Budgeting Methods for Future Cost Management

This document discusses the purpose of budgeting, traditional and alternative budgeting approaches, and their application in planning future cost management. It also explores the use of different budgeting methods like rolling budget, activity based budget, and zero based budget for BoatWorld Plc's business expansion in Netherlands and Germany.

Project

Table of Contents
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
1. Explanation of different terms.................................................................................................1
2. Application of concepts within the company...........................................................................3
3. Analysis and recommendation regarding the steps which should be taken to improve cash
flow through better working capital management.......................................................................3
PART 2............................................................................................................................................4
1. Purpose of preparing of budget and explanation of traditional and alternative budgeting
approaches....................................................................................................................................4
2. Demonstration of application of budgeting methods showing the way in which they might
be used to plan future cost management......................................................................................6
3. Analysing of whether traditional or alternative budgetary system is appropriate to all of the
parts of the business in its planned future form...........................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Business finance is the set of different monetary resources which are required to be
maintained and managed properly by all the companies for the purpose of operating business in
systematic manner. If an organisation is not having sufficient funds then it may create difficulties
for it to attain all the business goals because it is not possible to carry operations without proper
funding (Bakar, Rosbi and Uzaki, 2017). This report is based upon two different organisations
which are Bright Lawns Ltd operates in London, Birmingham and Manchester and BoatWorld
Plc a leisure company that rents boats to holiday makers and operates in United Kingdom and
France. This assignment covers various topics which are explanation of profit, cash flow,
working capital, receivables, inventory and payables, application of all of them and steps to be
taken to improve cash flow. Along with this, purpose of preparing a budget, explanation of
tradition and alternative budgeting methods, their application to show the way in which they
might be used to plan future cost management and appropriateness of one of the processes are
also covered in this project.
PART 1
1. Explanation of different terms
Profit: All the incomes which are gained by an organisation by selling all its products
and service to clients is known as profit. For the purpose of calculating it cost is deducted from
the selling price of the items which are sold to customers. It is a type of financial gain which is
used by organisations to carry out business for long term.
Cash flow: The monetary resources which are flowing inward and outward of an
organisation are known as cash flow. In order to calculate it managers have to deducted all the
outflow from inflow. In other words, it can be defined as the money which is transferred in or out
of a business.
Difference between profit and cash flow: There are various differences between cash
flow and profit. All of them could be analysed with the help of following table:
Cash flow Profit
It is calculated through cash flow
statement.
Profit and loss or income statement
is used for the purpose of
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calculating it.
While calculating it investing,
financial and operating activities are
considered.
The activities which are considered
in the calculation of profit are sales
and purchase.
It is recorded in statement on cash
basis.
Accrual basis is used to record
profits in accounts.
With the help of it liquidity of the
company could be analysed.
It helps to determine that company
is attaining profits or not.
Working capital: It can be defined as the capital which is used by organisations to
perform its regular activities. While calculating it current liabilities are deducted from current
assets (Aktas, Croci and Petmezas, 2015). There are some key areas which are required to be
focused while calculating it. These are inventory, cash and its equivalents, account payables,
receivables etc. Major use of it is to make sure that all the operations are performed in systematic
manner without error (Ekpu and Paloni, 2016).
Receivables: The companies which are allowing credit to its clients have accounts
receivables that are shown in the assets side of balance sheet. Mainly these are recovered within
an year because short term credit is provided to the customers to pay the owed amount.
Inventory: All the companies which are selling products to the customers have stock in
their warehouses. There are three types of them which are raw material, finished goods and work
in progress. In order to make sure that all the operational activities are performed properly it is
very important to keep detailed information of it because if the company is not having sufficient
stock then it will be very difficult to execute operations.
Payables: The organisations which are buying material from the external parties have
account or bills payables and the amount of them is required to be repaid within an year or on the
due date. It is recorded in the liabilities side of balance sheet because the company is liable to
pay its amount in upcoming period.
Changes in working capital affect cash flow: If working capital of an organisation get
changes then it affect the cash flow for the business. For example, if an organisation is having
debtors of 40000 pounds and the 1000 of them are not recovered then this amount will be
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deducted from the actual balance. It will also be added in the operating activities of cash flow
and affect the cash flow of the organisation (Gallegati and Semmler, 2014).
Those organizations having excessive working capital, they should have to invest in
corporate area because this channel helps in reducing the unnecessary working capital from the
one period (Aktas, Croci and Petmezas, 2015). Company cut working capital to re-deploy the
under utilization of resources for the higher uses. These changes further impact the cash flow of
company which need to evaluate by the managers to build strategies to overcome the challenges
in the business operations.
2. Application of concepts within the company
There are various concepts which are described in the above question, all of them are
applied in BrightLawns Ltd. The analysed elements from all of them are net profit which is
showing a balance of 5 million pounds. It is profit before interest and tax. The amount of account
payables which are owed by BrightLawns Ltd are recorded at 1.5 million pounds. Outstanding
dispute is also showing an outstanding amount of 2 million pound.
In order to calculate the accurate amount of cash flow its concept is also applied by
accounting professionals of BrightLawns Ltd. The dispute of 2 million pounds have faced by the
company due to faulty workmanship of contractors which are resulted in stopped payment. Due
to this issue financial results are getting negatively influenced because it is showing higher debts
for the organisation.
3. Analysis and recommendation regarding the steps which should be taken to improve cash flow
through better working capital management
In order to improve the cash flow of BrightLawns Ltd through better working capital
management following steps could be taken by the managers:
 The management can plan to meet debt obligations that will help to pay all the payables
on time and maintain working capital management and improve cash flow (Atrill,
McLaney and Harvey, 2014).
 It is very important for managers to manage inventory properly and ignore tom record
such items which are not having any reliable value. With the help of it working capital
management could be performed in better way and cash flow could be improved.
 By decreasing the overspending of budgets management can also improve cash flow
because it results in proper management of working capital (Haseeb, 2018).
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PART 2
1. Purpose of preparing of budget and explanation of traditional and alternative budgeting
approaches
Budget: It can be defined as the estimation of all the expenses and incomes which could
be acquired by an organisation in future. With the help of it, management of large as well as
small business entities get aware of all the areas where funds are spent for the purpose of
carrying out operational activities. Mainly it is generated on yearly basis but some companies
create it create it on half yearly, quarterly and monthly basis for the purpose of running business
smoothly.
Purposes of budget: Various organisations generate budget for different purposes. All of
them are as follows:
 It is basically prepared for the purpose of analyse financial performance of business and
formulate strategic decisions for future (Hope and Vyas, 2017). In order to determine overspending of funds budgets are prepared because with the help
of them it could be reduced.
Traditional budgeting: It is a technique of preparing a budget in which last year's data is
used for the purpose generating records of current year. It is made by altering the old reports and
making adjustments according to the existing conditions of business. The factors which are
considered for the purpose of making changes in financial plan are consumer demand, inflation
or deflation rates etc. Incremental budgeting is the approach of traditional budgeting. Description
of it is as follows:
Incremental budgeting: It can be defined as the process in which last year's budget is
considered as the base for the records of current year. In some of the cases when appropaiet
information regarding previous reports is difficult to gather then actual performance is used 9in
this method for the purpose of conducting budgeting processes. It encourages the business
entities to spend up to the budget by allocating funds to all the operations accounting to their
requirements. All its strengths and weaknesses are as follows:
 Strengths: It is an easy to implement and understand method that can help to gather
accurate and trustworthy results. It ensures continuity of funding for the divisions without
any detailed analysis of requirements of them regarding funds (Khan, 2015).
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 Weaknesses: There is lack of innovation in this budgeting technique because new ideas
are not used in it to form budgets. By using this method business is executes in
conservative mode (Attrill, 2015).
Alternative budget methods: There are various budgeting techniques which could be
used by organisations and replace traditional approaches. There are various types of budgets
which are used by business entities for the purpose of keeping track record of all the financial
activities. All the types are described below:
Rolling budget: It is a type of budget which continuously gets updated with the changes
in business situations. In other words, it can be defined as a revised or new set of finance related
plans for upcoming financial year that replaces the previous one in the budgeting system. It
guides the managers to keep control over spending of funds and monitor the progress of
business. There are various strengths and weaknesses of it which are as follows:
 Strengths: This budget is flexible as changes are made in it with the modifications in the
business processes. It also helps to bring responsibility and understanding between the
enterprise and staff members (Rolling Budget, 2019).
 Weaknesses: The companies which are generating it required robust system and
experienced employees because the process of creating it is very critical. As constant
changes could be made in it therefore it results in confusion for staff members.
Zero based budget: It is a type of budget in which management have to justify all the
incomes and expenses for each and every accounting period. All the functions of the company
are analysed in detail in order to determine the financial needs of them so that appropriate funds
could be allocated to them. All its strengths and weaknesses could be understood with the help of
following discussion:
 Strengths: With the help of zero based budget detailed information of all the incomes
and expenditures could be analysed. This budget enhances motivation level of employees
because it provides them responsibilities in the decision making process (Owen, Brennan
and Lyon, 2018).
 Weaknesses: The process of generating this budget is time consuming and complex that
create difficulties for managers to conduct detailed analysis of all the transactions.
Activity based budget: In this type of budget activity based costing is used for the
purpose of conducting budgeting activities after considering all the overhead costs. Past year's
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records are not considered for the purpose of preparing budget for existing accounting period.
All the strengths and weaknesses of it are as follows:
 Strengths: With the help of this budget all the unnecessary activities could be eliminated
that helps businesses to save its costs that helps to attain competitive advantage. It guides
managers to find appropriate cost of each and every activity performed for attaining
business goals.
 Weaknesses: It requires proper understanding of the activity based costing because lack
of knowledge may result in improper formulation of budget. It could be used for short
term purposes as it is not able to provide positive outcomes in long run.
2. Demonstration of application of budgeting methods showing the way in which they might be
used to plan future cost management
BoatWorld Plc is currently operating business in France and United Kingdom and now it
is planning to open new outlets in Netherlands and Germany. The organisation has always used
traditional approaches of budgeting for business processes. For example, organisation used
incremental method for the purpose of formulating budgets for business. While using it the
managers used previous year's information so that estimation for current could be formed (Shah
and Rankin, 2017).
Now the managers can use different alternative methods for budgeting that can help to
forecast the cost for the business plan of introducing business in Netherlands and Germany. First
option is rolling budget in which management can make proper adjustments with time and plan
future cost management as it could be modified with situations.
Activity based budget can also be used by the management of BoatWorld Plc for the
purpose of recording detailed information of all the activities such as marketing, advertising etc.
separately. It will help to allocate funds properly because it guides managers to estimate the costs
which may take place in future.
Zero based budget is also an alternative method which starts with a zero base and justifies
all the incomes and expenses. With the help of it the managers in BoatWorld Plc will be able to
execute their plan of business expansion in Netherlands and Germany properly. This method will
be highly advantageous for the company because it will be formed for a new period according to
the market situations of new locations. It will also facilitate the process of managing future cost
because there will be no existing cost in the budget (Turner, 2017).
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3. Analysing of whether traditional or alternative budgetary system is appropriate to all of the
parts of the business in its planned future form
Alternative and traditional budgeting approaches are used by most of the companies for
different objectives. In various organisations such as BoatWorld Plc traditional approaches for
budgeting are used in which last year's information is used to create budgets. Currently, all of
them are being replaced with various alternative methods which are zero based, rolling and
activity based budgets.
As BoatWorld Plc is planning to expand its business in new locations so it has been
recommended to the managers to focus of alternative budgeting systems because all of them can
guide to manage the plan of expansion effectively. All the methods under this budgeting do not
take prior year's records that will be a great opportunity for the organisation to execute its plan
properly (Voordeckers, Le Breton-Miller and Miller, 2014).
CONCLUSION
From the above project report, it has been concluded that business finance is the term
which is used to define all the funds that are used by business entities to execute operations
properly. While planning for working capital management it is very important for accounting
professionals to focus on different elements such as profit, cash, inventory, payables, receivables
etc. In order to improve cash flows companies are required to take specific steps such as
reducing spendings, making payment in less than one year etc. There are various traditional and
alternative methods of preparing budget which could be followed by companies for running
operations. These are incremental, zero based, rolling and activity based budgets.
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REFERENCES
Books and Journals:
Aktas, N., Croci, E. and Petmezas, D., 2015. Is working capital management value-enhancing?
Evidence from firm performance and investments. Journal of Corporate Finance. 30.
pp.98-113.
Aktas, N., Croci, E. and Petmezas, D., 2015. Is working capital management value-enhancing?
Evidence from firm performance and investments. Journal of Corporate Finance.
30.pp.98-113.
Atrill, P., McLaney, E. and Harvey, D., 2014. Accounting: An Introduction, 6/E (Vol. 6).
Pearson Higher Education AU.
Attrill, A. ed., 2015. financial management for decision makers. Oxford University Press, USA.
Bakar, N. A., Rosbi, S. and Uzaki, K., 2017. Cryptocurrency Framework Diagnostics from
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Transaction. International Journal of Management Science and Business
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Ekpu, V. and Paloni, A., 2016. Business lending and bank profitability in the UK. Studies in
Economics and Finance. 33(2). pp.302-319.
Gallegati, M. and Semmler, W. eds., 2014. Wavelet applications in economics and finance (Vol.
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Haseeb, M., 2018. Emerging issues in islamic banking & finance: Challenges and
Solutions. Academy of Accounting and Financial Studies Journal. 22. pp.1-5.
Hope, O. K. and Vyas, D., 2017. Private company finance and financial reporting. Accounting
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Khan, M. M., 2015. Sources of finance available for SME sector in Pakistan. International
Letters of Social and Humanistic Sciences, 47, pp.184-194.
Owen, R., Brennan, G. and Lyon, F., 2018. Enabling investment for the transition to a low
carbon economy: government policy to finance early stage green innovation. Current
Opinion in Environmental Sustainability. 31. pp.137-145.
Shah, A. K. and Rankin, A., 2017. Jainism and Ethical Finance: A Timeless Business Model.
Taylor & Francis.
Turner, A., 2017. Between debt and the devil: Money, credit, and fixing global finance.
Princeton University Press.
Voordeckers, W., Le Breton-Miller, I. and Miller, D., 2014. In search of the best of both worlds:
Crafting a finance paper for the family business review.
Online
Rolling Budget. 2019. [Online]. Available through:
<https://www.wallstreetmojo.com/rolling-budget/>
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