Various Kinds of Budgets - Research Paper Example

Types of Budgets Recommended for PepsiCo Introduction A budget is an important tool management uses to navigate the direction of the company and to analyze the results of its operations. The budgeting process is a difficult one, however, done and followed properly; it can help spell success for the company. There are various kinds of budgets and each of these has its own uses. Different companies from various industries use different types of budgets. This paper discusses different types of budgets, which are recommended for a certain company, PepsiCo, Inc., or simply PepsiCo. PepsiCo Before presenting the different types of budgets recommended for PepsiCo, it is worthwhile to give a brief description of PepsiCo and its business. According to its mission, PepsiCo is a company in the consumer products business (PepsiCo, 2009). It focuses on manufacturing and distributing convenient foods and beverages. Its products include Pepsi Cola and other soft drink brands, Frito Lay, Tropicana, Quaker and Gatorade (PepsiCo, 2009). Recommended Budgets The types of budget that will be used by any company should conform to the main business of the said company. In PepsiCo’s case, being a company in the food and beverage industry, its budgets should be tailored to its specific needs and targets. The first recommended budget is the advertising budget. Since PepsiCo produces consumer products, these products should be marketed to the widest range of potential customers as much as possible. To do this, PepsiCo needs to aggressively advertise its products and even how it positions its products. Such a move will cost a lot of advertising expenses for PepsiCo, expenses that should be estimated or projected and placed in an advertising budget. This advertising budget includes how much PepsiCo expects to spend in advertising over a period of time (usually within one year) in various advertising vehicles such as print, media and even online. The second recommended budget is the department budget, which is usually prepared on an annual basis, but with a monthly breakdown. This type of budget is prepared for a company that has “multiple sales revenue units” (Jagels and Ralston, 2006, p. 370). Since PepsiCo has different product lines, the company can treat each product line as a department and draw up a budget specific to that product line. Since the department budget will show the revenues and expenses for the given product line, PepsiCo can immediately analyze which product line is the most profitable for the company, which has a positive contribution to the company’s bottom line and which products need to be taken out of the market, improved or phased out. The third recommended budget is the annual sales or revenues budget, broken down to revenues by brand and by month. The revenues budget should also include the budgeted sales volume on an annual basis, broken down by month. PepsiCo needs to specifically prepare a budget for its sales as the company needs to know how much sales each brand is really generating and how each brand’s total sales compare to the other brands and to the sales of the whole company. The Company also needs to indicate its target sales volume in the said sales budget. In fact, the 2008 Annual Report of PepsiCo singled out the retail sales of each brand for 2008 vis-à-vis the sales of the other brands as a major component in its financial highlights. Management’s Discussion and Analysis, also found in the 2008 Annual Report, also highlights the sales volume of the company for 2008 (for a more uniform assessment, the company uses a “common metric servings” to convert the sales volume of each brand to a common measuring unit). These show that PepsiCo is avidly monitoring its brand’s sales and supports the recommendation that the company needs to prepare this type of budget on an annual basis. The fourth recommended budget is the capital expenditures budget. Although PepsiCo is already an established company, it still needs to make major investment projects, acquire new machineries and equipment and even make major repairs in its offices and plants. These projects are not a one-off thing. They require the company to commit to spending a lot of its resources on a long-term basis. In this regard, a capital expenditures budget will help the company identify, evaluate, plan and finance its major projects (Grossman and Livingstone, 2009, p. 304). The fifth recommended budget is the cash budget (Montana and Charnov, 2000, p. 292). The need to manage cash and its movement is always present in any company or organization. For PepsiCo, with its vast operations, multiple divisions and international presence, the company needs to always be on top of how it obtains cash and utilize its cash. Thus, a cash budget is essential for its cash flows management. This cash budget will help PepsiCo’s management project when the company will have excess cash and when the company needs to obtain new funds (i.e. short-term bank loans) to finance its operations. The sixth recommended budget is the operating budget, which actually combines separate budgets in one comprehensive budget (Ward, 1994, p. 63). This budget is comprehensive in the sense that it will show the projected revenues and expenses of the company, as well as the various aspects of operations of the company. For PepsiCo, having this type of budget is critical as this will show the over-all projected results of operations of the company. Lastly, the seventh recommended budget is the balance sheet budget. If the operating budget is the consolidated budget for the income statement, the balance sheet budget is the over-all “master budget” (Montana and Charmov, 2000, p. 293). It shows the projected balances of the company’s assets, liabilities and equity and how all these three major balance sheet components relate with one another. In the case of PepsiCo, a publicly-listed company, having a robust balance sheet is a must in maintaining a healthy investor confidence. Thus, the company must make sure that it presents a healthy financial position to its investors and other stakeholders. Having a balance sheet budget will ensure that PepsiCo’s operations are in line with its goals and vision. Any deviation from the same budget will alert the company and its management to the negative impact of some aspects of its operations, thus, corrective action can be taken immediately. Conclusion Budgets are an integral part of properly managing a company. In PepsiCo’s part, it is doubly important. Since PepsiCo is a large conglomerate with international offices and brands, the need to ensure that all the operations are working well and seamlessly with each other an only can be achieved through the proper preparation of various budgets. This paper recommended various budgets for PepsiCo. These are the advertising budget (due to the large advertising expenditures incurred by the company), the department budget, the revenues budget (to keep track of the performance and the sales of the various brands of PepsiCo), the capital expenditures budget (to ensure that long-term investment projects are planned properly), the cash budget (for a properly – maintained cash flows), the operating budget and the balance sheet budget. Works Cited Grossman, Theodore and Livingstone, John Leslie. The Portable MBA in Finance and Accounting. 4th Edition. New Jersey: John Wiley & Sons, Inc. 2009. 4 February 2010 . Jagels, Martin and Ralston, Catherine E. Hospitality Management Accounting. New Jersey: John Wiley & Sons, Inc. 2006. 4 February 2010 . Montana, Patrick J. and Charmov, Bruce H. Management. 3rd Edition. New York: Barron’s Educational Series, Inc. 2000. 4 February 2010 . PepsiCo (2009). Our Mission and Vision. 3 February 2010 . PepsiCo (2009). Our Brand Portfolio. 3 February 2010 . PepsiCo (2009). 2008 Annual Report. 3 February 2010 < http://www.pepsico.com/Annual-Reports/2008/highlights/megabrands.html>. PepsiCo (2009). 2008 Annual Report – Financial Highlights – Mega Brands. 3 February 2010 < http://www.pepsico.com/Annual-Reports/2008/highlights/megabrands.html>. PepsiCo (2009). 2008 Annual Report – Financial Information – Management’s Discussion and Analysis. 3 February 2010 < http://www.pepsico.com/Annual-Reports/2008/financials/mda-14.html>. Ward, William J. Health Care Budgeting and Financial Management for Non – Financial Managers. Westport, CT: Greenwood Publishing Group, Inc. 1994. 4 February 2010 . Read More