Factors in Business Cash Budgeting: With Examples

Modified: 17th Jul 2018
Wordcount: 2602 words

Disclaimer: This is an example of a student written essay. Click here for sample essays written by our professional writers.
Any information contained within this essay is intended for educational purposes only. It should not be treated as authoritative or accurate when considering investments or other financial products.

Cite This

Contents (Jump to)

Task One (p3d) XYZ Traders – Cash Budget

Task Two (p3abc) Alpha Manufacturing – Budgets

Task Three (p4abc) Beales Manufacturing – Variances

Task Four (p2ab) Beales Manufacturing – Standard Cost

Bibliography

XYZ Traders – Cash Budget

  1. Introduction

In this report Part A presents a cash budget for XYZ Traders for the six month period from December 2008 to May 2009. Part B comments on the cash flow forecast and outlines the benefits of improved cash flow for the Company and recommends management consider a cash flow improvement program.

  1. Part A – Cash Flow Budget December 2008 – May 2009

Table 1

Table 1 shows the cash flow budget based on the following criteria:

  • Cash balance as at 1 December 2008 totals £2,600
  • Furniture units sold at £100 each
  • Furniture units purchased for £60 each
  • Customer collections on the basis of 50% in month of sale and the balance the following month
  • Purchases paid for in the month following delivery
  • Fixed expenses are £4,000 per month
  • Loan repayment of £10,000 due in April 2009
  • Stock units carried over from October into November 2008 unknown
  1. Part B – Budget Cash Flow Commentary

The cash flow budget/forecast for the next six months:

  • is cash positive for each of the six months under review
  • will generate sufficient cash for the £10,000 loan repayment on schedule in April 2009
  • will allow supplier payment on time one month after receipt of goods
  • has a lowest cash balance of £1,200 at the end of April following the loan repayment in the same month
  1. Recommendation – Cash Flow Improvement Program

The cash flow budget indicates that XYZ can continue trading for the next six months without recourse to additional funding. However improving cash-flow can have a number of benefits including:

  • reducing the equity required to finance the business
  • reducing loans and interest payments required for working capital
  • releasing funds for expansion and/or new business activities
  • providing funds for profit distribution to the owners/shareholders

We recommend management plan and implement a coordinated program to improve cash-flow. Specific areas for consideration are:

  • minimise inventory by introducing a “just-in-time” (JIT) arrangement where suppliers orders are placed at the time of customer purchase for receipt a day or two before delivery to the customer
  • eliminate inventory (except for show-room stock) by arranging for suppliers to deliver direct to customers under XYZ Traders instructions and identity
  • negotiate extended payment terms with the suppliers, say, three months credit
  • encourage customers to pay the full purchase price on order placement
  • offer sales on credit with a reputable finance company
  • increase sales volumes with well designed and executed advertising and customer incentive programs
  • reduce overheads and expenses with a cost-reduction program

Alfa Manufacturing – Budget Report

  1. Introduction

This report recommends Alfa Manufacturing introduce a budgetary control system. Section A outlines the purpose and benefits of budgets and Section B describes two possible budget formats, incremental and zero based budgeting and examines the advantages and disadvantages of each method.

  1. Section A – Budgets, Purposes and Benefits

The primary purpose for introducing a budgeting system is to provide the Company with a powerful tool for planning and monitoring business performance. It improves productive effectiveness and enhances coordination between the various arms of management to achieve the overall Company aims. Budgets represent the primary means of communicating agreed-upon objectives throughout the organization.

A budget is a formal written statement of the Companies plans for a specified time period. The principle element of a budget is to plan and predict future income and expenditure against a time-scale, usually on a monthly basis covering a calendar or accounting year. Actual income and expenditure is recorded as it occurs and monitored on a regular basis against the plan or budget. The differences between planned and actual results are monitored, reported and the variances analysed and explained.

In summary, the benefits of a budget are that:

  • Management must develop a comprehensive plan for the future.
  • Key objectives are agreed for monitoring and performance evaluation.
  • Potential problems are identified well in advance.
  • Coordination of activities within the business is facilitated.
  • Management is more aware of the Companies overall operations.
  • Each level of management participates in the planning, preparation and monitoring of financial activity.

The budget must have the complete support of top management and is an important tool for measuring and evaluating managerial performance. Contemporary budgeting has been defined as a system wherein managers are provided with the flexibility to utilize resources as required, in return for their commitment to achieve certain performance results (Deloitte Touche Tohmatsu, 2008).

  1. Section B – Budgeting Systems

This section contrasts and compares two basic budgeting methodologies currently in use in industry today, Incremental Budgeting and Zero Based Budgeting.

  • Incremental Budgeting (IB) is the traditional approach to budgeting which relies on historical information and the previous years budget as a basis for the preparing the input and data for the following year’s budget. For example, let’s say last year’s sales budget was for 1000 units at £500, giving sales revenue of £500,000. For next year’s budget the market for the product is anticipated to improve by 10% giving unit sales at 1100 thus giving budget sales revenue of £550,000. Similarly costs would be based on last years budget, modified by projected inflationary factors. Anticipated raw material price increases and labour rates are used in the cost of production and increases in say, rent and utilities would reflect in overheads. Managers will prepare their individual budgets based on a series of pre-determined criteria and assumptions which are normally provided by top management, finance and accounts.

The advantages of IB are that it is:

  • relatively easy to implement
  • easy to understand and appreciate
  • less time-consuming to prepare than ZBB
  • a “top down” approach with the same basic assumptions for all

The disadvantages of IB are that it:

  • assumes that the budget methodology and cost structure is correct
  • encourages expectations of inflationary increases
  • predicts sales will reflect the market without competitive analysis
  • encourages departments to spend all of their allocated budget
  • Zero Based Budgeting (ZBB) is an approach to budgeting that starts from the premise that no costs or activities should be factored into the plans for the coming budget period, just because they figured in the costs or activities for the current or previous periods. Rather, everything that is to be included in the budget must be considered and justified. (Chartered Institute for Public Finance and Accounting, 2006). Another definition is the use of budgets which start from a present base of zero and regard all future expenditure as being on new items rather than a continuation of existing ones. In practice this means that a budget has to be justified in full for each year of operation (Steven A. Finkler, 2003). In implementing this process each manager must critically examine his own activities and operations and build his budget from scratch.

The advantages of ZBB are that it:

  • questions accepted beliefs
  • focuses on value for money
  • links budgets and objectives
  • involves managers leading to better communication and consensus
  • can lead to better resource allocation
  • is an adaptive approach in changing circumstances

The disadvantages of ZBB are that it:

  • is time-consuming and adds to the effort involved in budgeting
  • can be difficult to identify suitable performance measures
  • can be seen as threatening–careful people management is required
  • is about costs and resources of options ignoring current practice
  • can be difficult to comprehend and execute by managers with little financial knowledge and skills
  1. Recommendation

Since Alpha Manufacturing has no previous experience of budgetary control it is recommended that an Incremental Budgeting program is introduced initially. The budget can be prepared using historical data with guidelines and assumptions provided to each manager by the Finance Department.

Beales Manufacturing plc: Flexible Budgeting

  1. Introduction

This report examines the budget and actual results for October. It flexes the budget to actual output, provides a variance analysis and identifies possible causes for each negative variance. Managerial accountability for each variance is suggested and possible remedial actions for the unfavourable variances identified. The benefits of using flexible budgets are explained and it is recommended that this technique be introduced as a feature of Beales’ regular budget reviews.

  1. Variance Analysis and Explanations

Table1 shows the results of the budget and actual output for October, flexed to actual output with each variance examined for possible causes, accountabilities and suggested remedial actions.

 

 

  1. Benefits of Flexible Budgeting

Static budgets have the disadvantage of providing a single specific predicted volume of output. In reality, it very unlikely that the actual output exactly matches the budget. Thus any comparison of actual output to budget suffers from the problem that some of the variances, particularly for variable costs such as labour and materials, will be as a direct result of the differences in the volume of output.

Flexible budgets provide an after the facts device to tell what it should have cost for the volume level actually attained (Steven A. Finkler 2003) They are a useful tool for analysing the effects of variations in volume of output against the original budget. Dennis Caplan (2006) suggests that “the motivation for the flexible budget is to compare apples to apples. If the factory actually produced 10,000 units, then management should compare actual factory costs for 10,000 units to what the factory should have spent to make 10,000 units, not to what the factory should have spent to make 9,000 units or 11,000 units or any other production level.”

  1. Recommendation

For Beales Manufacturing to make the best use of the budgeting process it is recommended that flexible budgets are prepared each month. Variance analysis as demonstrated above will assist management to implement contingency plans to correct any unfavorable trends and enhance profitability.

Beales Manufacturing plc: Standard Costing

  1. Introduction

This section defines and describes the principles of Standard Costing. It is an accounting technique which provides a powerful tool for management to analyze business performance and plan improvements. An example of a standard cost is derived from the October budget and the use of variance analysis to identify problem areas and possible remedial actions.

  1. Definition

Standard costing involves the development of a product or service cost using estimates of both the resources consumed and the prices of those resources. The standard cost may then be increased by an estimated profit margin to produce a standard selling price. These estimates of cost and revenue then provide a foundation for further planning and control (Barrie Mitchinson 2000)

  1. Illustration

The best way to illustrate the benefits of standard costing is to use the October budget data to arrive at an example of a Standard Cost. This cost can then be compared with the actual unit cost for October and the variances analysed as shown in Table 3 below.

Standard Unit Cost vs. Actual (October)

 

From this analysis specific product cost information can be derived. For example, although raw material costs per meter were below standard cost, more material than standard was required to complete the production schedule. Why was that? The manager responsible for production will be able to use the information to investigate the unfavourable variance. Possibly scrap rates were excessive so improved quality control could help reduce or eliminate the problem. Raw material costs were also above standard which will alert the purchasing manager to an overrun of purchasing costs which may require action.

  1. Recommendation

We recommend that Beales consider the introduction of Standard Costing to provide management with a powerful tool to improve efficiency, productivity and product profitability.

Bibliography

  1. Deloitte Touche Tohmatsu, 2008, Budgeting & Budget Controls http://www.deloitte.com
  2. Chartered Institute for Public Finance and Accounting, 2006, Zero Based Budgeting Briefing Paper, http://www.cipfa.org.uk
  3. Steven A. Finkler, 2003, p158, Finance & Accounting for Nonfinancial Managers, CCH Tax and Accounting
  4. Steven A. Finkler, 2003, p162, Finance & Accounting for Nonfinancial Managers, CCH Tax and Accounting
  5. Dennis Caplan, 2006, Management Accounting: Concepts and Techniques, OSU College of Business, http://classes.bus.oregonstate.edu
  6. Barrie Mitchinson, 2000, Standard Costing and Fixed and Flexed Budgets, Association of Chartered Certified Accountants, http://www.accaglobal.com

 

Cite This Work

To export a reference to this article please select a referencing style below:

Give Yourself The Academic Edge Today

  • On-time delivery or your money back
  • A fully qualified writer in your subject
  • In-depth proofreading by our Quality Control Team
  • 100% confidentiality, the work is never re-sold or published
  • Standard 7-day amendment period
  • A paper written to the standard ordered
  • A detailed plagiarism report
  • A comprehensive quality report
Discover more about our
Essay Writing Service

Essay Writing
Service

AED558.00

Approximate costs for Undergraduate 2:2

1000 words

7 day delivery

Order An Essay Today

Delivered on-time or your money back

Reviews.io logo

1837 reviews

Get Academic Help Today!

Encrypted with a 256-bit secure payment provider