BSBFIM501

Manage Budgets and Financial Plans

Activity 1

1.

It is essential for the organizations to collect, file and maintain accurate financial records for following reasons:

• To assist in operating the business by measuring success or failure
• To determine all business aspects and target marketing and development
• To evaluate business practices to determine whether the adopted procedures and processes should be discontinued or avoided (Porter & Norton, 2012).
• To evaluate the performance level of the firm and take effective measures for betterment

2.

Managers and supervisors expect that company maintain budget and execute financial plan into the business to conduct the operational activities efficiently. The availability of the desired budget for execution of the operational activities is must for the managers and supervisors. Sufficient budget or financial plan should be allocated to each operational activity. All the staff should be educated regarding the roles and responsibilities of allocating budget to the resources and maintaining costs (Vemic, 2010). The financial plan or budget should include sufficient compensation for the supervisors and managers including bonus and incentives.

Different reports including financial statement reports can be used for financial planning in an organization. These reports include profit loss account, balance sheet statement, cash flow statement and creditors and debtors reports (Wang, 2010).

For preparing budgets or other financial budgets, the following process is adopted:

• Identification of needed data
• Identification of data sources
• Assurance of reliability and validity of data
• Classification of the data as per accounting principles
• Calculation of costs, profits, losses, breakeven analysis (Tracy, 2011)
• Determination of outcomes of data analysis
• Preparation of formal or informal reports on the outcomes
• Keep accurate and secure reports

5.

• Fixed budgeting
• Flexible budgeting

6.

Flexible budget allows changes to be made as this budget is useful for different production levels or capacity utilization. It is used to change the amount as per the activity level. This budgeting form can be easily modified according to the activity level attained.

7.

Contingency plans work to address the unexpected changes that may be possible in future. These plans are applicable in ‘What if’ scenario and avoid the disruptions in operating the business.

8.

Contingency may be possible due to uncertainties in any area or process of the business. Therefore, team work may be beneficial to get ideas from different processes and areas to make the contingency plan effective. The ideas from different people of team are effective to analyze the processes and procedures from wide perspective and get the better solutions. Team work is helpful to get innovative ideas to identify the contingencies and overcome these situations effectively (Melicher & Norton, 2011).

Activity 2

1.

The employees can be engaged in preparation of financial plans by allowing them to participate in the decision making. They should be allowed to share their ideas and opinions regarding their department to better relate it to the financial plans. Apart from this, performance measures of employees should also be incorporated to improve the processes throughout the business (Mayo, 2015). All the information should be disseminating to team members as they could understand the financial plan and provide their insights to make it better.

Employees should be involved in setting and monitoring the budget because they are close to the operations and processes as they can provide better information to make the budget in informative way. It enables to relate the existing situation with the budgets to make it real and achievable.

Responsibility accounting is the system of costing that is used to control the costs. In this system, responsibility is allocated to control costs. It is important for the firms to allocate authority to individuals to keep up their performance and control the costs of the business. It is accountability of an individual to adopt better practices which are useful to control costs and generate benefits for the company (Warren, 2012). It helps the firms to determine who is accountable for the lower performance as compared to the predetermined standards.

Cost centre is the business unit that is accountable for the costs that it incurs. The performance of a cost centre is assessed by comparing the budgeted and actual costs. The costs incurred by a cost center is aggregated into a cost pool and allocated to other business units. It includes location, person or item of equipment for which cost may be allocated and utilized for controlling the cost (Samonas, 2015). For example, cost center may be a location like department or person such as machine operator and an item of equipment like plant or machine.

Activity 3

1.

Cash flow budget can be important for a firm to manage the cash for conducting different operational activities smoothly. It ensures the business will have enough money on hand. it is significant to track the use and needs of the money in future. Maintenance of cash flow budget enables the firm to forecast the required money and evaluate the overall financial health of the organization (Pratt & Grabowski, 2014). If the firm does not prepare cash flow budget, it may get into the trouble due to not having the sufficient cash on hand to fund their operations.

2.

There is need to collect data related to cash inflows, cash outflows, overhead expenses and variable expenses from operational and production department, finance department and sales department. Cash flow budget can be prepared by using this information by recording the changes in cash flows.

3.

The budget is used to monitor work, performance, variation and team outputs by comparing budgeted and actual outcomes. Budget sets some standards for the activities including costs and profits. Based on this information, it is easy to compare the actual outcomes with the set standards that are effective to monitor work, performance, variation and tam outputs. It also provides variances between the actual and budgeted amount that depicts the favorable and unfavorable variations in the outcomes (Loughran and McDonald, 2016). On the basis of this, it is also effective to evaluate the performance level of the involved teams by analyzing the set and actual outcomes.

Activity 4

1.

1. Assets: Assets are the something owned by the company that may be useful to gain the future economic benefits. It can be fixed assets such as plant, furniture, equipments, vehicles, etc. while current assets like inventory, cash and cash equivalents, trade receivables, etc.
2. Liabilities: Liabilities are the company’s obligations that must be paid in future. It may be current liabilities such as short term borrowings, payables, etc. and non-current liabilities like debt (Marsh, 2012).
3. Expenses: Expenses can be defined as the outflow of money or assets as a payment. It is the cost experienced by the firm or paid out to the suppliers or for products and services obtained from other sources. It reduces the value of equity. It is the cost that occurs as operational activities during particular period of time.
4. Equity: Equity is the amount of the capital that is invested by the owners within the business. It is the difference between assets and liabilities.
6. Variance analysis: It is the quantitative investigation of difference between actual and budgeted or planned behavior. It helps the team operations to determine the achievement of the actual results and take effective measures next time for betterment (Lee et al., 2009).
7. The general ledger: It is the master set of accounts that provides summary of the transactions occurring within an entity. It is useful for team operations to ensure the proper reporting of transactions in the business and prepare financial statements and accounts.
8. A sales analysis report/budget report: This report records the sales volume of the company over time. It is used to determine whether sales are increasing or declining. it is useful to determine the sales trends and adopt effective practices to identify market opportunities and areas to improve the sales.
9. Variance analysis report: This report presents variance analysis by comparing the actual and set performances. It is used to compare the estimated costs or profits or budgeted items to the actual values for the same time period. It is used by team operations to identify gaps and take particular measures for improvement (DRURY, 2013).
10. The revenue and expenditure report/budget: This report/budget provides the information related to revenues and expenditures. It includes all the sources which provide the revenues and cause expenditures for the firm. Through this, team can generate the need of cash and operate the functions smoothly.
12. Management: Reports are made to the management because it helps them to assess the operational performance and take effective measures to improve the operational performance. With the help of this, the management makes also investment decisions related to new product development or expansion in new areas (Vernimmen et al., 2014).
13. Investors: Reports are made to the investors to inform them about the financial health of the firm. On the basis of the information given in reports, the investors evaluate the financial health of the firm and its ability to provide returns to make investment decisions (Brown et al., 2011).
14. Creditors: Reports are made to the creditors to inform them about the solvency and liquidity of the firm. Based on this information, creditors are able to make decisions related to creditworthiness of the firm and ability to repay the amount which they want to provide.
15. The government: Reports are made to the government to inform about the fairness and transparency in the business activity. On the basis of this information, the government determines the tax liability of the firm and ability to comply with the set rules and regulations.

4.

A financial report might provide the information related to all expenditures and revenues which are incurred in an organization during the specific period of time. Apart from this, all the assets and liabilities including current and non-current might be included in the financial reports to inform the stakeholders and users of the financial reports. In addition, changes in cash flows might be included in financial reports to determine the cash position of the firm in specific financial year. Changes in equity might be included in financial reports to inform about the changes in capital structure of the firm (Berk et al., 2013). Different financial ratios and percentage changes in financial parameters might be incorporated in financial reports to inform the users about the financial health of the company. In addition, trial balance reports might be included to list the debit and credit balances of all general ledger accounts at any point in time.

References

Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V. and Finch, N. (2013) Fundamentals of corporate finance. Pearson Higher Education AU.

Brown, P., Beekes, W. and Verhoeven, P. (2011) Corporate governance, accounting and finance: A review. Accounting & finance, 51(1), pp.96-172.

DRURY, C.M., (2013) Management and cost accounting. Germany: Springer.

Lee, A.C., Lee, J.C. & Lee, C.F. (2009) Financial Analysis, Planning & Forecasting: Theory and Application. Singapore: World Scientific.

Loughran, T. and McDonald, B. (2016) Textual analysis in accounting and finance: A survey. Journal of Accounting Research, 54(4), pp.1187-1230.

Marsh, C. (2012) Financial Management for Non-Financial Managers Strategic Success. UK: Kogan Page Publishers.

Mayo, H. (2015) Basic Finance: An Introduction to Financial Institutions, Investments, and Management. USA: Cengage Learning.

Melicher, R.W. & Norton, E.A. (2011) Introduction to Finance: Markets, Investments, and Financial Management (14^th ed).  USA: John Wiley and Sons.

Porter, G., & Norton, C. (2012) Financial accounting: the impact on decision makers. USA: Cengage Learning.

Pratt, S.P. & Grabowski, R.G. (2014) Cost of Capital: Applications and Examples, 5^th edn. USA: John Wiley & Sons.

Samonas, M. (2015) Financial Forecasting, Analysis and Modelling: A Framework for Long-Term Forecasting. UK: John Wiley & Sons.

Tracy, J.A. (2011) Accounting For Dummies. USA: John Wiley & Sons.

Vemic, M.B. (2010) Elaboration of Key Aspects of Financial Planning In Entrepreneurial Endeavours, Economics and Organization, 7(4), pp. 411 – 421.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A. (2014) Corporate finance: theory and practice. USA: John Wiley & Sons.

Wang, X. (2010) Financial Management in the Public Sector: Tools, Applications, and Cases. UK: M.E. Sharpe.

Warren, C.S. (2012) Survey of Accounting. USA: Cengage Learning.