Zero-Based Budgeting for Nisa Retail Ltd

This assignment involves a comprehensive study on zero-based budgeting (ZBB) as a preferred corporate strategy. It focuses on eliminating unproductive spending and utilizing resources efficiently for cost control. The case study recommends Nisa Retail Ltd to create multiple budgets using ZBB, including cash budget, capital budget, manufacturing budget, and sales budget. Additionally, the report suggests implementing accounting tools such as financial governance, benchmarking, and KPIs to manage financial risk and achieve sustainable growth.

Management Accountant

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
PART B...........................................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
In the rising competition level in the corporate world, companies are subjected with
various financial turbulence i.e. sudden rises in the cost driven by high rate of inflation,
increasing cost of borrowing, monetary requirements to purchase new technology and others.
Nisa Retail Ltd is a small sized independent retailer based on UK and operating through its
convenience stores as well as small-sized supermarkets. This assignment lay emphasizes upon
different kinds of budgetary tools that Nisa Retail Ltd can choose to design their own budget.
Apart from this, in order to combat the situation of financial turbulence, the study will assess
various management accounting tools like key performance indicators, financial governance and
others. Using such techniques, an establishment can overcome financial problems and gain long-
term success.
PART A
To: Line manager
From: Management Accounting Officer
Date: 16th March 2018
Subject: Budgeting, types of budget and various budgetary methods
Introduction
The report aims to inform about the meaning and significance of budgeting for the future
growth and success. It will also provide a clear explanation of various budgeting methods along
with their implications on the business performance.
Meaning of budgeting
Budget is referred to a financial statement that provides estimation of revenues and
spending for a specified period of time. A budgetary statement predicts the financial position of
the company for the prospective period. It is used by companies as an internal managerial tool
that facilitates executives, departmental heads and others in exerting sound control over daily
operations and keeps cost under the strict control and supervision so as to attain budgetary goals.
It also helps in performance assessment and measurement because budget sets a benchmark for
the evaluation of actual performance and takes preventing measures.
Explanation of different types of budgets
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In the practical corporate scenario, there are number of budgets designed by the
companies incorporating varied goals. Some of the important tools that Nisa Retail Ltd needs to
prepare are explained underneath:
Cash budget: It is a budget that informs managers about the future cash incoming and
outgoing during a specific period. The budget accumulates three important sections that include
cash receipts, its disbursement and net cash surplus or deficit (Miller, 2018). In context to Nisa
Retail Ltd, this budget is helpful to determine its cash income from customers while spending
plan covers expense on material purchase, labor and other operational spending. Excess of cash
inflows over outflow is called net cash balance. It helps firm in advance planning for managing
sufficient cash money in the business for liquid availability.
Sales Budget: This budget, as its name, present estimation about expected sales revenue
and known as backbone of the entity. The budget helps in determining the sales quantity, selling
price and discounts that will be offer to customers and inform Nisa’s managers about net sales
revenue.
Production budget: It is designed considering sales targets and stocking level that needs
to be maintained. It covers cost for the resources requirement of material, labor and other direct
overheads to produce required quantity of units to meet the forecasted demand (Arnold and Artz,
2015).
Capital expenditure budget: It predicts the expected investment in the long-lived capital
project such as purchasing fixed assets like equipment, machinery, plant, developing new
product and expanding existing product line. This budget creation helps to make excellent
financial plan so as to satisfy financing requirement for the investment projects.
Explanation of alternative budgeting methods, their merits and limitations
Developing budget is of key importance for the Nisa Retail Ltd that helps to assure
financial success. Budgetary planning help firm keeping strong control over the spending and
manage sufficient liquid availability. Various budgeting method by which firm can prepare
budget are explained here as under:
Zero-based budgeting: It is a popular budgeting method which examines every cost to
assess their requirement and necessity in the business (Lauth, 2014). The method justifies every
component incorporated in the budget and avoids spending on unnecessary activities.
Merits:
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 It provides accurate prediction about operational cost and future revenues considering
necessary adjustments regarding inflation and other factors.
 It helps in creating a perfect resource allocation basis.
 It helps eliminating redundant business activities of Nisa Retail Ltd that are considered
unproductive.
Limitation:
 Lacking managerial expertise bring hurdles in budget creation
 Need lengthy time in budget creation
 Costly method
Incremental budgeting: The method just evaluates Nisa Retail Ltd’s historic year’s
budget and adds few percentage or value in the last year’s targeted value to set current year’s
goals (Frow, Marginson and Ogden, 2010).
Merits:
 Easy way of budget creation because it requires few amendments
 Low preparation cost
 Less possibility of conflict among workers
 Maintain cooperation and coordination among all divisions
Limitation:
 Encourage spending level every year
 Does not evaluate all the activities rigorously & continuous the same resource allocation
basis
 With the change in market, budgeting priorities may change due to which, it is unlikely to
have practical or real-life significance (Jordan, Yusuf and Hooshmand, 2017).
 Budgetary slack promotes management by exception
Responsibility budgeting: In this method, budget is created by the responsibility centres including
cost centre, revenue centre and profit centres. Cost centre creates spending plan and set maximum limit,
revenue centre set targets for minimum revenue whereas profit centre aims to maximize profit through
negotiation with material supplier and laborers and tight controlling over daily expense (Miller, 2018).
Merits
 Helps to minimize all the controllable cost elements and maximize revenues of Nisa
Retail Ltd to attain high profit
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 Helps in decisive policy formulations and actions like fixing selling price, cost-
contingency plan and others
Limitations:
 Do not pay attention to the uncontrollable cost while they also affect profit
 Its implementation requires sound structure with a clear framework of delegation of
responsibilities and reporting.
Implications of budget on behavior in an organization
Budget may have positive behavioral implications on people because it aligns individual
goals with the organizational goals. It will help Nisa Retail Ltd in motivating people to bring
excellence so as to achieve goals. Moreover, participation of departmental managers in the
participative budgeting motivates them and they feel happy as they are considered to be an
important asset of the organization. It promotes creativity, employee performance and boost their
morale. On the other side, negative variances can create adverse impact because such worker is
treated as poor performer. Less managerial support disappoints workers and develop adverse
attitude. Competition among various departments of Nisa Retail Ltd for scarce resources increase
inter-departmental conflicts as managers fights each other for power & recognition.
3 Pricing Methods
Penetration Pricing: This is the technique under which the firm presents lower prices
over the securities in terms with gaining the quick capital collection. However, this is the
strategy which will be implemented by the professionals as on the new launch of the products
and services in the market. However, there are several advantages and disadvantage such as:
Advantages:
 This strategy helps in preventing the competition in the market as per the low prices of
share being offered by the firm which prevents the new entrants in the firm.
 It facilitates the firm in creating the dominance in the market (Pandey, Mehta and Roy,
2017).
Disadvantages:
 It will be non-beneficial as the firm will have reduction in the consumers.
 It provokes the price war in the industry.
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Psychological pricing: This is the psychological techniques on which the prices of the
products and services will be set on the basis of slight reduction from the round off total
(Parameshwaran and et.al., 2017). Therefore, it has been analysed and assumed by the
professionals that the consumers will have adequate responses and reaction towards the prices of
the products which will be quite satisfactory and convenient in psychological terms.
Advantages:
 It is beneficial in creating the non-rational pricing as well as in appropriate control over
the transactional activities in the business.
Disadvantages:
 It becomes complicated to the cashier in terms of calculating the total amount to be
charged from the consumers.
Price Skimming: This the pricing technique on which the firm present the higher prices
over the newly launched product and then after some time they reduce the price or stop the
production of such products (Debowska and Boduszek, 2017).
Advantages:
 It is the most profitable in context with having the adequate gains over the newly
launched product as to recover the costs made over it.
Disadvantages:
 There will be strict rights and regulations which were implied by the government as to
secure the consumer rights.
PEST model
This is the technique which will be helpful in analysing the influences in the organisation
by the various external sources. Therefore, it will be a fruitful technique in determining the long
term changes in the organisation (Sasmal, Mandal and Chattopadhyay, 2017).
Advantages:
 The determination of the resources which are quite effective and accurate in terms of
planning the strategies for the operations in the business
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Disadvantages:
 The data from external sources are based on assumptions which do not reflect the
transparency in the outcomes.
 It will be expensive as to conduct the research over the external sources.
PART B
To: Line manager
From: Management Accounting Officer
Date: 16th March 2018
Subject: Accounting planning tools to solve financial problems and achieve sustainable success
Introduction:
This report clearly explains how Nisa Retail Ltd can undertake help of various planning
tools to combat financial turbulence and gain success.
Accounting planning tools
There are numerous planning tools that Nisa can use to prevent itself against possible
financial circumstances that can threaten its long-term success that are explained below:
Key Performance Indicators: It is a quantitative measure that is useful to measure the
organizational success. It helps to assess that how well or effectively firm is achieving their set
objectives. In the real world, companies use KPIs to monitor their regular practices and make
informed decisions. Nisa Retail Ltd can use sales growth metrics, profitability measures,
inventory movement into sales, day sales outstanding, staff turnover, customer satisfaction score
and others to evaluate their performance against targets (Reh, 2017). Lagging indicators aware
managers towards adverse outcome so that controlling measures can be taken to overcome its
reoccurrence. With this, sales managers, customer support team, marketing head and others can
formulate better policies and enjoy sustainable growth in future.
Financial Governance: It covers a set of rules and managing principles that regulators
use to assure that all the financial execution is smoothened and well governed. Nisa Retail Ltd’s
financial manager can design a regulative framework for the financial planning and monitoring
including capital structure decisions, resource allocation system, monitoring and controlling of
financial activities (Macintosh and Quattrone, 2010). The system helps all the managers in
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maintain good control over their business cost to keep it under the restricted limit, assure
efficient and optimum resource utilization and creates plan to safeguard the business against
sudden changes such as high cost of borrowing by creating a balanced mix of debt and equity.
Benchmarking: It is a practical method wherein Nisa must compare their own financial
ratios with the best performing or leading company so that managers would be aware about the
aspects where it must focus to improve performance i.e. liquidity, cash management, gearing
level, profitability, cost control or other (Zimmerman and Yahya-Zadeh, 2011). Using market
leader’s performance as a baseline directs their efforts towards goals and ensures a competitive
success with long survival.
Management accountant’s skills set: No-doubt, the skills, knowledge and excellence of
the managers also plays a great role in the success of an establishment. Having exceptional
knowledge and expertise in the managers come out with the unique thoughts and creative growth
plans and helps in outer performing over competitor.
CONCLUSION
The investigation presented a clear view that zero-based budgeting is a highly preferred
in the corporate world which focuses on eliminating unproductive spending and utilize resources
efficiently for cost controlling. Thus, Nisa Retail Ltd must create various budgets i.e. cash
budget, capital budget, manufacturing budget and sales budget using ZBB. Lastly, firm is
recommended with varied accounting tools including financial governance, benchmarking and
KPIs to overcome financial risk and enjoy sustainable growth.
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REFERENCES
Books and Journals
Arnold, M. C. and Artz, M., 2015. Target difficulty, target flexibility, and firm performance:
Evidence from business units’ targets. Accounting, organizations and society. 40(12).
pp.61-77.
Debowska, A. and Boduszek, D., 2017. Child abuse and neglect profiles and their psychosocial
consequences in a large sample of incarcerated males. Child abuse & neglect. 65. pp.266-
277.
Frow, N., Marginson, D. and Ogden, S., 2010. “Continuous” budgeting: Reconciling budget
flexibility with budgetary control. Accounting, Organizations and Society. 35(4). pp.444-
461.
Jordan, M. M., Yusuf, J. E. W. and Hooshmand, S., 2017. BUDGETING BY PRIORITIES:
BALANCING STABILITY WITH ECONOMIC RESPONSIVENESS. Public Finance &
Management. 17(1). pp.16-39.
Lauth, T.P., 2014. Zero‐Base Budgeting Redux in Georgia: Efficiency or Ideology?. Public
Budgeting & Finance. 34(1). pp.1-17.
Macintosh, N.B. and Quattrone, P., 2010. Management accounting and control systems: An
organizational and sociological approach. John Wiley & Sons.
Miller, G., 2018. Performance based budgeting. Routledge.
Pandey, N., Mehta, N. and Roy, S. B., 2017. Semiconductor Pricing Strategy in USB Market: A
Market Leader’s Dilemma. Business Perspectives and Research. 5(1). pp.1-10.
Parameshwaran, V. and et.al., 2017. Is the lack of specific lesbian, gay, bisexual, transgender and
queer/questioning (LGBTQ) health care education in medical school a cause for concern?
Evidence from a survey of knowledge and practice among UK medical students. Journal of
homosexuality. 64(3). pp.367-381.
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Sasmal, S. K., Mandal, D. S. and Chattopadhyay, J., 2017. A PREDATOR-PEST MODEL
WITH ALLEE EFFECT AND PEST CULLING AND ADDITIONAL FOOD
PROVISION TO THE PREDATOR—APPLICATION TO PEST CONTROL. Journal of
Biological Systems. 25(02). pp.295-326.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and
control. Issues in Accounting Education. 26(1). pp.258-259.
Online
Reh, J. F., 2017. The Basics of Key Performance Indicators (KPI). [Online]. Available through:
< https://www.thebalance.com/key-performance-indicators-2275156>.
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