Manage Budgets and Financial Plans - Case Study Example

Name: Institution: Topic: Manage Budgets and Financial Plans Date: 1. Performance Record for Luke Since his appointment, it can be said that Luke has exhibited a lot of responsibility as a manager for the Energise Retail. His performance record begins at the moment he takes a review of the industry’s previous performance in the market scale. This is only when does he realize some of the overhauls in the industry for major changes to made (Anandarajah, Aseervatham, Reid and Reid H, 2008, p. 61). The biggest challenge that Luke faces as a new manager is maintain the company at the top based on its past success in the Sport Clothing Industry. From the case study, we are informed that Luke was recruited as a manager in the company in July 2011. As such, his first move was to recruit new employees to increase efficiency in the operations of the company. This followed the company’s collective responsibility to get at the top of the Sports Clothing Industry. Due to increased demand and need to reduce the gap between clientele perception and satisfaction, the company had to increase its capacity in the retailing section. Luke’s key role as a manager was to increase sales and reduce expenses for the company which could ultimately lead to profitability increase (Nugus, 2008, p. 17). Luke realized that before his recruitment, the company had been operating without a budget which is essential for any company to gauge its progress in the market performance. His second move therefore was to make a budget for the company though this was a simple, bottom-up budget process. The manager’s rationale behind this was that he did not want to impose ideas and figure to the employee without establishing their performance level. Budgeting began early enough in November 2010 in which case all concerned personnel were involved. The manager’s goal was to give directions whereby he asked the managers of different departments to breakdown their budgets on a monthly basis (Nugus, 2008, p. 22). In addition, he asked them to give estimates of expenditure and his ultimate work was to review, consolidate and endorse the budgets. After a discussion with concerned departmental heads, in which case changes suggested were made, he went ahead and endorsed everything. On the other hand, his role as a manager was to monitor the progress of different departments based on the budget projections. He used the budgets to monitor other employee performance as well as get indicators for any inconsistencies. Such cases resulted into departmental heads being held accountable, though this was done through wide consultation (McMillan, 2010, p. 142). It can therefore be deduced that Luke valued communication. Is good performance was well expressed in the manner in which he responded to the global economic recession. He changed figures at different seasons up and down ensuring that the totals for the financial year remained the same. However, major concerned can be seen in the way he failed to revise the annual budget in a formal manner, only waiting for uncontrollable circumstances. This put the company at risk of losing its profitability in case of any overhauls. Looking at the financial statement for Energise, it is indicative that the manger should look into employee incentives. His bonuses ate inclined to the senior management while overlooking some areas like the marketing section which play a major role in promoting the company’s products. 2. Possibilities Functioning of Energize without a Budget A budget is an imperative tool in decision making processes of any company. A budget states the facts on how much money is invested into the company as well as cash the flows out of the corporation. It is possible for companies like Energise to operate without a budget based on the inconsistencies that budgets cause in a company’s operations. It is noted that budgets involve cash flow statements which are imperative in the optimization of cash utility. This implies that budgets are supposed to retail minimum required working capital, while investing the larger sum into profitable activities (Jepson, 2004, p. 87). The most important aspects are to ensure expansion of production and purchasing of raw materials as indicated by Energise’s cash flow statement. However, Energise can opt to function without a budget following the fact that budgets result into distortions. Research into the budget of Energise for the year 2011 reveals that cash inflow cannot be equated to the profit. In this case, considerations are given to the amount coming in as a result of security deposits, fines, the sales or any other activity as not necessarily reflecting the continuous source of income for the company. Nevertheless, this does not mean that reduction in cash flow should raise any concerns from the side of the management. It works out to balance the general annual sales at different seasons. This has well been illustrated in the case of Energise when the actual sales for July were below the budgeted. Contrary to this, companies like Energise can sale their sporting items with longer credit periods to increase the profit margin. This then works to cover the interest associated with securing short-term loans from banks as in the case of Energise, to cater for immediate operations. It is as well possible for the company to operate without a budget since budgets are vulnerable to manipulation. A good example is making a large payout at the time before the termination of a budget period. This is usually misleading since payouts have to occur a few days after the end of the period. In most cases, such incidences restrict cash flow for a particular season while increasing the other season. For Energise, this may happen in summer and winter selling periods. The most significant reason why companies like Energise can operate without budgets is the overreliance on estimations. In most cases, cash flow budgets utilize the results of one year to make budgets for the subsequent years. This is misleading since there is no guarantee that the level of cash flow, revenue and expenditure will be constant. 3. Recommended Budgeting and Review Process for Energise It is imperative that Energise management considers reviewing of its budget on a regular basis following the continuous growth of the company. In the process, the company will manage its cash flow more efficiently and find out what should be attained in the following budget year. For Energise, its budget review should begin from the actual income compared to the sales made. In this case, the company should list the performance of each department instead of making general budgets. Departmental budgets will help the company realize sections that are making over-estimations which cannot be attained. It will be easier for the company management to analyze incidences of shortfalls like the exhibited low sales volumes in some sections of the company. Employees’ bonuses should be revised to reduce on turnover levels which eliminate more experienced workers (Nugus, 2008, p. 39). In the case of increased employee salaries, the company should consider contracting human resources that may be cheaper as compared to the permanent employee scheme. The company should reduce on expenditure which is working against its profit margin at the long run. As seen in the Energise’s budget, it is realized that the actual fee charges by head office branch to the budgeted ones are higher. This may have a negative impact on the functionality of the company as operations are limited to the budget reducing the performance level hence, profitability. In addition, the management should strive at reducing cases of bad debts in the budget so that such amounts are channeled to more productive sections. Departments that are actively involved in production and sales should be allocated more funds than the passive one. This make call for reallocation of funds to the sales and marketing sections. Marketing and promotional departments are determinant forces to the level of sales attained in each financial year. 4. Improving Performance Improvement of performance in Energise lies in the power of its human resource management department. It is important that Luke strengthens the human resource management to work on the morale of employees for increased performance. Better performance is the main target of every successful organization. This is well associated with the kind of leadership styles employed for the company to move forward. In the event of Luke improving performance in the company, it is important that he introduces a better scheme of incentives to the workers. This implies that salaries for workers should purely be based on the level of performance. Such a move will stimulate competition among workers as they strive to be rewarded for their good performance. In addition, Energise’s manager should introduce a rewarding scheme for departments. At the end of each financial year, the best performed department should have a set reward. This encourages departmental competition which leads to the ultimate improvement of the company’s profitability. However, it should be noted that good performance is based on the collective responsibility of the managers at different levels of the company (Jepson, 2004, p. 100). As such, Luke should consider better performing employees as the managers of key departments of the corporation. On the other hand, Luke should put in place a team that deals with collection, reporting and analysis of data at performance level. In some cases, it is challenging to manage enormous employee performance data (Walmsey, B., & Walmsey, H., 2009, p. 73). As a result, there should be a system that efficiently gives feedback to the overall manager. This could be accomplished through improved technology in which data is computerized on the attendances as well as departure periods of employees. In reporting of such information, Luke has to incorporate a wide range of analyses techniques like bar-graphs, pie-charts and line graphs which provide a better trend in the performance of individuals in the company as well as departments. Communication is another area that can lead to a better performance of the company. In most cases, reception of the performance evaluation systems is not good. It requires that staff members are enlightened on the purpose of the system. They should be encouraged through rewards set by the system rather than allowing demoralizing incidences among them. Appendix 1.1. Performance Report EXHIBIT 3 ENERGISE Income Statement Actual versus Budget Comparison for Dive ‘n Surf, Inc., Performance Report July 2010 and 2011 Year-to-Date     Budgeted Actual Variance %Variances F/Unfav Sales 471,000 493,600 -77,400 16% unf Opening Inventory 661,500 680,400 18,900 0.0 unf Plus: Purchases 312,900 327,600 14,700 0.0 unf Less: Closing Inventory 680,400 705,600 25,200 0.0 unf Less Cost of Goods Sold 294,000 302,400 8,400 0.0 unf Gross Profit   177,000 91,200 - 85,800 0.5 unf Expenses Sales and Marketing Salaries: Team leaders 6,500 6,500 - - f Salespersons Wages Casual 24,000 26,000 2,000 0.1 Unf Sales team permanent 37,680 39,488 1,808 0.0 Unf Labour On Costs Motor Vehicle Leasing 2,500 2,500 - - f Sales and Marketing Expenses   70,680 74,488 3,808 0.1 unf Finance and Credit Salaries: Accountant 6,000 6,000 - - f Clerk Audit Fees 400 400 - - f Bad Debts 4,710 4,936 226 0.0 unf Labour On Costs Finance and Credit Expenses   11,110 11,336 226 0.0 unf Warehouse and receiving Salaries: Store person 6,500 6,500 - - f Delivery 1,200 1,200 1.0 unf Labour On Costs Human Resources Expenses   7,700 6,500 1,200 0.2 unf Administration Salaries: Manager 7,200 7,200 - - f General Admin Costs: Fee Charges by Head office to Branch Telephone 1,500 1,500 - - f Light & Power 700 350 350 0.5 unf Cleaning 300 300 - - f Maintenance 450 450 - - f Advertising 100 1,200 1,100 11.0 unf Labour On Costs Administration Expenses   10,250 11,000 750 0.1 unf Rent Showroom space Warehouse and storage       Rent Depreciation Warehouse Fixtures 1,333 1,333 - - f Office Equipment 1,250 1,250 - - f Depreciation   2,583 2,583 - - f Total Expenses 102,323 95,957 6336 0.1 unf Net Profit   74,677 14,707 89,384 1.2 unf 1.2. July 2010 Expenses Graph Graph showing total expenses for the month of July 2010 Six Months Year to Date (Jan - June) Budget Actual Variance %Variance Fav/Unfav Sales 2,890,000 2,590,500 299,500 0.1 unf Opening Inventory 1,323,000 1,323,000 - f Plus: Purchases 1,958,600 2,046,000 87,400 0.0 unf Less: Closing Inventory 1,461,600 1,570,100 108,500 0.1 unf Less Cost of Goods Sold 1,820,000 1,798,900 21,100 - 0.0 unf     Sales and Marketing Expenses   1,070,000 791,600 278,400 - 0.3 unf Expenses Sales and Marketing Salaries: Team leaders 39,000 38,480 520 0.0 unf Salespersons Wages Casual 144,000 146,400 2,400 0.0 unf Sales team permanent 231,200 243,240 12,040 0.1 unf Labour On Costs 66,272 68,660 2,388 0.0 unf Motor Vehicle Leasing 15,000 15,000 - f 495,472 511,780 16,308 0.0 unf Finance and Credit Salaries: Accountant 36,000 37,600 1,600 0.0 unf Clerk 28,500 30,250 1,750 0.1 unf Audit Fees 2,400 3,800 1,400 0.6 unf Bad Debts 28,900 37,000 8,100 0.3 unf Labour On Costs 10,320 10,856 536 0.1 unf Finance and Credit Expenses   106,120 119,506 13,386 0.1 unf Warehouse and receiving Salaries: Store person 39,000 42,100 3,100 0.1 unf Delivery 14,250 15,126 876 0.1 unf Labour On Costs 8,520 9,156 636 0.1 unf Human Resources Expenses   61,770 66,382 4,612 0.1 unf Administration Salaries: Manager 36,000 36,000 - f General Admin Costs: Fee Charges by Head office to Branch 71,250 75,626 4,376 0.1 unf Telephone 9,000 8,700 300 - 0.0 unf Light & Power 4,200 700 3,500 - 0.8 unf Cleaning 1,800 1,800 - f Maintenance 2,700 2,560 140 0.1 unf Advertising 600 2,600 2,000 3.3 unf Labour On Costs 17,160 17,860 700 0.0 unf Administration Expenses   142,710 145,846 3,136 0.0 unf Rent Showroom space 90,000 110,000 20,000 0.2 unf Warehouse and storage   13,200 13,200 - f Rent 103,200 123,200 20,000 0.2 unf Depreciation Warehouse Fixtures 8,000 8,000 - f Office Equipment 7,500 7,500 - f     - Depreciation   15,500 15,500 - f     Total Expenses 864,772 872,192 7,420 0.0 unf     Net Profit   248,428 67,412 315,840 1.3 unf Performance (July 2010 and 2011 Year-to-Date) July 2010 Bibliography: Anandarajah, A., Aseervatham, A., Reid, A. and Reid H., 2008, Manage Budgets and Financial Plans: Managing Finance, California, Pearson Education Australia. Jepson, J., 2004, Manage Budgets and Financial Plans, Australia, Software Publications Pty, Limited. McMillan, E.J., 2010, Not-For-Profit Budgeting and Financial Management, Chicago, John Wiley & Sons. Nugus, S., 2008, Financial Planning Using Excel: Forecasting, Planning and Budgeting Techniques, New York, Butterworth-Heinemann. TAFE Frontiers, 2003, Manage budgets and financial plans: Diploma of Business, Sidney, TAFE Frontiers. Walmsey, B., & Walmsey, H., 2009, Manage budgets and financial plans, New York, Software Publications. Read More