans 20 return pay loads /trips per month from Sydney to Canberra with an average cost of $280. His average cost at the end of the month for each return trip is $380. Unfavourable negative result The variance must have been caused by increased prices for oil. It must also have been caused by other costs like increased costs imposed by weighbridges so that the new rates have pushed the overall costs upwards to accommodate the newer rates being charged at these weighbridges. Benefit of Preparing a Cash Variance Report A cash variance report allows the preparers of budgets to formulate corrective actions, which can be taken in order to minimise possible differences in the future. Furthermore, it facilitates figures for all future spending patterns to undergo adjustments as appropriate. Assessment Part 4: Review and Evaluate Financial Management Processes Item Current Year Actual % inc Next year Budget Sales 10,000,000 15% (115/100*10,000,000) =11,500,000 Advertising Exp’s 300,000 5% (105/100*300,000) = 315,000 Salaries 800,000 6% (106/100*800,000) =848,000 Marketing Exp’s 250,000 5% (105/100*250,000) =262,500 Transport 80,000 9% (109/100*80,000) =87,200 Travel costs 30,000 8% (108/100*30,000) =32,400 Selling costs 280,000 9% (109/100*280,000) = 305,200 Task 2   Month 1 Month 1 Month 2 Month 2   Budget Actual Variance Budget Actual Variance Revenue $50000 $45000 (5000) $50000 $37500 (12,500) Purchases $22000 $22000 0 $22000  $22000 0 Advertising $500 $2000 1500 $500  $2000 1,500 Cleaning costs $500 $500 0 $500  $500 0 Office Supplies $2000 $1750 (250) $2000  $1750 (250) Repairs & Maintenance $1000 $3000 2000 $1000  $2910 1910 Telephone and postage $1500 $1000 (500) $1500  $980 (520) Wages & on-costs $10000 $10000 0 $10000  $10,500 500           Profit (or Loss) $12500 $4750 (7750) $12500  $(3,140) (9,360) Read More