Understanding Management accounting and Financial Management - Essay Example

?Understanding Management accounting and Financial Management By Module Module Table of Content Task a - REPORT 3 Task-B 5Final Recommendation 6 References 8 Appendix 9 Word Count: 2108 Task (A): i) Cash Budget for Mowtown Store (given in appendix) Report: The financial standing of the Mowtown Store is fundamentally stable; however there have been observed ups and downs in terms of the closing balance of the company at the end of each month from January to June. The company had the lowest balance in the end of April and highest one in the end of the May. Yet the store management should realize they are not in a position to expand their business as they do have the finance but that is limited in terms of opening up a likewise store in some other city. Considering the cash budget of Mowtown store, the management should be credited for the limited amount that is being paid as payroll as a wage. On the other hand, they have been getting the efficient services from the employees of the store. Another main factor that needs to be considered by the management is that they should look for the same policy reforms that affected their profit to rise with the highest percentage, i.e. the ending balance of February and May will indicate that. The managers must also look for reducing the costs such as shipping costs and maintenance costs. Budgeting and better management decision making and management control: An effective budgeting system will facilitate the management to make an effective decision making, which lead to the results that are expected by the management in the end of a period. Without a proper budgeting and forecasting system, the management cannot predict or decide what steps must be taken to expand or at least maintain the business, what measures should be taken to reduce the overall costs, and how this framework must be established. An improper budgeting system will lead to a frustrated decision making process which might not be in favor of the management or a particular business. Budget actually defines the quantitative expression of planning and decision making process to be carried out in the future period. Budgets are prepared by the company operatives at various departmental levels; whereas the ‘master budget’ actually highlights the comprehensive financial plan for a particular period. The main objectives of preparing a budget which can also be termed as the advantages can be explained as follows: The budget must be prepared in order to direct the attention of the management to the future trends of the business, based on the results of the present trends and transactions. The budget actually affects the decision making process of the management and helps the system to reform the strategies and policies of the company. It allows the company management to critically analyze the activities running on in the business. The proper budget allows the management to predict the problems and issues as well as key opportunities that can be controlled or covered in the coming period. The budgeting enables the managers to achieve their objectives as well as important goals of the company more efficiently. A budget will remind the management about what objectives they have set and how they have to carry out those. An effective budget also helps the management in terms of performance evaluation. A budget leads to the management making authorized actions. As mentioned above, an effective budget helps the management process. In terms of this process, the first thing that needs to be considered is the planning period, which should be future-oriented. The proper planning is totally dependent upon the statistics of business, i.e. current financial situation, and most authorized proof for that is given by the budget to the management officials. An effective budgeting will also state the condition regarding the goals that have been set by the management in the beginning of the financial period, and whether the processes to meet these goals are being undertaken properly or not. This is an important tool for analyzing whether the business processes are going in the right directions or not, as every planning process is started through keeping some goals in mind and the security of the fulfillment of those goals is achieved through the periodic budgets made by the management. Another important factor in which the budget helps is the meeting of financial objectives. To meet the major goal, the periodic financial objectives have to be met and so, that is only possibly checked through the budgeting process that is meanwhile carried out periodically. Therefore, the management will then be able to state its goals as well as performance objectives in terms of the financial standings achieved with the help of the information extracted from the periodic budget. From an organizational point of view, the departmental coordination and integration is an important thing that the management must consider for the organizational success. Planning a budget involves the whole organization as one unit as everyone has to provide his input in terms of recording the transactions. So the management must also consider it a test for all the personnel of the company in terms of coordination building and integration. The management can also advantage from the documentations that had been prepared in the previous periods as the past records will enable the management to check through the trends that had been adopted by the previous management personnel in decision making process according to the past budget records. Some of the management personnel prefer to do the forecasting instead of budgeting as they consider the periodic budgeting process as hectic and useless; whereas this is true on the other way. The budgeting no doubt involved hectic tasks to be undertaken, but the final budget report actually helps the management to take corrective and accurate decisions which will be able to make them forecast the results in terms of profits etc. On the other hand, a forecasting and prediction mechanism will be very harmful for the management as the inaccurate decisions might be undertaken which will create the whole business a mess. ---------------------------------------------- Task (B): The R&D projects will be evaluated through 4 performance methods to decide which approach the company must undertake in order to get more financial gains in the long term or short term period. Payback Period: The Payback Period will determine the length of time which will be required by a project after which it will have to recoup its primary cost. In other words, the payback period will decide after how much time the machine or project will be completely depreciated. According to the playback method, a project with more depreciation cost will be less reliable. The payback formula is as follows: Payback period for option A = investment required/net annual cash flow = 12000000/3267 = 3673. Payback period for option B = 12000000/5811= 2065 Hence the more favorable option would be A. Accounting Rate of Return: The Accounting Rate of Return is concerned with the rate of earnings that are made after an investment has been made. The option with higher rate of earnings will be feasible according to this method. Given the two options A and B, the latter has higher rate of earnings and hence it will be favorable to go with. Net Present Value: The Net Present Value technique actually evaluates an investment, and it rules out the time factor when two or more investment alternatives are being compared. If the net present value is positive for an option then it must be selected, and vice versa. For the two given investment options, the net present value for option A as well as B are positive. Therefore both can be taken as feasible. Internal rate of return: The internal rate of return is another method that works same like NPV. The IRR method also calls for the feasibility of both the options. Final Recommendations: According to the present as well as future requirements of the firm, the two options of investment have been feasible according to the investments made and the rate of returns that were gained. According to all the methods mentioned above except Payback Period, it has been mentioned that both the options A and B are feasible to go with; however the company still has to choose the best one and apply that. Therefore we have to look for some advantages as well as disadvantages that we can expect from an investment program in the present as well as in future. The one exception in the two options is that the payback period of the two options is different according to which the option A seems more feasible. But the company needs to look over the long term period in concern with the financial gains that will be enjoyed by the firm. The option A has lesser depreciation rate per annum compared to the option B, and another factor that the company must be considering is the cost which has been incurred by the company to purchase any of the two, and there the company will think about option A as it is less costly than option B, and has lesser depreciation rate. But according to payback period, the option A will not provide enough gains as are provided by the option B. Combining all the factors that have been discussed by now, the option A has lower depreciation rate, higher payback period, but offers lower financial gains over the long term compared to option B in which case things are happening the other way. Based on the current as well as the future requirements of the company, the option A cannot be reliable as a high investment is being on the way to start a new project which has a certain amount of depreciation. On the other hand, the option B can be finalized as the company will incur a higher cost as investment but the higher profits per annum are more certain in case of the option B. As of the data given, the net cash flow in case of option A is better than option B in the first year, but then it has been shown that the net cash flow as well as the profits gets higher for option B compared to option A. The one time investment made by the company in both the cases is different and so are the net cash flows, following the principle that more investment leads to more capital flows. The main difference in the feasibility of the both the options is that option B has increased productive capacity than option A and in B’s case, the company can enjoy more gains as the annual productivity will be increased which can cover the cost of the same machine 10 or more times. Although the depreciation of the option A is lower but it cannot ensure the increased productive capacity, which can be made through option B. additionally, the lesser depreciation rate in case of option A will although indicate more years for which the machine can be operated, but the pace of productivity as well as the accommodation will be lower than the machine B which has a higher depreciation rate but the management can take a risk of purchasing the same machine in the future again given that they will be able to gain the maximized productivity which will offer increased benefits to the management. Therefore, the management of the company must decide on pursuing option B as it will provide better productivity, higher profits, and increased flow of cash. But the company will have to bear a higher cost in the option B due to which the net cash flows in the first couple of years might be negative due to compensating the investments made into establishing a new set up. References: Jones, Michael. Management Accounting. Hoboken, NJ: John Wiley & Sons, 2006. Print. Foerster, Stephen Robert. Financial Management: a Primer. New York: Norton, 2003. Print. The Cash Budget. [New York], 1937. Print. Hope, Jeremy, and Robin Fraser. Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Boston, MA: Harvard Business School, 2003. Print. Callahan, Kevin R., Gary S. Stetz, and Lynne M. Brooks. Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability. Hoboken, NJ: J. Wiley, 2007. Print. Lorenzini, Arthur L. Strategic Planning and Management Control: Rethinking Roles and Responsibilities in Council-manager Cities. Claremont, CA: Claremont Graduate School, 1979. Print. Palmer, Adrian, and Bob Hartley. The Business Environment. London: McGraw-Hill Higher Education, 2009. Print. Raiborn, Cecily A., and Michael R. Kinney. Cost Accounting: Foundations and Evolutions. Mason: Thomson/South-Western, 2009. Print. Jones, Michael. Management Accounting. Hoboken, NJ: John Wiley & Sons, 2006. Print. Brigham, Eugene F., and Louis C. Gapenski. Financial Management: Theory and Practice. Fort Worth, Tex.: Dryden, 1994. Print. Appendix: Cash Budget For Six Months Ending June 31, 2011 January February March April May June Beginning Cash Balance (?) 150,000 327,500 437,500 382,500 325,000 422,500 Expected Cash Receipts Cash Sales (?) 250,000 200,000 200,000 300,000 350,000 200,000 Collection of Account Receivables (?) 460,000 350,000 220,000 200,000 260,000 330,000 Other Income (?) 0 Total Cash (?) 710,000 550,000 420,000 500,000 610,000 530,000 Expected Cash Payments Rent (?) 5,000 5,000 5,000 5,000 5,000 5,000 Depreciation expenses (?) 25000 25000 25000 25000 25000 25000 Payroll (?) 90,000 50,000 70,000 70,000 40,000 60,000 Plant and Machinery cost (?) 0 50,000 Loan interest payment (?) 0 45,000 45,000 Sales Expenses (?) 4,12,500 3,15,000 3,75,000 457,500 397,500 400000 Closing Balance 327,500 437,500 382,500 325,000 422,500 412,500 Read More