Goals of Business Budgeting - Coursework Example

? Budgeting a) Budgeted Profit and Loss account for the year ending 31st March b) Trading cash budget for the period of six month ending 30th September 2011-12-08 C) Calculation and suggestions for overdraft limit With cash contribution of ?5000 towards operating activities, Nod is facing cash shortfall only in two months out of first 6 months. The cash receipts are sufficient to meet cash payments as soon as the taxi hire rates are raised to $30 per hour from fourth month. The maximum shortfall is in the month of May and that is by $776. Accordingly arrangement of overdraft for around $800 in April for a period of four months will serve the cash requirements of Nod. This is because from fifth month Nod will have sufficient cash not only to meet regular cash payments but also Nod will have sufficient cash to return the overdraft. The consideration is also required for capital expenditure that Nod is planning to incur in the beginning of 2nd year. The cost of car is $15000. Nod will generate $3000 on selling an old car and the rest ?12000 will be easily generated out of operation in next six months. This is because cash by the end of September 2011 after paying overdraft of say $800 will be $13150. Each month enough extra cash will be generated to meet $15000 cost easily. Accordingly Nod is advised to negotiate only for an overdraft of $800 in April for a period of four months. Word count: 221 d) Budgeting and business goals Budgeting has become an essential function of any business activity so much in the sense that it becomes easy to attain the purposes for which the business activity is planned for. In fact management plans to achieve several goals when budgeting is under taken for a business activity. Under normal circumstances budgets are used for the purposes of attaining control and evaluation, communication with different concerned parties, planning, and motivation of the factors involved in the business process. “Goal setting is a characteristic of successful business and a budget is a critical part of the process. It is a financial forecast of your operating and capital activities.”(Carol Patterson)i Operating budgets are used for planning the operations to achieve strategic objectives. Operating budget draws the attention of the management toward revenue projections and regular and routine expenditure to raise that projected revenue. The management can set up goals of earning specific revenue in order to meet the required payments for the generation of that revenue and improve the entity’s liquidity to meet unforeseen expenditure and payments. In fact operating budget force the management to plan for increasing profitability as there is direct relation between economising of the business expenditure and profitability. The main goal of planning and control is always achieved through efficient budgeting. “The budgeting system is designed to plan and control a business. However, it is common for the budget to be ‘gamed’ by its participants. For example managers may pad their budgets with excess resources. In this way, managers will have additional resources for unexpected events during the period. If the budget is being used to establish the incentive plan, then sales managers have incentives to understate the sales potential of a territory to ensure hitting their quota.”(Carl S Warren, James M. Reeve, and Jonathan Duchac)ii That way revenue or operating budget can be made objectives to be achieved by the operational staff. Incentives when linked with budgets automatically create sort of enthusiasm among the operating staff to achieve budgetary targets or goals. It is believed that businesses should always create and apply budgets in order to keep a check or track of their income and expenses. This is more applicable for small business and operations. Budgeting helps the businesses to project their profitability to be achieved over a period covered by the budget. Budgeting can spot problems and plan in advance the means to rectify those problems and issues. In a way financial stability can always be maintained when budgeting is undertaken to the extent of minute detailing with regard to operating activities. The main or primary goal of budgeting is to project how the business will perform financially under different scenarios. For example estimates of fixed expenses always put an aim to have contributions to cover those fixed expenditures if the entity has to attain profitability. Determination of breakeven stage is the one of prime responsibility of budgeting process. The break even stage suggests that upon achieving this any business is comfortable in a competitive environment. Though profitability is the main goal of the organisations but attaining break even provides management a relief that ensure that there would not be losses for which the management face accountability. Further, budgeting exercises provide an idea of period involved when the organisation would start earning profitability and plan for expansion and enhancement of business activities. Another goal that is very closely associated with budgeting is setting up of prices of the goods or services. “When you know the costs to run your business, you can set the prices for your product and services. A budget helps to identify non manufacturing costs, such as overheads, debt service, professional fee and other cost you incur. Knowing your exact expenses will help you set realistic prices.”(Sam Ellyn)iii In a public company attraction for public to invest depend upon the earning the capital investment. Any investor will like to invest in a company that not only provide competitive dividend but also opportunities to enhance the value of investment. That is the reasons that in documents t required to be submitted with stock exchanges to seek permission for raising further capital budgeted income statements as well as budgeted statements of financial positions. Lenders and providers for supplies to companies always ask for the future plans of the company. Their decision to lend always depends upon the future profitability and liquidity of the company. Lenders are particularly concerned with future liquidity in order to ensure the repayment of the loans advanced to the company. Accordingly budgeting becomes a necessary exercise to project future profitability and liquidity in order to avail funds required for business purposes, whether those funds are owned by the shareholders or loaned by the company. There is direct relationship between risk and profitability. An assessment of risk is an imperative exercise in order to achieve the goals of profitability. An appropriate assessment of risk is therefore a sign of efficient management. Budgeting is tool that provides an idea about risk involved in the further investments of any business. Thus budgeting is a process that helps in taking decision about further raising of funds, investments, and the effective enhancement of the wealth of shareholders. Budgeting creates documents that set standards and actual performances can be measured by comparing those with the standards. Actual performances are the goals of any entity and budgeting help entities in achieving goals when variances between standards and actual performances are analyzed in order to enhance or improve the performances to reach up to standards. Word Count: 962 References Read More