Budgeting Essay Example

14Accounting

Budgeting

Lecturer:

Preparation of income statement and balance sheet

WB Events

statement of comprehensive income

as at 30 June 2013

sales revenue

Cost goods sold

Gross Profit

Less op expenses

Gen operating expenses

Depreciation

Dividend paid

Total operating expense

Net profit

WB Events

Balance sheet

as at 30 June 2013

fixed assets

Accumulated depreciation

NBV Plant

current assets

Cash at bank

Inventory

Total C assets

Total assets

current liabilities

Accounts payable

Net assets

Financed by

Share cap

From the WB income statement and annual report

a) Gross Profit = 10,500

b) Net Profit = 3,610

c) Current Assets = 4,100

d) Non-current Assets =9,980

e) Total Liabilities = 2,300

f) Total Shareholder’s Equity = 11,780

  1. Potential readers of annual reports

The potential user of the company’s annual report are as follows;

Investors

The company investors both current and potential investors are interest in information contain in annual report (Chordia, 2008). The company current investors uses annual report to obtain and evaluate the company financial performance in order to assess the effectiveness of realizing their predetermine business objectives and earn dividends. Potential investors uses the information in annual report to assess the company’s profitability, economic and financial stability to evaluate whether they should invest in the company.

Management

The company’s management uses the annual report to determine the performances of the company and provided corrective measures to realized shareholder objectives. Management asses the corrective measures on the business to enhance efficiency in its operations.

Financiers

Financiers are interested in the company’s information in annual report to assess the company’s credit worthiness as depicted in the credit rating to enables them to determine whether they should finance the company or limit their credit to the company.

Government agencies

Government agencies are interested in financial information in order control the company’s taxation policies on the basis for national income statistics as well as regulating the company’s activities.

  1. Information contained in annual report

Annual report contains detail description of company information both financial and non-financial (Clyde Stickney, 2006). The information in company annual report is sequentially described according to the specific directives such as director’s report, financial statements, and governance report.

Financial statement contained in annual report provides the company’s financial performances over the financial period. This information assist the users to assess the company’s financial condition and performance thus making valid investment decision.

Director report in the annual report provides specific investment and managerial information on the company’s profile. This information reveals the company’s critical investment decisions.

Profitability ratios

Profitability ratios are ratios used to determine the company’s aptitude in making profits in relative of the equity, turnover and assets. Profitability ratios measure the business entity’s ability in generating earnings and the cash flows in relative to the company’s investment.

Return on assets

Return on assets ratio is used in assessing the company’s profits relative to the average total assets employed in making profits (Clyde Stickney, 2006). The higher return on assets ratios indicate that the company operates efficiently in generating earnings while lower ratios discloses poor efficiency or the competitors efficiency in strategic ways that earnings as compared to the company’s profitability on the assets

Budgeting 1BudgetingReturn on assets =

C Crown Limitedumn1

Total Assets

5,872,530

5,023,775

4,969,121

Return on Assets

From the return on assets graph, Crown Ltd reveals an increasing trend of return on the company’s assets from 7.79% in 2010 to 8.10% and 10.55% in 2011 and 2012 financial years. This describes that the company is efficient enough in utilizing its assets to generate earnings hence it is considered viable for investment.

Gross profit margin

Gross profit margin portrays the company’s gross profit in relation to the sales revenue. It shows how well the company converts inventory into income through sales (Clyde Stickney, 2006). The higher values of gross profit margin portrays that the company earns more income for every dollar of revenue which is more favourable since extra earnings will be available to meet operating costs.

Gross profit marginBudgeting 2 =

C Crown Limitedumn1

Gross Profit

Sales Revenue

2,808,870

2,409,241

2,342,248

Gross Profit margin

According to the Crown Ltd gross profit margin, The Company show an increasing trend of converting its inventory in to cash for 20% in both 2010 and 2011 and increase to 26.22 in subsequent year 2012. This unveils that the management have effective measures that ensures that company inventory is converted to cash to meet the operating expenses.

Net profit margin

The company’s profit margin is an accounting tool that assesses the company’s financial health in regards to earning capacity (Alisdair McGregor, 2013). This ratio shows the company’s inbuilt that indicates the efficiency of capturing the amount of surplus which is generated for every unit of the product or services the company sales.

Budgeting 3Net profit Margin=

C Crown Limitedumn1

Sales Revenue

2,808,870

2,409,241

2,342,248

Net Profit margin

From the Crown Company net profit margin describes that the company has increasing trend in generating revenue from sales from 16.54% in 2010, 16.90% in financial year 2011 to 22.07% in financial year 2012. This describes that the company is effective in enhancing higher return attributable to shareholders thus good for investment.

Return on investment

This ratio describes the earning power of company’s equity in generating revenue. Return on investment measures the net income to the average company’s capital employed.

C Crown Limitedumn1

Capital employed

3,374,750

3,260,360

3,419,305

Return on Investment

From the above return on investment ratio describes that Crown Ltd has increasing trend on earning generated from the capital investments. Crown Ltd depict an increasing efficiency in utilizing its invested capital to generate earning from 8.55% in 2010 to 10.305 and 15.21% in 2011 and 2012 financial years. However this shows that Crown Limited is viable for investment.

AnalysisTrend

Trend Analysis

Breakfast

Total Revenue

Budgeting 4

e) Gross Profit Margin

Gross profit

Budgeting 5

f) Labor Cost

Budgeting 6

g) Net Profit Margin

Budgeting 7

  1. Internal and external factors that could contribute Variance

1. Internal factors

1. A Poor forecast.

The company might have used poor forecasting techniques that consider the tome value of money at present years in projecting the revenue and expense to be incurred (Alisdair McGregor, 2013). Instigate on the relevance of the employed forecasting tool by the practitioner in order to ascertain the adequacy of the tool.

1. B Errors in estimation.

The financial analyst might have entered wrong figure in calculating the forecasted revenue and expense and thus emergence of variance was eminent. Performance test of detail in order to ascertain the relevance of the errors and to consider whether the errors are fraudulent or innocent

1. C Negligence.

The management might be reluctant in following the budget estimates and also ascertaining the time frame to beat in order to realize the budgeted profit. In this regards, reluctant on the side of management leads to variances whether adverse or favorable since what is expected to be followed in order to realize the set goals is ignored, Perform a forensic investigation on the subject matter.

2 External factors

  1. Inflation and adverse economic growth

Rise of inflation renders the economy stunted and makes companies to close some of its production operation or reduce the numbers of goods to be sold (Chordia, 2008). In this regard, the budgeted estimates will not be realized and thus there will be emergence of variances. Check on the general economic condition as well as perform cross sectional and trend analysis of the company in current economic conditions.

  1. Adverse competition

Adverse competition will make the busy not to realize its desired end result since, their competition will make their product more affordable and pleasing to the customers hence reducing the level of sales since, the company will not reduce beyond the break-even point. In this regards, there will be emergence of variance either favorable or adverse from the actual figures and the budgeted one, consider the performance of the competitor and ascertain the efficiency of their marketing strategy.

  1. Government policy

The government might pass a law that will affect the general performance of the company and hence making the company not to realize its objectives as well as budget attainement.This will create variances

B. control Measures

The budget committee should review the appropriateness of the forecasting tools in order to ascertain the relevance of the tool to the business and whether it fits the general economic condition in forecasting the future revenue and expense to be incurred by the company (Clyde Stickney, 2006). This will go hand in hand together with the experience of the financial analysis and thus, a person with good budgeting skills should be assigned the job in order to get rid of errors in budgeting as well as guaranteeing on the accuracy of the forecasted data.

C. Recommendation for improved budget management

1. Budget formulation

The budget committee should formulate the budget by coming up with realistic budget estimates. This is achieved by considering the goals of the company as well as ascertaining gm the general economic condition that will affect the achievability of budget estimates And concluding on factors to be understating incase of adverse economic situation that might affect the achievability of the budget (Chordia, 2008).

2. Budget review

Once a good budget has been formulated, it is advisable that a review should be made after a certain period. This will aid in checking whether the planned budget is as planned and incase of any deviation. Corrective, ensure to be undertaken in order to reduces chances of variances.

3. Budget coordination

Each department in an organization should contribute in budgeting process. This will help in providing clear estimates of how each department is going to spend and what it requires. Brainstorming will hence aid in generating a conclusive budgeting with minimal errors or deviation.

Importance of communicating the budget objectives

Budget achievability

Budget can easily be achieved where members of the staff clearly understand the financial objectives of the company within a given financial period and what is expected from them in ensuring that the desired budget objective is achieved, Involving staff ensures that a clear set of objectives is well understood by all staff in every department and thus there will be enhancement of mutual benefit as far as the company goals and objectives is concerned.

Timeline awareness

Communicating the budget will enhance time awareness on budget achievability and thus avoid variances in budget since; the desired end result is achieved within the stipulated tine frame. In this regard, staff will aware of the budget estimates and time it takes for the budget to be completed (Alisdair McGregor, 2013). Good communication skills reduce conflict and misunderstand among staff of the organization and the budget committee. This will as a result lead to easy budget attainment and reduces variances in budgeting.

Ways of communicating the budget

1. Company news letter,

Budget can made available to all staff through company news letter and thus each worker will easily access the budget and ascertain the relevance of the budget and what is expected of them in budgeting.

2. Internal memo.

The budgeting committee through the department managers will write a memo of the budgeting participation by entire staff member s and thus each worker will have access of the budget as well.

3. Electronic billboard

The company might be having an electronic bill board within the company premises and thus the budget can be made available easily to every staff for comprehending and providing feedback if possible.

References

Alisdair McGregor, C. R. F. C., 2013. Comparability analysis on financial statements . In: s.l.:Routledge, p. 113.

Chordia, T. R. R. &. S. A., 2008. Liquidity and market efficiency. Journal of Financial Economics, pp. 249-268.

Clyde Stickney, R. W., 2006. Financial Accounting: An Introduction to Concepts, Methods and Uses. In: s.l.:Cengage Learning, p. 317.