Managing Financial Resources And Decisions

The Importance of Budgeting

Write an essay on “Managing Financial Resources and Decisions”.
 

Budget is anticipation and preparation of statements in order to plan and control the revenues and costs of products so that the business can achieve is desired goals. Master budget is a set of forecasted and planned financial statements and schedules prepared for the entire company (Ahmad 2015). On the other hand, functional budget is a statement of incomes and expenditures plan for the operating department of an organization.

Sales budget of an organization is an evaluation and measurement of the sales forecasted in terms of price and units that are considered by the products, geographical region, sales period and marketing channels (Lawson et al. 2015).

Selling and distribution expenses budget is a statement that presents the expected, forecasted expenditures related to salaries and commission to the sales department of the organization, and other marketing and sales related cost forecast like transportation charges, fright and carrier charges, warehousing or storage costs etc  is presented in this statement (Weygandt, Kimmel and Kieso 2015).

Research and development cost budget is presentation of the costs related to the research and development of products of the company. This expenditure is a non-recurring expenditure and is incurred before the start of manufacturing process for the design and development of the products (Ahmad 2015). This statement presents costs related to the cost of manufacturing, designing of products, labor costs, executive compensations etc are determined.

Production or manufacturing costs budget presents the planned and anticipated costs and quantities related to the production and manufacture of products in order to meet the supply and market demand in the industry so that the company can achieve its targeted goals. The statement also presents the units and costs of raw materials, work in progress limitations, labour costs in relation to production, cost of manufacturing machines and equipments are also presented (Lawson et al. 2015).

Capital budgets is an important functional budget statement as the entire operation of the business primarily depends on the capital structure employed or to be employed by the company (Boyabatlı, Leng and Toktay 2015). This statement presents the mode and structure of capital components that the company plans to employ for the operation of its business.

Apart from the above tools, administrative budget, labor budget, cash budget are also important tools that help in the decision making process in an enterprise. Hence, it can be said that the master budget helps the owner or entrepreneur in the decision-making process if the above stated parts of the financial and production budget is prepared and determined properly. 

Company XYZ limited

Sales budget

Third quarter 2016

Partiulars	Budgeted units to be sold	Budgeted sales price per unit ($)	Budgeted Total sales price
June 2016, Actual (assumed)	600	150.00	90,000.00
July 2016	750	150.00	112,500.00
August 2016	1050	150.00	157,500.00
September 2016	1000	150.00	150,000.00
Total for third quarter	2,800		420,000.00

From the above example it is observed that the forecasted sales budget for the third quarter month July is the lowest compared to other months hence the management can take steps to increase the sales units.      

Unit cost is the cost of one product produced and sold by the organization when it produces the huge number of same and identical units. The unit cost is determined from the variable and fixed costs of the products involved in manufacturing process (Javid et al. 2015). The fixed cost is a non-recurring cost that comprises of the cost of manufacturing equipments, plant or factory rent, research and development costs etc. whereas the variable cost comprises of direct materials, direct labor cost, and direct expenses in relation to production process. The following formula can be used for the computation of unit cost:

Functional Budgets for Operating Departments

(Total fixed cost+ total variable cost)/ Total unit produced

For example, company XYZ has direct material costs $1,000, direct labour costs $1,050, equipment cost $10,000, direct expenses $2,000 and units produced 2,000.

Total variable cost:

Direct material                                    $1,000

Direct Labour                                      $1,050

Direct Expenses                                  $2,000

Total variable cost                             $4,050

Total Fixed cost                                 $10,000

Units produced                                   2,000

Therefore, unit cost is ($4050 + $10,000)/ 2,000 = $7.025

Different types of pricing strategy are used by the organizations in order to sell the goods and services so that the revenue generation and profitability of the business can be maximized. The pricing strategies are also used to obtain the market share of the industry in terms of consumers’ demands and supply of the products (Chandar and Tchamkerten 2015). The different types of pricing strategy use in the business are as follows:

Premium Pricing is a strategy in which the owner fix the price of the product more than the price of competitors that can be used if the product is new in the market or unique to the consumers or it has some distinctive features (Crott et al. 2016).

The entrepreneur uses Penetration Pricing for the products by establishing low price in compared to the competitors in order to capture the market share and to attract the buyers. This strategy is used to make the products more saleable with lower sale price so that the business can sustain in the market and maximize its revenue in the long run (Javid et al. 2015).

Price Skimming is a process that is used by the owner as a competitive advantage to earn maximum turnover before the competitors offer similar or identical products. Under this strategy the pricing is fixed for the new and varieties of products by constant change in the design and technology to attract the consumers (Crott et al. 2016).

Psychological Pricing is commonly used by the producers and manufacturers that provides a small incentives to the consumers but makes huge psychological impact on their minds in order to purchasing the products for example, price of product at $199 will attract customers instead of pricing at $200 (Chandar and Tchamkerten 2015).

Payback is a period that is required to retrieve the “cost of investment” that is considered in the business operation so that the determination of profitability can be done. The payback period should not be longer as the longer recovery period implies the less or slow recovery of cost of investment that is not fruitful for the company’s growth and is computed by dividing cost of project by annual cash inflows (Orioli and Di Gangi 2015).

Whereas net present value is determined as the difference between the project outflows in the first year and the present value of cash inflows projected for a particular period (Winkler 2015).

Calculation of payback period for the data provided in the assignment:

$1,850,000/ $(250000+ 350000+ 500000+ 500000+ 450000)

=$1,850,000/ $2,050,000

= $0.902 year i.e. 1 year approximately

Calculation of NPV
Year	SG $	Discounting factor @15%	Present value
0	(1,850,000.00)	1	(1,850,000.00)
1	250,000.00	0.869	217,250.00
2	350,000.00	0.756	264,600.00
3	500,000.00	0.658	329,000.00
4	500,000.00	0.572	286,000.00
5	450,000.00	0.497	223,650.00
	NPV		(529,500.00)

From the above calculation, it can be interpreted that the payback period of the project as per finance assistant of Spring ltd. is around 1 year that is the expected period to recover the cost of company’s investment. While NPV determination shows that, the project is incurring negative NPV and the project should not be considered. However, in case of payback period, only the cost recovery period is measured and not the profitability hence, if the profitability is ignored then the company can go ahead with the project because the period of cost retrieving is quite decent that is one year. However, if the company is more inclined for profit earning then it should not take up the project as it is showing loss with the five years of cash inflows.

Sales Budgets and Forecasting

Trading Account is an initial part of the financial statements for an organization that discloses the gross profits or losses of goods and services incurred. Trading account is comprised of direct incomes, expenditures, and inventory for trading profit and loss determination during the period of accounting and transferred to the profit and loss account. The main purpose of the trading account is to measure the sales turnover of the products with the cost of goods sold including inventories (Brown 2016).

Profit and Loss Account is the second step of the financial statements that represents the net profit or net loss of the business in an accounting period and the balance of the profit and loss is transferred to the balance sheet statement of the company (Biddle 2015). Profit and loss account is prepared by considering all the indirect expenses and incomes on accrual basis of accounting along with recording the trading gross profit or loss and is prepared in two parts- above the line items and below the line items. Above the line items of profit and loss account consists of the incomes and expenses that are directly related to the business while below the line items are the appropriation of profits (Minnis and Sutherland 2015).

In the context of accounting, profit and loss accounting is also known as Income Statement that measures the financial performance of the enterprise at the end of the financial year. The income statement is prepared by recognizing the operating and non- operating incomes and expenditures for the determination of net incomes and losses (Bostwick, Lambert and Donelan 2015). Another difference is that the profit and loss account is prepared for the organizations involved in trading and manufacturing sector while income statement is prepared for the service sector and individuals.

Balance Sheet is a statement of financial accounting that represents the financial position of the enterprise at the end of the accounting period in order to measure the balance of assets and liabilities the company is employing. The purpose of the balance sheet is to disclose and obtain the information about the company’s total capital balance at the end of the accounting period and the values the “company owns and owes” which is a statutory requirement for the benefit of investors, shareholders and government (Yeh et al. 2016).

A. In the books of Famous Travels
Financial statement for the year ended 31st December 2015
Account Number	Particulars		Amount  SGD	Amount SGD
Profit & Loss Account/ Income Statement
410	Ticket Sales		3,500.00
401	Client Fees		100.00
	Total Income (A)			3,600.00
	Less: Expenditures:
501	Advertisement Expenses		1,000.00
510	Maintenance Expenses		350.00
520	Rent Expense		2,000.00
530	Utilities Expenses		450.00
	Total Expenditures (B)			3,800.00
	Net Income/ Loss (A-B)			(200.00)
Statement of Financial Position
	Assets
	Non- Current Assets:
120	Computer Equipment		1,250.00
130	Office Equipment		300.00
	Total non- current assets (A)			1,550.00
	Current Assets:
105	Account Receivable Hague’s Market		250.00
110	Account Receivable Yopp Co.		750.00
101	Cash		17,500.00
	Total current assets (B)			18,500.00
	Total Assets (A+B)			20,050.00
	Capital and Liabilities:
301	Matt William, Capital		20,000.00
305	Less: Matt William, Drawings		(500.00)
	Add: Net Income/ Loss		(200.00)
	Total Capital (A)			19,300.00
	Liabilities:
201	Account Payable First City Press	500.00
205	Account Payable Ken’s Office Supplies	250.00
	Total liabilities (B)			750.00
	Total Capital and Liabilities (A+ B)		20,050.00

The financial statement for Matt William has been prepared in accordance with the “Singapore Financial Reporting Standards” and consisted of income statement/ profit and loss account and statement of financial position (Bostwick, Lambert and Donelan 2015).

The above financial statement prepared for the travel agency owner who is a single shareholder of his company, therefore capital is measured by considering the investment by Matt William, drawings and net loss incurred during the year (Yeh et al. 2016).

B. In the books of M/s Zara Textiles
Financial Statement for the year ended 31st December 2015
	Particulars		Amount  SGD	Amount SGD
Trading Account
	Sales (A)			3,686,000.00
	Less: Cost of goods sold
	Opening Stock		63,650.00
	Textile Purchases		2,256,000.00
	Carriage Inwards		178,200.00
	Wages		325,000.00
	Total cost (B)			2,822,850.00
	Gross Profit/ (Loss) (A-B)			863,150.00
Profit and Loss Account
	Gross Profit b/d (A)			863,150.00
	Less: Indirect Costs during the year
	Salaries		104,000.00
	Rent		126,000.00
	Printing and Stationery		74,650.00
	Advertisements		86,000.00
	Total Indirect Costs (B)			390,650.00
	Net Profit/ (Loss) (A-B)			472,500.00
Statement of Financial Position
	Assets
	Non- Current Assets:
	Office Building		423,450.00
	Machinery		569,000.00
	Motor Vehicles		210,000.00
	Total Non- Current Assets (A)			1,202,450.00
	Current Assets:
	Trade Debtors		208,000.00
	Cash		26,000.00
	Bank		119,000.00
	Total Current Assets (B)			353,000.00
	Total Assets (A+B)			1,555,450.00
	Capital and Liabilities
	Total Capital:
	Capital			250,000.00
	Retained Profit		652,950.00
	Add: Net Profit		472,500.00	1,125,450.00
	Total capital employed (A)			1,375,450.00
	Liabilities:
	Trade Creditors (B)			180,000.00
	Total Capital and Liabilities (A+ B)		1,555,450.00

The above financial statement has been prepared in accordance with the “Singapore Financial Reporting Standards” and on accrual basis of accounting.

The format of financial statement differs in both the task (A) and (B), because the financial statement in first task has been prepared for a sole proprietorship business engaged in providing travelling services, hence trading account for the same cannot be prepared. Whereas in case of second task the financial statement prepared is for a company engaged in textile manufacturing business that involves in manufacturing and trading business and therefore trading account is a first step of financial statement that is to be prepared.

Computation and analysis of ratios based on the financial statements of Xylo Pte Limited for the financial years ended on 31^st December, 2013 and 2014:

Calculation of ratios
Financial statements of Xylo Pte Ltd
For the year ended 31st December
			2014	2013
1	Gross Profit Ratio:
	Gross Profit (A)		208,000.00	180,000.00
	Net sales (B)		836,000.00	784,000.00
	Ratio = A/B*100		24.88	22.96
	Analysis:
	This states that the company is earning a gross margin of 24.88% in 2014 and 22.96 in the year 2013. It implies that the company can decline its sales price by 24.88% and 22.96% respectively.
2	Net Profit Ratio:
	Net Profit after tax (A)		68,000.00	52,000.00
	Net sales (B)		836,000.00	784,000.00
	Ratio = A/B*100		8.13	6.63
	Analysis:
	Net profit ratio interprets the total profit earned by the company in terms of percentage. High percentage of net profit indicates the efficiency of company to generate total profit.
3	Return on Capital Employed:
	Earnings before interest and tax (A)		116,000.00	100,000.00
	Capital Employed (Total assets- total current liabilities) (B)		632,000.00	636,000.00
	Ratio = A/B*100		18.35	15.72
	Analysis:
	Return on capital employed states the efficiency of earning on the cost of capital invested by the company. In the given case, return on capital shows the efficiency of earning on capital, as return on both the years is high.
4	Current Assets Ratio:
	Current Assets (A)		296,000.00	340,000.00
	Current Liabilities (B)		184,000.00	260,000.00
	Ratio = A/B		1.61	1.31
	Analysis:
	Current ratio of a company states the availability of working capital funds in order to meet the obligations and it should be more than one. In case of Xylo ltd., the current ratio is above the industrial standards and hence it is efficient in paying off the current liabilities.
5	Quick Assets Ratio:
	Current Assets- Inventory (A)	128,000.00	192,000.00
	Current Liabilities (B)		184,000.00	260,000.00
	Ratio = A/B		0.70	0.74
	Analysis:
	Quick Assets Ratio states the efficiency of an organization in meeting its liabilities excluding inventories and this ratio should also be more than one. In the given case, the ratio is less than one in both the years 2013 and 2014; therefore, the company is required to improve its working capital funds.
6	Trade Receivable Period:
	Average Accounts Receivable (A)	150,000.00	92,000.00
	Total sales per day (B)		2,290.41	2,147.95
	Period in days(A/B)		65.49	42.83
	Analysis:
	Trade Receivable Period is the period that indicates the length of the credit period a company can allow in terms of credit sales. From the given calculation, it can be observed that the company can allow around 65 days of credit in 2014 and 42 days in 2013.
7	Trade Payable Period:
	Total Purchases (A)		648,000.00	636,000.00
	Average Accounts Payable (B)	332,000.00	260,000.00
	Period in days(A/B)		1.95	2.45
	Analysis:
	Trade payable period determines the “number of days” a company is paying off its purchasers or creditors. The above calculation shows that the company was paying off its creditors in 2 days in the year 2014 and 2.5 days in 2013 (approximately). The information that are required by different decision makers are the elements of financial statements, that is profit and loss account elements, cash flow information, capital structure, profit earned, assets and liabilities and other relevant information (Im and Choi 2015).

Ratio analysis helps in decision-making process as it involves different types of components in the calculations. The ratio analysis implies the results and comparisons in terms of percentage and therefore it becomes easy to make decision for the investors and users of annual report (Bhatia 2015).  

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