Mastering Budget and Cost Center Budgets, Implementation of Financial Management Approaches - Assignment Example

Financial Management Name: Tutor: Subject: Date: Introduction Financial management is the process by which a company manages its funds in its daily operations. Financial management means, organizing, planning, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise (Allen, et al, 2013). It means applying general management principles to financial resources of the enterprise to generate profits and to sustain the organization’s cash flow. The organization makes investment decisions in fixed assets better referred to as capital budgeting. The company may also make decisions on financial matters using current assets that are also part of the investment as working capital decisions. Financial decisions are made since the company has to raise finances to facilitate its operation (Brigham, and Ehrhardt, 2013). There are various sources of finances that an organization can use to channel its finances from. This will depend on the type of source, cost of financing, period of financing and the returns that are expected. Dividend decisions are involved in the financial management of an organization such that the finance manager has to be able to make decisions depending on the net profit distribution. These profits are normally in two forms: dividends for shareholders and retained profits. Retained profits are the amount of funds which have to be finalized which will depend upon expansion and diversification plans of the enterprise (Allen, et al, 2013). There are several objectives of financial management planning, this is generally concerned with procurement, allocation and the control of financial resources. To ensure that the organization has a regular and adequate supply of funds to various operations. The aim of financial planning is also meant to that there is optimum fund utilization To ensure there is safety on investment, funds should be invested in profit ventures with high returns. High returns to shareholders in the company that depends upon market prices and expectation from shareholders. Task 1 Review the master budget and cost center budgets The master budget review will consist of the analysis of the budget, determining the extend of the budget on the investments of shareholders and determining the return on investment of the budget. The master budget below indicates the projection for the four quarters in the financial year 2011/2012. Financial Planning Financial Planning is the process of estimating the capital required and determining its competition. It is the process of framing financial policies in relation to procurement, investment and administration of funds of an enterprise. The planning is important due to the fact that the capital requirement is determined by planning (Allen, et al, 2013). From the above master budget, Big red bicycle was able to make a return on investment of about 20% in the year ended 2012. The company made a profit of about twice the investment according to the budget. The net profit of $ 938,500 for the whole year indicates that the revenue was more sustainable to subsidize the expenses and all other expenditure by the organization. The budget is used to determine the capital requirement. This is determined by the cost of current assets, the sales which are made by the company was about $ 3,000,000. The current assets are considered to be short term. The capital structure is also determined by the budget, this is used to determine the relative kind and proportion of capital requirement (Brigham, and Ehrhardt, 2013). The debt-equity-ratio is also determined by the capital structure derived from the budget. The budget is also used to determine the financial policies such as lending, borrowing, and cash control. The finance manager ensures that the organization uses a limited amount of finances to produce maximum returns through efficient utilization of funds. The budget projections are realistic since a number of expenses are reasonable and can be sustain by the amount of revenue which is projected to be generated. The budget is achievable due to the fact that the projected earnings in terms of revenue and sales are high. The organization is also having a low cost on various expenses for the company. Wages are kept at a sustainable value since the company has to pay their workers well and at the same time make profits without any imbalance (Allen, et al, 2013). This has been attained by the company since they expect to pay $500,000 to its workers in terms of wages for those working on waged job. The following are some of the plan financial management approaches that will enable the company to achieve its target master budget in the period ending 2012. Review of the past: the company has been doing well in terms of budgeting in the past since it has never been in a position of not attaining their budgeted profits and revenues. For the past three years, the company has been able to rise more than the projected revenues. The sales have been phenomenal and the remuneration of its employees has been exceptional (Brigham, and Ehrhardt, 2013). This has enabled the business to sustain various projects and to venture in to new investments. In the previous financial report, the company has been able to maintain its investments and create new investments with the help of the relatively low cash flows. Looking to the future: the company is expecting to increase the cash flows due to the higher demands of the company’s products. The company is expecting more sales as the business is growing in its popularity. The organization is also changing its policies on the budgeting buy ensuring that more sales are generated from sales persons hence there is need of keeping cash flows higher since they are paid within a very short period of time. The expansion of the company is also a major impact in terms of creating a budget since more revenues are expected and hence profits will increase if the market economies don’t vary to an unsustainable level. Set strategies: the company has set various strategies to improve their return on investment on various investment regions. The company is expecting to use more than $200,000 on an advertisement since the company is undergoing expansion. The company is also expecting to increase the number of employees to sustain the increasing customer base in various centers in Australia. Adelaide is one of the regions that is expected to host many customers since there is appositive publicity of the store in terms of giving back to the society through the use of sponsorship of various charity foundations in the town. The sales centers A, B, and C above indicate that there is increasing cash flow in the organization since its products are being sold at a higher rate. There is also increase in commission paid to sales persons. This is responsible for the increasing sales since most sales people are have been given more commission hence they work extra harder to earn more commission. The projected percentage of the commission was 2% which will now impact the budget since there should be more cash flow and hence more revenue. A number of sales also in the quarters have increased in the second quarter compared to the initial quarter and the last two quarters. This is due to the maintenance that took place in the second quarter. The business is much impacted due to the fact that there should be an increase in the expenses of maintaining the premises in the second quarter. The 20 % increase in a number of sales in the second quarter is also a subject of improved service and goods delivery by the company (Brigham, and Daves, 2012). Risk assessment This is an event which arise in the operation of the business activities and causes losses to the company in the process. There are several risks that face firms which depend on sales to make revenues. The big red bicycle is likely to experience loses due to the rising number of firms in the industry and other several factors that are indicated below. Competition from new firms: the company is faced with a lot of risks due to the new firms coming into the market. The impact of these firms will destabilize distribution of revenues. Whenever a new firm enters the industry the company risks the reduction of sales in various stores. Customer choice and preference: the customers who use bicycles are reducing due to other developing means of transport. This has reduced the total sales of the company. However, the impact is not much felt since there are many new customers who like to use the bicycles in their daily activities since the country is evolving to the use of rail trails which are used for bicycles and other non-mechanical means of transport. Change in economic climate: the company is faced with the challenges experienced by the country in general due to the financial crisis which is experienced. The country is faced with economic instability. Australia has been a country with growing economy hence there are challenge faced due to the growth of the economy. The cash flow among the citizens has led to the reduced purchasing power thus reducing the number of sales. Contingency plan This is a plan that the company can implement to eliminate the risk that is experienced by the business as far as the financial projection is concerned. Below is the contingency plan Contingency Plan Company name: Big Red Bicycle Pty Ltd Person developing the plan: Name Position Charles stellar Manager of Sales Centre A Risk identified: reduction of projected sales Strategies/activities to minimize the risk By when By whom Increasing the number of sales agents End of quarter Sales manager Creating awareness in the public by intensifying advertisement First quarter Marketing department Creating a good customer relationship End of first quarter Relations department Reducing prices relative to those of new firms Any Quarter Sales manager Doing market research to determine the customer needs for product improvement Fourth quarter Relations department Having an exit plan General manager Task 2 Implement financial management approaches The business has to be in a position to implement the financial management approaches that are provided so as to be able to control the cash flow in the organization. Reduced expenditure on basic things- the company has to ensure that there is a little amount of money being used for the purchase of this like stationaries and office tools. This will help the company to reduce cash flow and at the same time reducing the number of expenses which will result in the increase in the net profit. Lowering the cost of raw materials- the company has to be in a position of buying goods in bulk which will eventually reduce the amount paid for raw materials. This will help the company to be able to produce at a low price and sell them a suitable price. Product promotion- the business should be able to increase the amount of funds used in the advertisement so as to increase the awareness in the market hence increasing the revenues generated by the business. Reducing the amenities- this will be able to get more income to pay more workers rather than over compensating the workers for the work they do. From the budget, its projected that the sales will rise for each quarter, amounting to $200,000. The expenses will be expected to reduce due to the reduction of petty expenses in the organization. The company is expected to use about $5,000 dollars each quarter in expenses like calls and communications (Kaplan, and Atkinson, 2015). This is much attainable hence the use of the realistic budget. The occupancy cost is also expected to be kept constant over time since the cost of electricity and rent will not be increased in any time soon this will make the company pay about $500,000 for the occupancy cost. The business will also have to spend more funds on employment expenses since the sales people have been awarded a 0.5% increase in commission. Financial policies and procedures According to DRURY, 2013, This are set of instructions and regulations set by the company to eliminate reckless expenditure by various departments. The purpose of the policy is to provide the required details and procedures which are adhered to by the organization. Expense reimbursement to detail procedures to be followed in relation to expense reimbursement that has been incurred on behalf of the organisation. The policy Dolly’s Delight will reimburse staff for reasonable and authorised expenses that have been incurred by them on behalf of the organisation or in the course of conducting Dolly’s Delight business. The following are the expenses which were traced Travel expenses Reimbursement expenses Accommodation Employee’s own meals Expenses Q1 Q2 Q3 Q4 Travel $ 5,000 $4,000 $4,000 $3,000 Reimbursement $3,000 $3,000 $3,000 $3,000 accommodation $5,000 $5,000 $4,000 $6,000 Meals $2,000 $2,000 $1,000 $3,000 Total $15,000 $14,000 $11,000 $15,000 Those are the expenses that were incurred by the company during the period that ended 2012. These petty expenses were traced to ensure that the organization has been in a position to account for its expenditure according to the policies set. In conclusion, the company has been able to manage its finances for the whole year. This is due to the policies set and the precise budgeting of the company. The budget which was created by the business was able to sustain the organization through its financial period. However, there are challenges faced by the organization due both external and internal factors. The company has thrived through all this challenges and has expanded. The budget has been attained as projected on several occasions. References Allen Jr, E., Melone, J., Rosenbloom, J. and Mahoney, D., 2013. Retirement Plans: 401 (k) s, IRAs and Other Deferred Compensation Approaches. McGraw-Hill Higher Education. Brigham, E. and Daves, P., 2012. Intermediate financial management. Cengage Learning. Brigham, E. and Ehrhardt, M., 2013. Financial management: theory & practice. Cengage Learning. Brigham, E. and Houston, J., 2011. Fundamentals of financial management. Cengage Learning. DRURY, C.M., 2013. Management and cost accounting. Springer. Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning. Read More