Finance Skills: Budget Management Assignment Answer
Knowledge activity 1: Securing support of different stakeholders
|Identified stakeholder||Internal or external?||What is important to them?||How will you secure their support?|
|Government bank||External||Trust and honesty of budget and also security of lent money||By showing that budget is consolidated and has no loophole|
|Financial Advisor||Internal||Objectives of formulating budget and efficiency of budget||By asking for best advice based on similarly successful budgets|
|Media||External||Information regarding progress of budget||By asking them to create live coverage of progress made in budget processes|
Task 1: Gathering relevant information for budget
A. Previous budget
Figure 1: Sales budget for Sorts International Ltd
(Source: Wallstreetmojo.com, 2019)
The above figure of budget example shows a ‘sales’ budget of a sports company. It is clearly understood that particulars for budget need to be pointed out and expenditure to be incurred are to be mentioned. This will help in producing a rough draft of budget.
B. Planned activities
Activities for budget are to be planned at the very beginning. This is because without an activity plan, budget could not be drafted. Plans help in deciding upon direction of budget and processes to be involved for budget formation.
C. Sales forecasts
Predicting sales for an intended budget is necessary because a budget is formed with aim of revenue creation (Huikku et al. 2017, p.435). This creates need to predict sales for budget that will help to have a rough idea regarding profitability of budget.
D. Current staffing levels and their costs
In order to help a budget to progress, employees are needed who will work based on an agreed pay scale. This creates need to stratify staff into levels of hierarchy where talented and skilled staffs will form part of upper hierarchy. Their pay scale will be high because of their productivity and experience. These points need to be carefully considered while creating a budget.
E. Overhead costs
Budget formation involves several overhead costs like premises, equipments, utilities and other necessities. These costs could be said to be extra but necessary. This creates need for maintaining a separate amount of money for them (Newcomer et al. 2015, p.636). This amount of money is to be clearly mentioned while formulating a budget so that it may be accessed when needed.
F. Supplier data
In any budget, raw materials are needed for proposed processes. In order to gather raw materials, supplies are to be contacted. This creates need for gathering supplier data so that good quality raw materials could be purchased at minimum available costs. This will make budget cost effective.
G. Organisational sales forecasts, strategies and targets
Target for organization is essential for formation of proper budget that will help in achieving organizational goal and objectives. Strategies are to e identified while formulating budget so that they may help in attainment of organizational goal and objectives. Sales forecasts is also important for organizational budget so that purpose of formulating budget is not defeated and healthy profits are made when budget is put into action.
H. Industry and market trends
A budget is based on certain industry. This create need to identify industry’s market trend. Proper identification of this will lead to formation of a consolidated budget that will be less likely to fail. For example, in case of toy industry where it is a “Red Ocean”, budget will significantly differ than that in case of a “Blue Ocean”. Reason for this difference is that Blue Ocean is more conducive than Red Ocean because of Red Ocean being highly competitive (Eskandari et al. 2015, p.139).
Task 2: Identifying and planning for potential variances
|The type of variance:|
Reason for the potential
|Sales volume||Sales||While formulating budget, sales volume could be predicted. This prediction may vary significantly when budget is actually initiated and is monitored||In order to prevent this variance, it is essential that proper marketing strategies be adopted that will help in boosting of sales volume|
|Sale price||Cost||While formulating budget, sale price could be predicted. This prediction may vary significantly when budget is actually put into action||In order to prevent this variance, sale price of similar products or services needs to be studied and then decision should be made|
|Profit volume||Profit||While formulating budget, profit volume is roughly predicted. This prediction may vary significantly when budget is actually put into action||In order to tackle this variance, good quality raw materials need to be purchased at a cost effective price. Sale price should be ideal and sale volume should be healthy through efficient marketing of products and services|
|Net profit||Profit||While formulating budget, net profit is roughly calculated. This prediction may vary significantly when budget is actually put into action||In order to minimize this variance, cost-benefit analysis must be carried out for project|
|Labour cost||Labour||While formulating budget, labour cost is roughly predicted. This prediction may vary significantly when budget is actually initiated||In order to negate this variance, cheap skilled labour should be arranged. According to budget requirement, labourers should be employed|
|Labour efficiency||Labour||While formulating budget, labour efficiency is roughly predicted. This prediction may vary significantly as budget progresses||In order to tackle this variance, labours should be provided periodic rest between work. Sunday must be declared as a holiday for them to refresh their body and mind|
|Material usage||Material||While formulating budget, material usage is roughly predicted. This prediction may vary significantly when budget progresses||In order to tackle this variance, extra materials should be purchased and stored. |
This will prevent from hindering of progress of budget due to scarcity of required materials
|Material cost||Material||While formulating budget, material cost is roughly calculated. This calculation may prove incorrect when budget progresses||In order to mitigate this variance, proper survey needs to be carried out regarding cost of required materials in both near and far away markets|
|Staff cost||Fixed overhead||While formulating budget, staff cost is roughly calculated. This calculation may vary when budget is initiated||In order to tackle this variance, staff requirements should be decided and pay scale of staffs should be fixed. Staffs should be appointed according to requirement of budget|
|Overhead cost||Overhead||While formulating budget, overhead cost is merely calculated. This calculation may vary as budget progresses||In order to negate this variance, a separate amount of money should be maintained. Moreover, funding sources could be arranged|
Task 3: Setting a realistic budget
A. Sources of internal and external information
|Sources (internal and external) - summary of gathered information and key points|
|Source 1||Internal reports like sales reports and financial statements have revealed that sales rate is average, assets value is greater than liability value and net profit increases as years pass|
|Source 2||Market condition is external source of information that has revealed that existing market has become Red Ocean and that there is need to search for emerging markets that have Blue Ocean condition|
|Source 3||Employee interaction is an internal source of information. This has revealed that they have not been too much comfortable with work because of lack of technological tools and aids|
|Source 4||Customer records are internal sources of information. It has been revealed that orders placed by customers have been huge in the past and they prefer to make online payments rather than paying in cash|
|Source 5||Existing competitors are external sources of information. It has been found that they are functioning quite well, there is fierce competition and big players have grabbed big market share|
B. Consulting for checking assumption
|Stakeholder or stakeholder|
|Date of meeting:||03/10/2019|
|Record what you have done|
to secure their agreement
for the budget and be sure
that it includes realistic
assumptions and forecast:
|They have been kept updated regarding progress of budget. All budget details have been honestly portrayed to them. This has helped in securing their agreement for budget. It is expected that they will continue to support our budget till its completion|
|Stakeholder or stakeholder|
|Date of meeting:||07/10/2019|
|Record what you have done|
to secure their agreement
for the budget and be sure
that it includes realistic
assumptions and forecast:
|Necessary papers have been mortgaged to acquire their trust. Furthermore, budget details including predicted profitability have been clearly explained to them so as to secure their agreement for the budget. It is expected that they will continue to fund for budget as long as budget progress healthily|
C. Explanation for budget
This budget is a kind of conglomeration of miniature budgets that are synthesized as a wholesome to create an overall budget. Master budget contains components like cost overhead, labour cost, material cost, sales volume, profits and staff welfare.
Actual budget within master budget and conformation to organizational requirements
Actual budget had been formulated on a small scale basis that targets the marketing section of business. It is a part of master budget where it lays down principles for effective marketing strategies and cost effectiveness to be achieved while following marketing-related activities. As far as organizational requirements are concerned, actual budget has been aligned with them. It has been decided that marketing will particularly aim at expanding market, penetrating market, brand promotion and boosting sales that are major objectives for this organization. In order to achieve this, amount of money to be spent on marketing products has been clearly stated in budget and marketing strategies to be followed has been clearly delineated.
Task 4: Managing budget
A. Organisational financial governance and compliance requirements
These requirements affect a budget hugely. Whenever a budget is formulated, requirements of organization are kept in mind. For the marketing budget, costs and expenditure are kept at an average rate. This is because organization does not want to spend too much upon marketing. While printing advertisement in newspaper, content has been kept brief and small so that less expenditure will occur. UK Aid Direct budgets is a compliance standard that dictates process of making calculations for expenditure of grants (Ukaiddirect.org, 2019). This directive has been referred to while monitoring costs and expenditure of budget.
B. Monitoring expenditure
Spending that has occurred for set budget has been done weekly according to frequency of organization’s spending plan. This kind of spending will help in keeping record of spending on a regular basis that will inform extent of expenditure incurred in budget on a weekly basis. There had been an instance when expenditure was needed to be done for two consecutive days. This act was barred and concerned official was asked to manage till end of week.
C. Organisational processes and guidelines for reporting against set budgets
Organizational process and guidelines are fixed when one is to report against set budgets. Most of the organizations follow similar procedures with minimum variation. Outline of budget was communicated to all relevant staffs as soon as it was formed (Sheffield.ac.uk, 2019). This kind of monitoring had helped in proper communication of budget details. Furthermore, budget tasks have been delegated to ‘named’ individuals so that people may know who had received which kind of responsibility.
Task 5: Identifying and addressing variances to budget
|Variance identified:||How it was identified:||Investigated yes/no and why:||Action(s) taken to address variation|
|Labour efficiency||By supervising work of labour on a daily basis||No, it was not investigated because drop in labour efficiency is a common occurrence||Labours were given oral warning. They were informed that their salary might be deducted if they further fail to maintain efficiency|
|Overhead cost||By calculating overhead cost expenditure once a week||Yes, it was investigated because this condition was leading to reduction of available money for performing budget-related activities||Draft of overhead list was refreshed and further arrangements for extra financing was carried out (Lau, 2015, p.17)|
|Sale price||By carrying out benchmark analysis||Yes, it was investigated because it led to reduction of revenue generation||Market analysis of similar products were carried out to decide upon ideal price|
|Net profit||By calculating each type of income and expenditure||Yes, it was investigated because it was threatening profit generation||Weekly updating of financial statement was made mandatory|
|Staff cost||By reviewing salary structure of staffs||No, it was not investigated because this condition is not of much concern and can be solved easily||Work pressure of staff was reduced and job description was revised. Needless job positions were abolished (Andrijasevic and Sacchetto, 2017, p.62)|
Task 6: Proposing realistic revisions for budget
|Budget revision:||What evidence supports the need for the revision:||Senior management person reported to and outcome:|
|Overhead costs||Suddenly overhead costs increased and started to spin out of control (Shelton and Sharma, 2017, p.3). Excess money had been spent in large amounts on a frequent basis||Finance Manager has been reported to. He had promised to investigate the matter and it is currently under investigation|
|Staff salary||Staffs have revolted against work pressure and have informed that their present salary does little justice to their job responsibility||Board of Directors have been reported to. They have decided to specify job roles and have agreed to increment salary based on job performance|
|Marketing expenses||Suddenly it has been found that expenditure on marketing purpose has escalated and more than allocated budget money is being spent||Marketing Manager has been reported to. He has asked for revision of budget and had decided to restrict marketing activities to an ideal level (Tonkova, 2016, p.170)|
|Sales volume||Recently, there has been a drop in sales volume and comparatively less number of customers have turned up in past few weeks||Sales Manager has been reported to. He has agreed to talk with Marketing Manager and shortly come up with a plan to boost sales volume|
Task 7: Providing budget-related information
|Budget and information report 1:||The budget on marketing activities has been successfully formulated in a consolidated manner. According to agreement, marketing budget was formulated within a week of formulation of ‘financial budget’. Each aspect of marketing has been identified and related costs have been clearly mentioned. Organizational needs, goal and objectives have been aligned with marketing budget (O’Keeffe et al. 2016, p.430). An average expenditure for marketing activities had been formed. Activities like print media advertisement and online advertisement have been stratified into their subparts. Most of the money has been allocated to newspaper advertisements because people have habit of going through newspaper on a regular basis.|
|Stakeholder presented to:||Marketing Manager (internal)|
|Outcomes:||There has been some glitches in marketing budget like some activities have incurred extra expenditure while some activities have received less focus contrary to what had been decided before. Overall, budget limit has been maintained as it had not been crossed|
|Budget and information report 2:||Sales budget had been formulated with much consideration. At the very beginning, it had been formulated. Last year’s sales had been compared with sales of previous years. This has helped in drawing necessary conclusions. Even business model has been reviewed in order to find out what changes have affected sales. External forces like competitive edge, market competition and threat of new entrants have been closely studied and taken into consideration while forming budget (Armstrong et al. 2018).|
|Stakeholder presented to:||Sales Manager (internal)|
|Outcomes:||It had been found that sales budget had been upto the mark. Prediction regarding future sales within one year has been more or less perfect. Budget is working quite well and is progressing according to plan.|
Task 8: Evaluating budget management
A. Sources of information used to conduct review
In order to conduct review regarding budget management, various sources of information like finance journals, magazines, governmental website, online journals and educational textbooks have been used. These sources of information have been selected because they contain valid information and could be trusted as genuine sources of information. Some of these are:
Governmental website: Governmental website of different nations has proved useful regarding reviewing of budgeting process. They have provided requisite information regarding which points need to be considered for reviewing (da Cruz et al. 2016, p.874).
Finance journal: This journal specifically covers all areas related to domain of finance. Within these journals, one sub-topic is ‘budget’. In order to gather a detailed information regarding budget, Global Finance Journal had been main focus of study. This journal specifically has helped in gathering information necessary for reviewing budget. Major points of reviewing had been revealed in this journal.
Magazine: Multiple magazines had been studied to gather information regarding reviewing budget. Detailed readings had helped in drawing upon review plan and had helped in gathering knowledge regarding process of reviewing budgeting processes.
B. Aspects of processes involved
Setting: Setting up a budget had been a hard task. It required multiple considerations from a variety of viewpoints. It required detailed study of budget examples. However, in the end, a consolidated budget had been formulated.
Revising: This part was typically hard. Formation of budget was in itself hard. Revising it proved to be harder. Original budget had to be carefully studied to find out loopholes in it. Not every loophole was explicit (Ippolito, 2017). Implicit ones had to be scanned out by minutely going through budget details over and over again.
Monitoring: Budget monitoring had been a huge responsibility. It required focus and concentration. Several issues had cropped up which took time to solve. Constraints of budget had to be maintained carefully.
Reporting: This has comparatively been an easy part. It plainly required collecting information regarding progress of budget. However, collecting information needed careful approach. It had been made sure that information so collected and displayed have been valid and no kind of unethical practice has been entertained while formulating budget reports.
C. Successful areas and reasons for success
Budget had witnessed a huge success in various areas like marketing strategy, profits, total expenditure and other relevant areas.Marketing strategies had been nearly perfect that had helped in boosting sales volume. Profits have witnessed a healthy growth in steady manner. Total expenditure as agreed in budget has not crossed the established boundary. Reason behind this huge success is that budget has ben formulated by benchmarking it against best budgets existing in industry (Boyabatlı et al. 2015, p.230). This kind of approach has helped in creating a consolidated budget that had taken care of each area mentioned within budget. Furthermore, extra reserve of money had been maintained for the budget that had helped in tackling issues of sudden and emergency expenditures.
D. Areas of budget for improvement and reasons for improvement
Though budget has been a huge success, there have been some gray areas in it. These areas have not been fully covered and have at times, created trouble. Marketing strategy though has been good overall, ran the risk of crossing its budget. Some of the activities have run uncontrolled because of which other marketing activities had to be cut short in order to remain within limits of budget (Mostenska, 2015, p.27). Staff cost had to be increased because of complaints by staffs regarding unjustified salary scale. This extra cost had been somehow managed by reducing expenditure in other areas of budget.
E. Recommending improvements for setting budget for next financial year
While setting budget for next financial year, following recommendations could be adhered to:
- Creating specific marketing strategies that will specify expenditure for each marketing activity
- Keeping welfare of staff in mind so that they may not complain regarding ineffective salary scale
- Identifying risks to budget and keeping risk management strategies ready for initiation as per requirement
- Maintaining a healthy repository of requisite raw materials
- Monitoring progress of budget on weekly basis