Monitor and Review Budget: Case Study, Issues, Variances, Performance, Recommendations

This report provides a budget variance report and details regarding the issues in variances, performance, evaluations, and recommendations identified from financial information for the company.

MONITOR AND REVIEW
BUDGET

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
CASE STUDY ................................................................................................................................1
Issues ...........................................................................................................................................1
Variances .....................................................................................................................................2
Performance ................................................................................................................................3
Recommendations .......................................................................................................................4
Evaluation ...................................................................................................................................4
CONCLUSION ...............................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Organisations are required to monitor and review their budgets timely to ensure that
actual activities are going as per planned activities. It helps in ensuring that expenditures and
costs of the company are in line with the available resources. Budgetary control refers to the
process used for monitoring and reviewing the different budgets. Review of budget helps the
business to analyse the performance and taken further actions that are adequate and will increase
the efficiency of organisation. The present report is based on review and performance of the
budget. Present report will provide a budget variance report and details regarding the issues in
variances, performance, evaluations and recommendations identified from financial information
for company.
CASE STUDY
Issues
The budgets are prepared to provide company a defined path to follow and carry out
expenditures on that basis. Every organisation prepares budget after making proper analysis and
evaluation of different factors associated with the budget however some issues are not within
control and affects the business operations significantly. The issues in current case study are that
it has not made up to the expectations. The current economy is facing considerable recession
which can impact budgeted figures. The impact may continue over future quarters as consumer
spending reduces due to rising prices(Harelimana, 2017). There is significant increase in rate of
interest as Houzit is having variable interest loan that fluctuates with market conditions. It will
increase the interest burden on company with decrease in sales. This will tend to remain high till
the economic conditions of the country reach at stable stage.
It is also analysed that due to factors like school and public holidays will affect the sales.
It is planning to reduce the spendings on advertising which it made for promoting store offers.
The reduction in advertising cost will benefit the budget and enable to meet other expenses. It
will help in increasing sales but sales are proposed with discounts to attract the customers.
Company would face further decline in revenues with discounts and gross profit margins. This
will make it difficult for management to meet the expenditures with reduced gross profits. The
downturn in economy is main reason behind decrease in revenues as company has to provide
discounts to consumers (Kamau, Rotich and Anyango, 2017). Falling economic growth reduces
purchasing power of people and consumers restrict their purchasing affecting the sales.
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Financial probity issues include bonus scheme. It is additional expense on company which needs
to be paid to employees. Payment of bonus at reduced prices will affect the profitability that
needs to be considered. Holding of bonus can provide support to operation of business. It pays
managers on the basis of performance reports. Performance reports have to be analysed properly
for making payments for manager remunerations ensuring that they are made on equitable basis.
Company has to consider these issues in budget as whole operations will be affected due
to them. Resources have to be utilised more effectively and evidently to overcome the above
problems.
Variances
Variance report refers to document which shows comparison of actual outcomes with
planned outcomes. The difference between the actual and planned figures is known as variances.
They are calculated to identify the variation so that management can search for the reasons for
them. On the basis of variance analysis company aims at framing policies and taking measures to
reduce these variations (Budgetary Control, 2020). They are important report for the
management to take future decisions regarding improvements or change in policies and
processes.
The variance report of Houzit shows considerable variation due to the above issues and
changes in economy. Unfavourable variances are seen in sales report due to decrease in sales
with 1%. The primary reason of decline was restriction on spending for advertising. The
advertisement is reduced due to recession face and to support the budget. However decrease in
sales will affect the gross profit (Chong and Khudzir, 2018). The variation is also seen in gross
profit margin which is seen due to the price discounts. GP has declined to 42% from 43%
because of providing discounts to customers to attract them and increase the sales. However this
led company to face downturn in GP.
As there was economic slow down there was impact on interest rates. The credit shortage
led the interest rates to rise and increase the finance cost for company. Company suffered the
impact as it has taken variable interest rate loan. There is significant rise in interest rate by 33%
which has affected profit levels. There is favourable variance in advertising cost as it has not
made spending over magazine advertisements. The non advertisement has made significant
reduction of 25% for first quarter. The net profit of company has increased by 414% which is
very high variance. This is seen mainly due to reduction in advertisement cost.
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Performance
Comparison of financial performance of organisation to the industry benchmarks for
organisation in line with retail trade. The current economic growth is slowed down that affects
the growth of business. The brand recognition has helped the company to achieve the targeted
goals. The present retail industry has suffered fall in sales due to recession and however
company has managed to meet the sales target above expectations from discounts. The quarter
has attracted wider customer base with discounts. The company has to make slight expenditure
on advertising about offers and schemes of business to continue the sales increase and meet the
targeted levels (Palermo, 2018). Strategies are required to be framed by the organisation to
enable the company to reach up to the margin levels of previous years. It can be done by
promoting business and reducing discount. Other retail industries are not able to provide this
amount of discount and thus facing issues.
The other relevant factor to be considered by management is wages and salaries. Houzit
provides its employees wages at 12.2% where the industry average is 11%only. Management
recruit efficient and highly skilled employees to carry out business operations. This provides
company with higher productivity and return to business. Therefore, it pays employees higher
than industry average.
The company is financial viable as despite of decrease in gross profit it has managed to
increase the profit level of company. It has been able to meet the other expenditures of the
business. Due to recession it has faced issues in first quarter and decline in GP. However, there
has been increase in sales level. The net profit level shows company is able to meet all its
financial obligations. Variance report of Houzit shows that it has maintained GP in line with
budget, but advertising in next quarter would bring GP back to normal. The ABS retail trade
figures shows that company is having good financial status based on the information provided.
There is increase in average debtor time but it is within the limit of 30 days which shows
that there will no major impact on cash flows of the business. Further increase in debtor days will
affect the cash cycle impacting the working capital requirements (Messer, 2017). It could be
analysed that Houzit is financially viable and also gross profits will be brought to previous level
if it stops giving the discount.
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Recommendations
The overall financial performance of company is adequate however it is required to pay
attention towards certain areas to operate the business successfully. Company is providing
discount at 50% which could be reduced to 20%. This will help to manage gross profit. Variable
interest is increasing financial cost which should be reduced by making repayments of loans.
Increase in interest rate will reduce profitability (Bui, Chapple and Truong, 2020). The wage
rate of company is higher than industry average and which could be reduced to improve the
financial viability of the business.
Also the adjustment of advertising budget over next quarter will affect the profit figures
of company for second quarter advertisement cost of both the quarters will be paid in one
quarter. The advertisement cost should be apportioned over the year to reduce the burden in one
quarter.
Evaluation
Houzit is big organisation with good financial management process. It has been able to
successfully manage the issues, identify reasons of variances and maintain the profitability.
Company can prepare monthly budgets for the cost centres to make more accurate allocation.
Monitoring report should be assessed on monthly basis to identify and fix the issues within short
period. Further it could convert the variable rate loan to fixed loan. This will reduce the volatility
in profit figures.
CONCLUSION
It could be summarized from the above report that management of Houzit is highly
efficient in managing the financial process. It has effectively managed the recession phase by
allowing discounts. Reasons for variations in actual and budgeted figures have been identified to
take necessary actions and to reduce them. Company can reach the target profit levels by
reviewing the discount policy and reducing them to appropriate levels. A good financial
management requires timely review and analysis of the performances and establish control
procedures at different levels.
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REFERENCES
Books and Journals
Harelimana, J.B., 2017. The Effect of Budgetary Control on Financial Performance of Kigali
Serena hotel in Rwanda.
Kamau, J.K., Rotich, G. and Anyango, W., 2017. Effect of budgeting process on budget
performance of state corporations in Kenya: A case of Kenyatta National
Hospital. International Academic Journal of Human Resource and Business
Administration, 2(3). pp.255-281.
Chong, V.K. and Khudzir, N.F., 2018. The effect of mutual monitoring and need for
achievement on budgetary slack in a team-based environment. In Advances in Accounting
Behavioral Research. Emerald Publishing Limited.
Palermo, T., 2018. Accounts of the future: A multiple-case study of scenarios in planning and
management control processes. Qualitative Research in Accounting and
Management. 15(1). pp.2-23.
Bui, B., Chapple, L. and Truong, T.P., 2020. Drivers of tight carbon control in the context of
climate change regulation. Accounting & Finance. 60(1). pp.183-226.
Messer, R., 2017. Budgets and other lies: Evidence of bias in financial planning. Business
Horizons. 60(4). pp.447-453.
Online
Budgetary Control. 2020. [Online] Available trough:
<https://hbpublications.com/2020/06/17/the-5-step-budgetary-control-process/>
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