Financial Management Approaches - Assignment Example

Assessment Part 1: Plan financial management approaches Task 1: Knowledge Questions 1. What is a budget? A budget refers to a detailed quantitatively expressed plan of action regarding the forthcoming accounting or financial period. In other words, it is a plan of what the company is aiming to achieve and the targets it has set to monitor the achievement of the desired goals. A budget being a quantitative statement for a certain period of time ( which in most cases takes an year) may include planned expenses, revenues, cash flows, assets and liabilities. 2. What is meant by budgetary control? Budgetary control refers to the process of keeping track of how the company is achieving its prior set targets and making necessary corrective measure to ensure that the desired objectives of the budget are met. Therefore, budgetary control aims at making sure that the right things are done. It is important to have an effective control in the budgetary process of a company since business operates in an environment that is very unpredictable which may cause disturbance in the system resulting deviation from the anticipated results. These disturbances may include entry of a powerful competitor in the market, anticipated rise in cost of production among others. 3. What factors would need to be taken into consideration before developing a sales budget? Several factors need to be considered before developing a sales budget. These factors include past sales patterns, competition, distribution, legislation, the economic environment, changing consumer tastes, environmental factors, results of market research, anticipated advertising, and pricing policies and discounts offered. 4. Name Six (6) internal and external factors should be taken into consideration when planning and preparing a budget? When planning and preparing a budget the internal and external factors that should be taken into consideration include i. The planned operating level of the company ii. The availability of resources in the company iii. The limiting factors of production iv. Political and legal events v. General and specific economic trends and vi. Anticipated competitors and customers’ activities 5. What is cash budget? Why cash budget is very important in a company? What method is used for monitoring the cash budget, please explain. What are the main causes of cash flow problems, please explain. A cash budget is a financial plan of the expected cash receipts and cash payments for the forthcoming financial period. A cash budget is crucial in a company since it aids the identification of cash surpluses and cash shortages in advance as it is a timing of all cash movements in the company. In addition, a cash budget allows the company to have an effective planning of when and how it will acquire its financial resources. Cash receipts and cash disbursements in a company are handled by different individuals in the company in order to ensure its good management and enhance monitoring the cash budget. Cash is not released in full to the various department nut it is received only when there is need. The respective department is supposed to account how it has used the previous released cash before more cash can be granted. In addition, the manager must state in clear terms how he intends to use the cash requested. If the use is not in the budget, then the manager is asked to wait for the next budgetary period. However, if the need was urgent, the cash can be granted upon authorization by the management. The main causes of cash flow problems is lack of harmonization of cash receipts and cash payments. It is usually the case that cash payments occurs before cash receipts. This brings about a case of temporary cash shortages in the beginning of the period. Another major cause of cash flow problems is use of cash in unplanned expenditure. Using cash for purposes that were not budgeted for brings shortages of cash in the company since there will not be enough cash to cater for the other activities that had been planned to take place during the budget period. This can be solved by sticking strictly to the budget. Task 2: Applied Learning Task Explain and Detail Four (4) different types of Budgets and their purpose or role in your business. The budgets are Revenue, Expense, Production and Purchase budget. No. Type of Budget Role 1 Revenue budget Summarizes the anticipated sales from the company’s products for the accounting period. 2 Expense budget it details the anticipated expenditures by the company during the budgetary period. It will show the expected cash payments by the company during the budget period. 3 Production budget it details the costs of direct labour, direct materials and overheads 4 Purchases budget This budget is used in the determination of the quantity of sales and the cost of goods for resale. Assessment Part 2: Implement financial management approaches Task 1 As part of your budget report, research five tools used to manage budgets. List these tools along with the advantages and disadvantages of each tool. Tool Advantages Disadvantages QuickBooks it is user-friendly and suitable for smaller business It requires substantial accounting knowledge MYOB Has very good bookkeeping capabilities its reports is not easily changed into another format SAGE suitable for a manufacturing entity it does not have robust help facilities inbuilt into the program Pastel It is very efficient because most accounting tasks are simplified It is costly hard to use by without good accounting backgrounds Net Suite It can be used and accessed online it is too simplistic to handle complicated budgeting issues Task 2 Complete the Contingency Plan below to identify and address 5 Major Business Risks. Identify each important risk, the probability of it occurring, the impact of the risk, how the risk will be monitored and strategies to prevent the risk if it does occur. Identify the risk Probability of it occurring Very Likely (VL) Likely (L) Unlikely (UL) Impact of the Risk High (H), Medium (M) Low (L) Monitoring the Risk Risk prevention in the future Reputation risk L H regulate the publication and public relation activities of the business Engage in Public relation activities and social responsibilities Information risk VL M Restrict access of company’s information by outsiders Copyright company’s information resources credit risk L H only extend credit facility to individuals and businesses that have good credit rating Encourage cash sales and prompt payment for sales discounts product risk U H Establish quality control circles in the company Buy quality raw materials from reputable suppliers market risk L L Expand business operations to other territories to increase market share diversification into other areas of operations Task 3: Negotiating budgets and changes to budgets with work teams Case Study Questions; 1. Who is responsible for developing and documenting the budget? Mary Jones 2. Who would the person developing the budgets need to consult and why? Mary Jones needs to consult Bill Smith since he is personally responsible for sales and marketing. Bills input in the budget would be of particular importance when making the sales budget which is the genesis of most other budgets. 3. Why is it important for a number of people to have an input into the budget process? Managers and individual employees are likely to accept the budget and strive to achieve the budget targets when their participation in way of consultation is considered during budget development. 4. Who would have the final say over the financial plans? Bill Smith will have the final say over the financial plans since as much as Mary Jones prepares and documents the budget she reports back to Bill. 5. If Hank wanted additional money to replace equipment, who should he approach? Hank should approach Mary Jones if he wants additional money to replace equipment. This is because Mary Jones is responsible for financial matters of the business and every cash usage should fall under the financial plan she has set. Assessment Part 3: Monitor and control finances Required 1. Complete the Cash Variance Report for Simply Stunning for the year ended 30 June 2014. State whether the variance is favourable or unfavourable. Justify your answer. Variance Report for the year ended 30 June 2014   Budget Actual Variance F/U Current assets $ $ $ Cash at bank 12000 11200 (800) U Accounts receivable 6500 6350 (150) U Inventory 2600 3400 800 F Prepaid expenses 1000 950 (50) U   22100 21900 (200) U Non-current assets       Land 30000 30000 0 Building and equipment 90000 90000 0 Accumulated depreciation -30000 -30000 0   90000 90000 0 Total assets 112100 111900 (200) U less liabilities       Current liabilities       Accounts payable 5900 6850 950 U Accrued expenses 1100 1150 50 U   7000 8000 1,000 U Non-current liabilities       Loan - due 2005 57500 57500 0   64500 65500 1,000 U Net assets 47600 46400 (1,200) F Owner's equity       Capital 30000 30000 0 Accumulated profits or losses 17600 16800 (800) F   47600 46800 (800) F 2. Types of Variances that can occur. What could be the reasons why actual and planned results differed in the following instances. ACTIVITY POSSIBLE REASONS FOR VARIANCE Your petrol budget for the month was $130 but you spent $160. Unfavourable negative result. The cost of petro per litre may have risen than was anticipated. Another reason would have been undertaking journeys that were not foreseeable during the budgeting process leading to high mileage during the month. You plan to spend $200 per month entertaining clients but you end up spending $180 per month. Favourable positive result. The number of clients that was anticipated reduced leading to lower entertainment expense planned for the clients. Visiting entertainment centres whose charges are lower or entertaining clients at the same provider hence qualifying for a discounted charge. You budget for new plant and equipment in your restaurant for $140,000. Your overall cost for the P&E is $183,000. Unfavourable negative result Buying high quality plant and equipment which have correspondingly high cost. Buying high technology advanced plant and equipment. A Haulage contractor plans 20 return pay loads /trips per month from Sydney to Canberra with an average cost of $280. His average cost at the end of the month for each return trip is $380. Unfavourable negative result The haulage contractor made less than 20 return pay loads/trips during the month. Escalating cost of voyage and cost of other related expenses. 3. Explain the benefit of preparing a Cash Variance Report. Cash is a very important resource in any organization (Horngren, Datar and Rajan, 2012). It is the most liquid asset of the company and is a means by which the other company assets are acquired. Due to its high liquidity, cash is easily embezzled or misappropriated which has a magnified effect in the company. When a company is faced with cash flow problems, it can easily encounter liquidity issues and consequently go into liquidation or be declared insolvent. Therefore, preparation of a cash variance report enables the company to better manage its cash resources and its cash flow position. A cash variance report can point to areas of cash mismanagement especially when there is unfavourable negative result. This means that individuals handling cash in the company will exercise good judgment when dealing with cash since they will be held accountable for any cash variance and any mismanagement, embezzlement or misappropriation will be exposed by the variance report. Moreover, a cash variance report can indicate the possibility of idle cash being generated by the company which can always be applied wisely in other areas of the company operations to realize even higher profit during the period. Assessment Part 4: Review and evaluate financial management processes 1. For the coming year, monitoring mechanisms to be used to ensure better controlled and more efficient financial management process. The owner expects a price increase for his products. Calculate the new budget for the coming year. Item Current Year % inc Next year Budget Actual Sales 10,000,000 15% 11,500,000 Advertising Exp’s 300,000 5% 315,000 Salaries 800,000 6% 848,000 Marketing Exp’s 250,000 5% 262,500 Transport 80,000 9% 87,200 Travel costs 30,000 8% 32,400 Selling costs 280,000 9% 305,200 2. You own a small services business. It is the middle of Month 2 of your financial year, and your accountant has just given you the results for Month 1 and the latest revenue forecast for Month 2, most of the actual amount are same as Month 1 but if repairs & maintenance cost decrease 3%, wages increased 5%, telephone increased 2%, what is the variance for month 1 and month 2.   Month 1 Month 1   Month 2 Month 2     Budget Actual Variance Budget Actual Variance Revenue $50,000 $45,000 ($5,000) $50,000 $37,500 ($12,500) Purchases $22,000 $22,000 $0 $22,000 $22,000 $0 Advertising $500 $2,000 $1,500 $500 $2,000 $1,500 Cleaning costs $500 $500 $0 $500 $500 $0 Office Supplies $2,000 $1,750 ($250) $2,000 $1,750 ($250) Repairs & Maintenance $1,000 $3,000 $2,000 $1,000 $2,910 $1,910 Telephone and postage $1,500 $1,000 ($500) $1,500 $1,020 ($480) Wages & on-costs $10,000 $10,000 $0 $10,000 $10,500 $500               Profit (or Loss) $12,500 $4,750 ($7,750) $12,500 ($3,180) ($15,680) 3. What reasons do you feel might exist for the favourable or unfavourable variances? Customers are dissatisfied with the service offered by the business which explains the unfavourable negative variance in revenue. This is true because even the actual revenue has declined from $45,000 to $37,500 from month 1 to month 2 respectively. This is also supported by the fact that the business has been doing everything possible to promote the services as can be seen by the high cost incurred in advertising despite the lower budget allocation. Unforeseen repairs and maintenance. This has tended to show huge variance in the two periods. This may be caused by aging equipment which have high frequent break downs hence the increased repairs and maintenance. 4. In what areas do feel corrective action may be required, and why? Please explain The business needs to identify another supplier where it can buy its purchases at a relatively lower cost. The variance report has shown that the purchase has cost the same in the two months despite revenue reduction. In usual circumstances the revenue and costs are positively related. The decline in revenue shows that the selling prices are reducing which should be accompanied by a subsequent reduction in purchases. The business should not hire more staffs. The staffs have been increased as has been shown by the increased actual expenditure on wages. Since this increment has not been accompanied by an increase in revenue then the additional expenditure on wages is not justified. The business should buy new equipment to avoid the escalating expenditure on repairs and maintenance. Usually when an equipment is old it incurs huge costs to maintain it which can be avoided by replacing it with a new equipment whose repairs and maintenance are reduced to the minimum. Reference Horngren, C. T., Datar, S. M. and Rajan, M. V., 2012. Cost Accounting: A Managerial Emphasis, (14th ed.). 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