Saving Money In Today's Economy And Consumerist Society - Term Paper Example

Saving Money In Today's Economy And Consumerist Society TABLE OF CONTENTS INTRODUCTION ..................................................................................... KEY TERMS ............................................................................................ 3 Basics of budgets .......................................................................... 3 Income: .............................................................................. 3 Expenses ............................................................................ 4 Money Spending ........................................................................... 5 Mandatory Spending ......................................................... 5 Discretionary Spending .................................................... 6 Debt: Good and Bad ..................................................................... 8 Saving .......................................................................................... 9 ACTION PLAN ....................................................................................... 10 Analyzing the issues .................................................................... 10 Alternatives and benefits of change ........................................... 10 Actionable Tasks .......................................................................... 11 SUMMARY .............................................................................................. 11 Performance measure ................................................................. 12 Future Implications ...................................................................... 12 CONCLUSION ..................................................................................... 12 REFERENCES ..................................................................................... 13 INTRODUCTION Saving money is perhaps one of the most significant elements of effective budgeting and successful business operation, because, businesses in these days are highly concerned about the fluctuating financial markets and economic factors like higher prices, inflation, declining values of investments and financial crisis etc. Even if businesses are not in serious debt, most of them have an unexpected need for money at some times. Saving money helps businesses have money when these emergencies occur or for their long-term plans like business expansion, purchasing of fixed capital etc. Though various financial sources and modes are avaialble from banks and financial institutions to meet business needs and emergencies, due to growing rate of interest and risks asscoiciated with such finances, most businesses prefer saving money as an effective business staregy to other types of financing. This piece of research paper is an attempt to outline basic concepts of income and expenses in terms of budgeting and describe various uses and managerial strategies of making use of good debt. This paper analyzes reasons for saving money and its different stargies. KEY TERMS Basics of budgets Reviewing the income and expenses tells whether the business is running within the expected means or not. Basically, budget is prepared based on cash analysis, like an income and expense statement and cash budget is prepared through three stages, estimating income, estimating expenses and finalizing the cash budget (Gitman and Joehnk, 2007, p. 2:46). As Gitman (2006) described, the cash budget or cash forecast is an accounting or financial statement of all cash inflows and outflows of a firm, used by it to estimate its short term cash requirements and with a particular intention to make surplus cash for cash shortage, more specifically for saving money to meet contingencies and unexpected emergencies (p. 116). Income: Income, commonly termed as revenue, is all the monies received by a business in a particular priod of time. This money is derived from retail sales, wholesale sales, sale of manufactured goods, sale of services, interestys earned and other miscellaneous receipts. In relation to a successful saving plan and budgeting porcess, income for a particular coming period of time (say one year) is to be estimated, including all its variations like income from interests, sales and other miscellaneous receipts. Sales forecast, which is very similar to the income forecast in relation to the cash budgeting, is the key input to the short term financial planning process. The sales estimation of firm over a given period of time is prepared by the management by estimating the monthly cash flows that will result from the projected sales receipts and pay outs related to porduction, inventory and sales. Expenses Expenses are all those monies that business pays out, including those that are paid out by cheques or cash. Expenses are falling to four categories; they are, a) cost of goods sold, b) variable expenses that are directly related to selling of the porducts or services, c) Fixed or adminitsrative expenses that are costs not directly related or attributable to products or services and d) other expenses like interest for loan etc. In budgetng, preparing a schedule of estimated cash expenses is perhaps a difficult stage. It is usually done using actual expenses from the previous year along with predetermined short run financial goals. Cash outlays or cash disbursements thus include cash purchases, payments of accounts payables, rent, wages and salaries, tax payments, interest payments, cash dividend and fixed asset outlays. Money Spending Identifying mandatory and discretionary money spending is critical to successful budget preparation. When it comes to personal or corporate or even government budgeting process, people in preparing budgeting often have difficulty of tough times and inadequate financial planning due to that they may not be able to differentiate mandatory and discretionary or necessary and unnecessary spending. Mandatory Spending Mandatory spending or expenses are those like health insurance for personal budgeting or rent for business budgeting. Mandatory spending are those expenses without that a business cannot afford. In doing business, there are a number of expenses that it has necessarily to meet like salary or wages when there are employees. As far as US government budgeting is concerned, mandatory spending refers to the budget authority and outlays controlled by permanent laws. For instance, permanent laws authorize spending of Medicare and Medicaid, unemployment insurance benefits etc and hence budget authority and budget outlays for these programs are mandatory (Dautrich, Yalof and Prindle, 2009, p. 496). As far as business budgeting is concerned, many expenses are mandatory as without these spending it cannot achieve the desired goal or attaining the desired profitability. A business makes profit by adding a profit margin on its expenses, so it is obvious that meeting certain expenses is critical to generating reasonable profits. As mentioned earlier, most of cash disbursements like rent, wages, salary, tax payments, cash purchases, interest payment, cash dividend, fixed asset outlays are mandatory expenses. These expenses are essential for a business and it may vary depends on the types of the business. For instance, cost of selling service is mandatory spending for a service business like restaurant whereas it may not be the same for a manufacturing company. When it comes to personal budgeting, it is highly important that people should look at what expenses are really necessary for their lifestyle needs. People may buy two or more vehicles for their personal use, mainly due to that vehicles can be purchased on various financing options and instalment payments. But, vehicles more than one are never mandatory for personal use. In a proper financial planning, people require assessing what specific expenses are really needed and what are not necessary for them. Discretionary Spending Discretionary spending are those that are not crucial to the existence of a person and his family, or a business. In both personal and business budgeting, one basic concept is that when financial conditions get rough or when money saving is necessary for meeting emergencies in the future, it is important to eliminate discretionary expenses and focus on saving money. Eliminating discretionary expenses is thus an important business strategy in times of recession and financial turmoil. Discretionary spending, in government budgeting, is budget authority controlled by annual appropriations acts and the outlays that result from the budget authority. The budget authorities and outlays for the salary and other operating expenses of government agencies are generally controlled by annual appropriations acts and hence these are, for example, discretionary spending. For a business, spending more than necessary is often considered to be too much. More specifically, spending on a brand new vehicle for a distribution purpose which may be only for one or two years even when there is leasing option available is unnecessary spending and is therefore discretionary. A business can decide on how it can eliminate many of its discretionary spending in order to help it survive in times of financial crisis or meet financial needs in the future. In today’s consumerist and highly dynamic marketing situations, people require to be particular in spending and they should identify what are discretionary expenses and how can they eliminate them to save money for their future needs. Debt: Good and Bad Usually individuals and businesses borrow money when they don’t have sufficient money to buy something or for some other purposes like education, business expansion etc. Businesses most often depends on various debts and some time they seem they are trapped of it or seem like they have gained an investment. It means, there are both good and bad debts. A business will be some time viewed as favourable by a lender than others. Identifying good and bad debts are critical to budgeting because it is important to get out of debts (Tyson, 2009, p. 34). Good debts are some time considered as investment. For instance, if a business purchases a house or land on debt, it is probably an investment because house and land are more likely to increase in its value. It is thus helpful to contribute to the overall financial strengths rather than contributing to the overall liabilities. A mortgage loan taken to pay out of house is also good debt because house will increase in its value. As far as personal budgeting is concerned, it is important to understand that a loan taken for students’ education is good debt because education will contribute to his whole life. If a mortgage loan is used to pay for house or land purchased, it had an ‘appropriate use’ (Hanson, 2006). When an individual or a business uses debt to finance things that are consumable, it is not an appropriate use and therefore it is bad debt. When a business uses its debt to finance to pay for salaries or wages or to meet some variable expenses, it creates an unhealthy financial conduction in the business. In today’s consumerist world, a very common debt that most people use is credit card which is considered to be a source of bad debt because of the nature of items that they are used to purchase. Borrowings that are used to finance vacation and meet day to day expenses are not used for its appropriate use and hence they are bad debts. Saving People tend to save money when they are uncertain about future financial needs. Similarly, businesses also save money when they are likely to meet specific financial requirements in the future like business expansion or purchasing of fixed capitals etc. The main reasons for saving are: a) to meet future needs, b) as a safety measure to meet financial contingencies, c) recover losses, d) make payments for fixed capitals like plant, machinery etc, e) expectation of financial crisis and so on (Jupp, 1997, p. 27). Proper budgeting and effective financial planning are critical strategies to save money. Money can be saved only by assessing the previous expenses and analysing future requirements. Both income and expenses that are likely to be gained and incurred are to reviewed and assessed in order to prepare an effective budgeting. Assessing mandatory and discretionary spending, identifying bad and good debts, tracking spending and evaluating the results, preparing a company saving plan and effective finance managing are some of the basic ways to save money for both business and personal purposes. ACTION PLAN This paper of the research paper presents an action plan for Excellency Pvt Ltd to save money. Due to a number of financial and economic factors, it is highly important that an effective action plan to be prepared in order to ensure proper money saving process. There are various factors that make it necessary to save money. As detailed above, meeting future money needs and facing contingencies require money in reserve and this can be done only through an effective money saving plan. Analyzing the issues The company auditing and accounting department have recently found that it faced deficiencies to meet an unexpected need for money, which was to pay for a capital asset need, and company had to depend on mortgage. The company also faced deficiencies at times to meet various needs like salaries and the department has reviewed that borrowing money for such purposes would eventually lead to bad debts. The main goals of money saving plan are: a) maintain sufficient money to meet future contingencies, b) eliminate risks associated with borrowing and bad debts, c) increase profitability by reducing payments of interests on borrowings, d) meet specific needs of business like buying of fixed capital etc. Alternatives and benefits of change There are various alternative financing options like leasing, venture capital, borrowing and loans or mortgage. But, all these alternative financing modes result in higher risks on business and its profitability because business has to pay certain amounts of interests. When the company goes to save money by assessing its expenses and incomes, identifying good and bad debts dimensions and re-thinking of mandatory and discretionary money spending, it can enjoy less risks and liabilities in meeting its money needs. If the company prefers money saving to any other financing methods like leasing, the risks associated with long-term dependability and higher interests rates can be up to an extent avoided. For example, a company has either saving option or leasing for purchasing a building that it needs for business long-term purposes. It may be easier to get it on leasing, but, recurring payments for the leasing would certainly be high and the building does not become under their ownership as well. Saving money helps them have sufficient money in hand for buying that building, making them able to own it and avoid any additional payments thereon. Actionable Tasks The main goals, as detailed above, are meeting the specific money needs that may arise in the future. These goals can be achieved only through an effective money saving process. The main steps involved in this money saving process are: Assessing the deficiencies from the current financial structure, Assessing and analysing the expenses and incomes, Identifying discretionary and mandatory expenses, Identifying good debts and bad and good borrowing and bad borrowing in relation to the appropriate use of it Reducing discretionary money spending and eliminating unnecessary expenses Avoiding borrowings for consumable items and eliminating debts to pay for variable expenses The Excellency Pvt ltd proposes money saving steps to be done and save approximately more than one $10,000 within the first year itself. SUMMARY Money saving is an extremely important element of effective budgeting today, especially in today’s consumerist and highly dynamic world. Even though there are various choices for meeting business money requirements, saving money is an effective and most useful strategy as it is helpful to reduce risks associated with it and eliminate any likely additional costs that are incurred for other financing options. Performance measure The effectiveness of the money saving plan can be assessed through measuring the exact amounts of money that could be saved within a specific period of time, for instance, within the first three months. The money saving process can be said to be successful when it helped the company to save money as expected and avoid bad debts or eliminate discretionary spending. If the company is not able to avoid discretionary expenses and borrowed money for paying of variable expenses or for things that are consumables, the money saving process is not effective. Future Implications The future implications of the money saving program would be more profitability, increased business performance and even sustainable competitive advantage. Many businesses seek for better strategies to achieve sustainable competitive advantage. But, saving money is rather an easy approach and effective strategy to achieve sustainable competitive advantage because reducing discretionary spending and avoid bad debts are basically ways to make a business more competitive and it would certainly help it achieve sustainable competitive advantage as well. Conclusion This paper has highlighted basic concepts of money saving, from different perspectives, and discussed the relevance of money saving in today’s consumerist world. This paper addressed basic concepts of mandatory and discretionary spending and good and bad debts in relation to an effective budgeting process. The action plan given in this paper is designed to help develop a money saving plan for Excellency Pvt Ltd to help it meet its money needs in the future. References Dautrich, K, Yalof, D. A, and Prindle, D.F, (2009), American Government: Historical, Popular, and Global Perspectives - Texas Edition, Cengage Learning Gitman, L. J (2006), Principles of Managerial Finance, Addison Wesley, Pearson Education, Inc. Gitman, L. J and Joehnk, M.D (2007), Personal Financial Planning, Illustrated eleventh edition, Cengage learning Hanson, J (2006), Good Debt, Bad Debt: Knowing the Difference Can Save Your Financial Life, Illustrated edition, Portfolio Jupp, B, (1997), Saving sense: a new approach to encourage saving, Demos Tyson, E, (2009), Personal Finance For Dummies, Sixth edition, John Wiley and Sons Read More