Unit 6 Business Finance Level 4 GSM London College

PART 1

1. Purpose of preparation of budget and process organisation needs to follow

Budget is termed as a financial goal that is prepared by firm in the best possible manner. It helps firm to effectively carry out adequate budget in anticipation of expenses to be incurred and revenue that will be generated from applying such budget (Yılmaz, 2018). This is quite useful for the firm as it clarifies what expenditures need to be made in order to earn desired revenue with much ease. It is important for TownScape Plc. which is engaged in manufacturing of furniture and is planning to expand its operations in Gulf, North America, Far East mainly China. This implies that for such expansion to varied nation, budgeting system need to be implemented so that costs may be analysed and estimated profits can be garnered in the best possible way. It will help firm to extract benefits out of these locations. This is crucial for TownScape Plc as it had implemented traditional budgeting system and as such, the same had not been successful as this system lacks flexibility. In relation to this, firm is required to anticipate budget in the light of expenditures and revenue. The budgeting process, organisation needs to follow is listed below-

1. Objectives

The objective of budgeting should be set by the budget committee so that figures may be anticipated accordingly (Richards, 2017). This is particularly important as decision-maker must set objective that mainly includes cost effective or cost savings in order to carry out benefit out by estimating expenses and as such, business may earn profit in the best possible manner. Thus, main objective of TownScape Plc is to expand in varied locations.

2. Analysing resources

This is the next step in preparation of budget which organisation needs to follow. It implies in order to achieve objective made in first step, firm now requires determining from where it can attain funds for accomplishing goals. Available resources are required to be assessed which may be availing loans and other sources of obtaining finance as well.

3. Projecting needs and available resources

Budget is based on an estimation and as such, firm requires to analyse competitors by obtaining previous data, analysing current and future economic trends in effective manner. Thus, by projecting needs and resources available business may easily prepare budget (Kimbro and Wehrly, 2017).

4. Final approval

After budget is set out which highlights needs and demands of various departments, final approval is required to be made by budget committee. They assess whether amount and figures stated will be useful or not and as such, yes or no decision is arrived at. It means that final decision lies on the hands of committee.

5. Distribution of funds

This step is arrived when budget has been approved by the authority. This is the final step as funds are allocated to departments in order to meet operational tasks in the best possible way. Thus, distribution is made to concern units and it is duty of Company Controller or CEO (Chief Executive Officer)

6. Monitoring

Measuring performance of organisation is required so that actual results can be matched with budgeted one. It is needed because if results are not in accordance to anticipated one, corrective action need to be implemented for removing variances (Patni, Tomar and Sharma, 2017).

2. Significant cost drivers for the business and specific areas for implementing cost budgeting and application of traditional budgeting

Costs are required to be controlled so that desired profits can be achieved by the firm. This is particularly vital for TownScape Plc planning to expand its operations and reach to various nations. Cost drivers are known as factors that leads changing of activity's cost. In simple words, these are drivers which drives the cost of manufacturing in the company. It is required that TownScape Plc should focus on minimising expenses which it incurs on production of street furniture includes litter bins, racks and other products. The cost drivers are carried out and allocated to cost units. In relation to this, setup cost of equipment is cost unit and number of setup takes place is cost driver. Another one is labour hours worked belongs to this context. Thus, it can be interpreted that expenditures are need to be controlled so that firm may be able to inject revenue (Trad and Kalpić, 2017).

Cost budgeting is another important aspect in the company so that expenses can be reduced up to a high extent. This means that cost drivers should be made in such a way which may lead to reduction of activity's expenditures quite effectually. Areas in which cost budgeting mainly includes overheads, direct labour hours worked by labourers. Thus, company can analyse cost drivers and as such, it will be able to know about expenses incurred on manufacturing products. Hence, costs can be minimised up to a high extent. It can be further explained that if driver for labour expense is cost of material, then expenditures on raw materials are required to be minimised in order to reduce labour costs. However, cause and effect relationship is not present between labour and raw materials.

Traditional budgeting approaches are various which includes static, top down, fixed and incremental budgets. In relation to this, static budget means that there is no flexibility to initiate changes which implies that once it is implemented, the same cannot be changed. Fixed budget is prepared for time frame which is generally fixed in nature (Zetlin-Jones and Shourideh, 2017). Top down approach implies that top management personnel sets goals and as such, workforce is required to perform in the same manner for accomplishing profits. While incremental budgeting means that TownScape Plc can just add more amount in current year budget by referencing past figures and as a result, it saves time for the management.

3. Analyse effectiveness of traditional budgeting for the business

Traditional budgeting system had been implemented by the company and as such, it is not good for the firm as flexibility do not prevail in such budgeting tool. It can be analysed from the case study that organisation is facing several issues and as such, it is required that modern tools of budgeting should be implemented in order to extract benefits with much ease. Moreover, TownScape Plc has already proposed and made contracts up to 35 million by shaking hands with various local authorities. Moreover, another target to be achieved is pilot scheme with police force and as such, benefits will be attained as design of 15 new commodities would be made which will fight with anti-social norms mainly in urban. Additional manufacturing capacity will be required by the business in 2018 financial year so as to attain revenue by completing above listed tasks within stipulated time.

In relation to above attaining tasks, traditional budgeting need to remove and modern one should be implemented so that expenditures may be estimated and analysed in effective manner. This is evident from the fact that such budgeting system has various disadvantages which limits the use of it (Lundstrum, 2018). One of main demerit is that it lacks flexibility which means once budget has been formulated by TownScape Plc, it cannot revert back by making several changes. This means that budgeted figures on implementation cannot be changed afterwards. This approach is not good as there are many external factors which affect company and it may require making changes by increasing expenditures or decreasing the same whatever be the case. There are many factors influencing operations of firm such as well-structured strategies implemented by competitors, change in demand and preferences of customers and market may undergo change as well. Thus, traditional budgeting do not take into account such changes and budget is prepared and cannot be changed.

Another demerit is that top managerial personnel increases previous budget data and prepares budget without referring to current year requirements of departments. This means that management just changes figures made in previous budget and no new one is prepared by the company which is not a good approach as it leads to budget inflation. Moreover, company prepares budget without anticipating the needs of departments (Lee and Park, 2018). Furthermore, manager of particular unit unnecessary demands for more funds than it is required and as such, this leads to budget inflation. Thus, wastage of funds are made and optimum use is not done. Hence, in planned future form, this system of budgeting would not be good for the firm.

PART 2

1. Explaining alternative budget methods and discussing advantages and disadvantages

Rolling budgets

Rolling budgets are implemented in company as this type of budget is continuously updated when one period is finished and it is implemented for another period as well. This means that rolling budget is an increment on existing budget. It implies that budget is revised set of plans for the company.

Advantages

1. The main advantage of rolling budget is that accuracy of budget as planning and controlling can be made easily as it is revised and updated continuously.
2. The management of TownScape Plc is able to assess budget on regular basis and as such, budget is prepared more accurately (Kass, Luby and Weber, 2018).

Disadvantages

1. One of the main disadvantage is that it consumes lot of time and are not cost effective as well. Valuable time of management is wasted in preparing rolling budgets.
2. More focus is made on the budget and as a result, less control on actual performance is done.

Zero based budgets

Zero based budgets are prepared without referencing to past year data and as such, completely new budget is made from scratch base. This means that management does not take into account historical figures and formulate budget accordingly. It leads to easily prepare budget without using past year budget leading too much transparency and clarity to business units.

Advantages

1. It is simple to prepare and does not lead to budget inflation as current requirement of departments are assessed and budget for future is prepared (Deering and Sá, 2018).
2. It is suitable for company as the integrity can be observed by effective planning and controlling.

Disadvantages

1. The major disadvantage is that lot of time is consumed of personnel to formulate budget from zero base.
2. It is not advantageous as more of the workforce is required in order to prepare budget which hampers daily routine work of employees.

Activity based budgets

The activity based budgeting means that costs associated with the activities and planned expenditures are assembled and budgeting is prepared on the basis expected level of activity in the best possible manner. Individual costs can be allocated to activities and as such, TownScape Plc can track cost incurred on each level of activities (Kengatharan, 2018).

Advantages

1. The main advantage of this method is that costs associated with each level of activities can be tracked in effective way by controlling can be done.
2. It is advantageous as cost driver can be easily attained and as such, business may be able to initiate control on activities in the best possible manner.

Disadvantages

1. It is not advantageous as lot of resources are consumed as numerous analysis is made making it time consuming task as well.
2. The budgeting purely focuses on the short-term goals and do not focus on long-term goals which can be disastrous for firm.

2. Application of alternative methods of budgeting in the business

The zero based budgeting means that entire budget is prepared from scratch base. For instance, TownScape Plc incurs 1 million on production of street furniture previously. As such, in preparation of budget for the next year, no previous figures will be taken into account. Thus, company can increased 7 % of the expenditure on the production coming year. On the other hand, rolling budget is updated and revised when budget period is completed. For example, TownScape Plc makes budget for six months and sales and costs are assessed. Then, rolls are forwarded to next period as well (Ali, Omar, Nasir and Osman, 2018).

Activity based budgeting can be used by to effectively track costs associated with activities in the best possible manner. Moreover, costs can be controlled in a better way. For example, if organisation receives an order of 40,000 litter bins for the period and cost of producing single litter bin comes out to be 5. Thus, 200,000 (40000*5) is the activity based budget prepared for the next year. Thus, above budgeting methods are quite useful for organisation in order to formulate budget so that it may be able to expand its reach to markets in effectual manner.

3. Analyse one or combination of methods appropriate to the organisation

There are various methods which can be used by the company in order to analyse and estimate expenditures and income for the budget with much ease. From the above discussed modern tools of budgeting such as rolling, zero based and activity based budgets, one of the method can be used by the company. In relation to this, zero based budgeting can be used by organisation so that it may formulate budget in the best possible manner (Angel, 2018). It is recommended to use this budgeting method as company can easily allocate resources without incurring any wastage. Moreover, TownScape Plc may be able to assess expenditure required to be incurred so that profits can be garnered from the expansion to various countries quite effectually.

Optimum utilisation of resources can be attained by implementing zero based budgeting in effective way. Furthermore, no historical data is used and as such, budget is formulated from entire scratch base with much ease. Moreover, discrepancies inculcated in previous year budgets are not made and carry forwarded to next year and as such, no errors are found because no relevance from past budgets are made (Rikhardsson and Yigitbasioglu, 2018). Thus, no creeping of mistakes are highlighted and observed in preparation of zero based budgeting. Thus, company can easily implement this system to resolve issues related to use of traditional system.

CONCLUSION

It can be concluded from the above report that business is required to meet operational tasks in the best possible manner and finance is the major need of company. Budgeting is quite useful for organisation so that it may anticipate expenses and as a result, revenue can be estimated as well. This means that budgeting process needs to be followed by firm so that budget can be formulated and prepared in the best possible manner.

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REFERENCES

• Ali, H. and et.al., 2018. Financial Literacy of Entrepreneurs in the Small and Medium Enterprises. InProceedings of the 2nd Advances in Business Research International Conference(pp. 31-38). Springer, Singapore.
• Angel, S., 2018. Smart Tools? A randomized controlled trial on the impact of three different media tools on personal finance.Journal of Behavioral and Experimental Economics.
• Deering, D. and Sá, C., 2018. Do corporate management tools inevitably corrupt the soul of the university? Evidence from the implementation of responsibility center budgeting.Tertiary Education and Management.24(2). pp.115-127.
• Kass, A., Luby, M. J. and Weber, R., 2018. Taking a Risk: Explaining the Use of Complex Debt Finance by the Chicago Public Schools.Urban Affairs Review. p.1078087417748782.
• Kengatharan, L., 2018. Capital Budgeting Theory and Practice: A review and agenda for future research.American Journal of Economics and Business Management.1(1). pp.20-53.
• Kimbro, M. B. and Wehrly, E. W., 2017. Capital Planning, Selection, and Investment Integrating Sustainability in Decision-making.Journal of Management for Global Sustainability.5(2).
• Lee, H. and Park, K., 2018. Advances in the corporate finance literature: a survey of recent studies on Korea.Managerial Finance.44(1). pp.5-25.
• Lundstrum, L. L., 2018. The Firm, the Market, and the Rising Finance Professional.Journal of the Academy of Business Education.19. pp.166-179.

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