Strategic Management Accounting - Assignment Example

Strategic Management Accounting Table of Contents Table of Contents 2 Question Problems Associated With “Traditional Approach to Budgeting and Budgetary Control” 3 Characteristics of Traditional Approach (TA) to Budgeting 3 Strategic Analysis of Budgeting as per Industry Structures 4 Budgeting in GlaxoSmithKline (GSK) Plc 4 Budgeting in Tesco Plc 7 Question 2: Working Capital Cycle in XYZ Limited 10 Trade Payables 11 Trade Receivables 12 Inventories 13 Work in Progress 14 Finished Goods 15 References 16 Bibliography 23 Question 1: Problems Associated With “Traditional Approach to Budgeting and Budgetary Control” Characteristics of Traditional Approach (TA) to Budgeting There are several advantages related with the Traditional Approach (TA) to budgeting or budgetary control which can help an organisation to perform its financial activities in an efficient manner. TA to budgeting provides more emphasis upon financial aspects rather than the physical aspects rendering a clear vision regarding its financial performances (CIMA, 2010). TA also resolves various financial problems by reducing expenses in particular areas through which organizations can avoid certain specific expenses identifying those as the possibilities of increased debts. Through TA to budgeting, an organization can adjust its profits in terms of expenses on a monthly or yearly basis (FAO, 2013). Contradictorily, budgeting through TA is often argued to be entirely based on predictions, which disregards the probability of any change or uncertainty owing to which, expenditure might be increased due to changing competitive business environment. This approach is also considered as non-comprehensive because bottom-up methods imply that management personnel only contribute towards the development of departmental budgets where frontline workers are not included allowing a certain degree of gap between the allocated and the required amount of budgets (Ljungman, 2009). Traditional budgeting is also time consuming and needs huge amount of management resources. While developing budgeting through this approach, managers tend to effectively concentrate on making future expenses rather than developing actual strategic purposes (ALG Software, 2013; L.E.K. Consulting, 2013). In order to evaluate this particular understanding, two organisations have been selected, i.e. GlaxoSmithKline (GSK) and Tesco. Where the former belongs to a stable industry structure of pharmaceuticals and the later belongs to the highly diversified and fluctuating market of global retail industry. Strategic Analysis of Budgeting as per Industry Structures Budgeting in GlaxoSmithKline (GSK) Plc Although the pharmaceutical industry is perceived to be a stable sector with minimum changes in terms of consumer demand, it also has to face significant influences from external forces, especially those dealing with the economic and policies interventions. In the aftermath of the recent financial crisis, the fear of ‘fiscal cliff’ was created by federal budget legislation among the pharmaceutical organisations. In order to avoid this turmoil, GSK effectively focused on its Research & Development (R&D) department where it was viewed that the budget of this department was relatively stable for the past few years which indicates that even though the company focuses on utilising a traditional approach, it also has to comply with the benefits of contemporary budgeting over the former mechanism (Telegraph Media Group Limited, 2013; GlaxoSmithKline plc., 2013). The benefits and disadvantages witnessed by GSK when applying the TA to budgeting can be better analysed with the application of these mechanisms in the budgeting procedures of the company. Traditionally, budgeting used to be prepared on the basis of either ‘top-down’ or ‘bottom-up’ methods. Contextually, top-down budgeting is considered as a systematic planning through which GSK can follow specific procedures while preparing budget as per certain well defined guidelines. With the help of this particular approach, GSK shall be able to channelize relevant information and the course of strategic initiatives among the low-level managers and thus ensure their commitment towards successfully accomplishing the determined goals for a particular year (Kim & Park, 2006; Florin, 2011). Moreover, this method is often argued to inculcate greater degree of flexibility and employee commitment within the working environment of an organization which can also be signified as an advantage for GSK. Additionally, through this budgeting method, GSK can bring more efficiency within its business operations and also improve its cost control in terms of incomes as well as expenses (Florin, 2011; Ljungman, 2009). As the bottom-up approach tends to make use of information that flows from the low-level managers to the top-level managers, this process is often argued to be quite beneficial in identifying the challenges witnessed by the employees in performing the operations in terms of finances and likewise develop requisite measures to allocate financial resources more appropriately. The process is also known as participative approaches, through which GSK can determine its actual input resources needs for the organizational managers as well as employees. GSK can also utilize this approach in order attain individual knowledge regarding the preparation of future planning and strategic development. GSK can also enhance employee motivation by improving job performance, deliver higher morale as well as effective commitment and also deliver efficient job satisfaction to the employees applying this particular approach (Florin, 2011; GlaxoSmithKline plc., 2013). This approach is quite suitable for the leading organisation that operates in a decentralized manner where departmental managers have a clear idea regarding consumer buying behaviour, preferences and product expectation. Additionally, as the company needs to witness insignificant changes in the consumer demands, the level of risk in terms of ambiguous conclusions regarding the consumer buying behaviour developed by the low level managers can also be mitigated in this process. Furthermore, with the help of this method GSK can efficiently improve its internal communication system which is frequently happened between functional departments with top level managers. Hence, through this budgeting method, GSK can appropriately establish the communication as well as coordination between managers and employees by which the company can influence the functions of different organizational levels to work in an efficient manner (Florin, 2011; GlaxoSmithKline plc., 2013). To be precise, traditional budgeting can assist GSK with its advantages of simplicity and definite guidelines. While implementing contemporary budgeting approaches can give rise to complexities owing to the fact that the industry structure is relatively stable to be influenced strongly or apparently by the elements considered in these approaches. For instance, Zero-based budgeting is considered as a systematic planning technique which entirely reverses the working procedure of the traditional budgeting method. Through this budgeting technique, GSK can comprehensively review its every functional department in terms of performance taking into account the possible aspects of uncertainties which may not have strong implications for the organisational operations performed in GSK. Hence, by taking into account the aspects of concerns which have minimal impacts on the business functions of GSK, the contemporary budgeting process is likely to increase complexities and challenges for the budgeting team therefore raising the chances of discrepancies in resource allocation (Cheong, 2012; Government Finance Officers Association, 2013). Budgeting in Tesco Plc Tesco operates within the global retail industry which is quite competitive and dynamic in nature being strongly influenced by the existence of huge number of competitors. In order to survive in this changing business environment, it is necessary for the organization to follow certain unique approaches while preparing its budgeting. Notably, in order to sustain in this competitive environment, Tesco attempts to render due significance towards assessing its Key Performance Indicators (KPIs) within frequent intervals applying the contemporary budget approach. Moreover, owing to the rapid alterations in its consumer preferences and lower bargaining power of the buyers, Tesco also attempts to involve Just-in-Time delivery as well as quality control measures in its business process which again implies significant influences on its budgetary process (Tesco, 2013; Telegraph Media Group Limited, 2013). The implications of contemporary budgeting over the traditional budget approach on Tesco can be identified with reference to the guidelines specified in the Activity-Based Budgeting (ABB) and the Beyond Budgeting. ABB is considered as a budgeting method which is entirely based on activity framework utilized as a cost driver data and also considered as a feedback procedure while preparing budget. The major objectives of ABB are to satisfy the changing demands of the potential customers by developing higher value in terms of products and/or services delivered taking into account the various influencing factors and thus rendering an in-depth understanding to its users such as Tesco. Contextually, the traditional approaches lack in this particular field which might increase the flaws in the budgeting process required to be followed by Tesco (Cranfield University, 2013). Through this budgeting method, Tesco can effectively maintain the relationship and also establish communication between production procedures and product performance. With the application of ABB, Tesco can also determine its future cost activities regarding the production of particular products as well as services in compliance with the demand of its consumers. This method of budgeting helps managers to transform its fixed costs into variable costs and accurately align costs with company’s objectives efficiently (Bengu, 2010). With the help of this budgeting method, Tesco can deliver more quality products and services by implementing accurate costing activities and also with the appropriate allocation of resources towards the company’s benefits. It also assists Tesco to measure its overall performance appraisals and likewise assess the ongoing operations at the time of decision making. Stating precisely, the ABB method assists Tesco towards understand its current business position and thus gain the efficiency to secure its long-term future growth which shall not be possible owing to the limitations of the traditional approaches when concerning the existence of high uncertainties (Bengu, 2010; The Institute of Chartered Accountants India, n.d.). Another contemporary budgeting practice of beyond budgeting is considered as a method that is appropriately suitable for those organizations which operate under unpredictable business conditions witnessing the challenges of rapid alterations in the product demand. Contextually, this method of budgeting is specifically designed to overcome the barriers of changing business environment and to develop flexibility within the operational activities and thus shall be highly suitable for Tesco owing to the prevalence of high fluctuations in its operations (Daum, 2011; Hope & et. al., 2013). Additionally, beyond budgeting is implemented on the basis of two aspects i.e. performance management and leadership. Through performance management technique, Tesco can influence its employees to give rapid response in terms of consumer needs and competitive environment. In relation to leadership techniques, Tesco can establish a decentralize framework by which it can facilitate its employees to understand potential circumstances and enhance their performances as per the changing environment (Goode & Malik, 2011). Notably, these aspects are not considered in traditional approaches owing to which the Tesco might have to face certain discrepancies in implementing a flawless budgeting practice. Question 2: Working Capital Cycle in XYZ Limited XYZ Limited is a manufacturing company and operates its businesses by selling its products and services to the industrial customers and thus performs in the business-to-business market segment. Additionally, XYZ might be able to improve its working capital cycle components through which the company can enhance flexibility within its day-to-day business operations. It is worth mentioning in this context that working capital refers to the resources or materials which are necessary for the businesses in order to manufacture products and/or services and is required to be introduced in the work-in-progress situations to stimulate the stability of the ongoing production as well as delivery processes. Without working capital, it is likely that an organization will have to face significant obstructions in terms of unavailability of required amount of resources, lack of cash or finances to smoothen the entire business process and also in terms of legal challenges to operate its businesses in an efficient manner. Additionally, through this cycle, company can identify its flow of assets throughout the overall business activities which comprises cash flow and other necessary assets such as raw materials and final products and therefore assists in the proper allocation of resources (Entrepreneurship Development Institute of India, 2009; Acorn Live, n.d.). Based on this particular understanding regarding the theoretical prospects of working capital cycle and the business operations of XYZ Limited, the following discussion will focus towards suggesting certain measures which can be beneficial for the company in enhancing its performance on the basis of Trade Payables, Trade Receivables, Inventories, Work-in-Progress and delivery of finished goods. Trade Payables Trade payables are primarily considered as the liabilities or amounts owed to the creditors, vendors, suppliers and lenders of finances which had already been used in the production process. Additionally, it is considered as liabilities by the suppliers for purchasing of products and services. Trade payables can be improved by managing business cash flow in an efficient manner. Contextually, by developing reliable cash flow techniques and superior budgetary control strategies, an organization can efficiently manage its trade payables (CIMA, 2012). It is in this context that XYZ can uphold its feasible cash flow system on the basis of certain aspects in order to enhance its cash inflow and thus manage its trade payables efficiently. Contextually, it is necessary for an organization to comprehend its cash flow techniques by frequently monitoring the overall business accounts. Through this strategy, XYZ can appropriately analyse the cash inflow as well as outflow of the businesses. Additionally, frequently analysing business cash flow can assist XYZ to indentify some of the basic problem areas within the cash flow cycle and respond to it efficiently and promptly. In order to improve trade payable, XYZ can develop a specific cash flow budget through which the company can efficiently forecast its business cash flow for the near future in the short-term period. Moreover, it is also necessary for XYZ, to appropriately manage cash surplus by which the organization can efficiently control its finances to allow a smooth continuation of cash flow cycle. In this way, XYZ can improve its business cash flow and subsequently improve its trade payables by a large extent (Accounts & Financial Services, n.d.). XYZ can also develop an effective communication system with its suppliers in order to inform regarding overall company’s financial situation within a specific period of time and therefore obtain flexibility in the duration of trade payables. In this way the company might develop trust and better understanding with the suppliers in terms of financial transactions. Additionally, the company can enhance its trade payable by expanding its payment time with the virtues of significant understanding developed within its supply chain partners. In this regard, the company should properly communicate and interact with vendors in order to develop an imbursement agreement so that the payment time period can be extended in case of urgent situations or obstructed flow of cash. Thus, it is necessary for XYZ to reinforce its relationship with vendors or suppliers in order to developed flexibility or efficiency in terms of disbursement of trade payables. Furthermore, company can also improve its working capital performance in relation to trade payables by implementing cost efficiency strategies throughout its business process so that sales can be increased by minimizing expenses within its manufacturing process (Schkeryantz, 2012; Accounts & Financial Services, n.d.). Trade Receivables In order to attain long-term growth it is necessary for XYZ to improve its performances on the basis of trade receivables through which the company can forecast its cash inflow towards its business and plan its budgetary control accordingly. Therefore, it is necessary for XYZ to effectively concentrate upon this aspect in order to improve its cash flow activities. Cash inflow is one of the vital aspects through which the company can determine its sales growth. Therefore, it is necessary for a business to follow certain steps in order to bring flexibility within the cash flow system by effectively managing its trade receivables. In order to enhance its cash flow flexibility, XYZ should focus on transformation of good and/or services into cash by effectively managing the materials supplied for manufacturing the products and subsequently, efficiently managing inventories into receivables and further in cash. In this regard, XYZ can improve its account receivable by offering certain discounts to its customers encouraging the customers to repay their credit amount within a short term period. Additionally, the company can also influence its potential customers in order to do deposit payments while taking orders of products. Moreover, XYZ can also issue invoices on time for the customers who have records of timely repayments of the credited amounts and thus should be able to immediately identify the slow payments. It is also essential for the company to concentrate upon the customer payments and should calculate it through advanced financial software in order to identify the accurate cash flow of the business. Furthermore, the company should also analyse the account receivables in order to recognize the attitude of customers who make the payment at the right time and build a better alliance with them from a long run perspective. Through this way XYZ might improve its account receivable areas which can also help to bring flexibility into its working capital cycle (OCC, 2013; SAP AG, 2001; Shantikumar & Stece, 1986). Inventories Inventories are primarily referred to as the overall costs of entire resources and materials that are currently presented in company’s stock and are not utilized for work-in-process in order to manufacture final goods as per the order received from the customers. It is also referred to the amount of raw materials that are presented in the hand of the company. There are generally two types of raw materials i.e. direct and indirect raw materials. These two types of raw materials are basically recorded in the account of inventory assets. This account shows debit to the account of inventory raw materials and the credit to the account of trade payables. By managing proper inventories of raw materials, XYZ can recognize the timely requirement of the raw materials through which it can enhance its business performance in an efficient manner facilitated with timely delivery of the ordered goods to its customers and therefore developing a smoother flow in its working capital cycle. XYZ can improve its inventory by effectively controlling its raw material movements. The company can control its business operations by continuously monitoring the time which are required for manufacturing and supplying of final products to the customers. Contextually, manufacturing time also involves reviewing the specific time period which are needed for the suppliers to supply the requisite amount of raw materials. Moreover, XYZ can also improve its inventory by frequently monitoring the order cycle of raw material qualities which are needed for the manufacturing of final products. Through this particular strategy the company can recognise the time period required for converting raw materials into final goods by which it can efficiently manage its inventories (INFLIBNET Centre, 2010). Work in Progress Work in progress in generally considered as materials which are utilized for manufacturing procedures prior to the completion of final production. In other words, work-in-progress is generally referred to the stage of production process when materials are utilized for partly finished products. By improving work in progress, XYZ can enhance its productivity and deliver the finished products at the accurate time to its customers. In order to improve its work in progress performances, the company should develop a checklist for the materials which are used for the production of final goods. Moreover, the company can influence the employees to enhance their work performance which can further improve the prompt utilization of raw materials and thus strengthen its work in progress performances. In this way company can understand the requirement of materials and efficiently manage its inventories developing a balance in cash inflow and outflow generation (Benjaafar, 2002). Finished Goods Finished goods are generally referred to the products which are finally obtained by the company through its manufacturing procedures and are termed as ready to the delivered to the customers. XYZ can improve its finished goods by efficiently managing its inventory and making control towards the flow of raw materials as well as quality. Moreover, finished goods can also be enhanced by improving the working activities of the employees so that the final goods should be produced in order to satisfy the market demands in a time efficient manner. Additionally, in order to improve the productivity, XYZ should understand its market demands and customer requirements which can further strengthen its working capital cycle by a large extent (Boyd, 2006). References Accounts & Financial Services, No Date. System Overview. Accounts Payable. [Online] Available at: http://accounting.ucdavis.edu/training/docs/AP.pdf [Accessed March 24, 2013]. Acorn Live, No Date. Working Capital Cycle. 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