Business Finance Report: Budgeting, Cost Drivers, and Methods Analysis

This report analyzes business finance, specifically focusing on budgeting and cost analysis within the context of TownScape PLC, an international manufacturer. The report begins by outlining the purposes of preparing budgets, the organizational processes involved, and the enumeration of...Read More

Business Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Part 1................................................................................................................................................1
1. Purposes of preparing budget and processes organisation needs to follow and enumerating
budget process........................................................................................................................1
2. Important cost drivers and areas where cost budgeting will be significant and application of
traditional budgeting approaches............................................................................................2
3. Analyse whether traditional budgetary system is significant to business in the future......3
Part 2................................................................................................................................................4
4. Different kinds of budget methods and merits and demerits of methods...........................4
5. Application of methods for effective performance of company........................................5
6. Assessing whether one of above methods or combination of method would be appropriate
for business.............................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Business finance is includes utilization of funds and it refers money and credit employed
in any business. All company needed business finance for evaluating their business and forecast
their income and expenses for earning profit. Its need is required for the business for its
establishment. In this report we used TownScape plc company context. It is an international
manufacturer of street furniture. This company produces 80 different products. Town space has
always used a traditional budgeting system. Thus, modern budgeting tools are highlighted in the
report for successful expansion.
Part 1
1. Purposes of preparing budget and processes organisation needs to follow and enumerating
budget process
Budget is a very important part of an organization for evaluating the actual results of the
organization. Budget is a future estimation of any company it includes income and resources.
Budget is a key component of a company. The main purpose of budgeting is to forecast of
income and expenditure for an organization. And budgeting is a tool for decision making And
budgeting is also monitoring business performance. Budget objectives is to set the fiscal targets
and the expenditure compatible with these targets. Allocation of resources is also a main
objective of budgeting (Bendell and Doyle, 2017)
In budget forecast of income and expenditure very important part of the business
planning. The organizations need to able to predict the business should make profit or not. The
organisation forecast their income and expenditure for profitability. And its purpose is to
provide a blueprint of the business how it should be perform . It also includes certain strategies,
events and plans. The another purpose of budgeting is to provide take a right decision according
to the process. To manage a business the expenditure must be tightly controlled. And the last
purpose of budgeting is business performance in this enable the actual performance to be
evaluate with the forecast business performance (Zetlin-Jones and Shourideh, 2017).
Budgeting process includes
Budget are always prepared on a assumption. These assumptions related with sales trends, cost
trends or environmental conditions. This assumption reviewed according to the recent
environmental conditions.
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Preparation of budget the attention has to be given to the available funding and investable
funding.
In budgeting costing is a main consideration point which is affect the business.
Budgeting process are taken in order to formulate a budget for the current period.
All budgets are based on sales. Because it determines the business is generating revenue for
survival.
The department budget will help to reach budget expenditure for the budgeted period.
Capital expenditure helps to expansion of the business . It's also help business to their growth.
If any changes in assumption then updated a budget model. The budget should be reviewed
thoroughly once its prepared because if any correction should be correct.
This budget presented to the top management for its approval. Then in the last the budget should
be issued (Bellucci, Borisov and Zazzaro, 2017).
Town Scape Plc company also used the budget model for its development. Firstly the
company prepared their assumption regarding future perspective . This assumption are based on
environmental condition of the company. If the company used budgeting so the company should
process according to the budget. It is the estimation of futuristic profit.
2. Important cost drivers and areas where cost budgeting will be significant and application of
traditional budgeting approaches
There are many cost drivers that are required by the business to initiate control so that
costs can be managed in the best possible manner. This is important for TownScape Plc which is
planning to expand its operations in Gulf, North America, China. Since, organisation is engaged
in manufacturing of street furniture which includes benches, cycle racks, litter bins and other
items, it is required to focus on cost drivers so that company may be able to expand with much
ease. It includes setup machine expense in which number of machines set ups is cost driver.
Moreover, number of hours in which machine has run is another driver. Furthermore, direct
labour worked is another cost driver in TownScape Plc. Thus, all these cost drivers are important
in terms of the business in order to control expenses in the best possible way (Hoque, 2017).
Furthermore, cost budgeting will be important in this aspect as company would be able to
control expenditures in effective manner. The cost drivers are discussed about are significant in
implementing cost budgeting which focuses on controlling expenses in effective manner. The
areas in which this type of budgeting system can be implemented are overheads, labour hours
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worked. Moreover, if cost drivers are analysed, management of company can easily assess what
are the factors driving expenses and as such, manager may minimise quantity of cost driver
which would help to reduce costs in effective way. This means that if driver for cost of labour is
raw material cost, this implies that for reducing labour expenditure, material expenses need to be
reduced however, no cause and effect relationship prevails between both of them. On the other
hand, cost budgeting would help organisation to reduce overall expenditures.
Traditional budgeting approaches such as incremental budgeting, fixed budget, static and
top down approach. Incremental type means that company just increases figures made in
previously prepared budget. This can be applied by TownScape Plc by using previous budget
which saves lot of time of management. Fixed budget means that period of budget is prepared for
specific time frame. It is useful for company to fixed time frame of budget and it can be
implemented. Static budget which cannot be changed once it is implemented. Thus, organisation
cannot make changes in it. Top down approach means that top management set targets for
achieving revenue and profit and the same is required to be carry out by employees
(Kengatharan, 2018).
3. Analyse whether traditional budgetary system is significant to business in the future
The traditional system is not appropriate for company as it has many current issues which
seems that modern budgeting tools and methods could be useful for company in attaining
objectives in the best possible manner. TownScape Plc has concluded contracts worth up to 35
million in pounds with 15 local authorities and as such, it needs to plan appropriately so that
revenue may be accomplished by company. Furthermore, another pilot scheme is carried out by
firm with police force and this will lead to design of 15 new products which will discourage anti-
social behaviour in urban areas. In addition to this, manufacturing and plant capacity would be
needed by firm in 2018 financial year. Thus, all these activities are required to be planned in
effective manner so that company may be able to achieve stated objectives with much ease.
Traditional budgeting has been implemented in TownScape Plc for many years which has
inculcated several issues. In addressing this, in proposed planned performance of company in the
future, this method of budgeting is not good for the firm (Traditional Budgeting. 2018). The
main disadvantage with regards to traditional system is that it is quite rigid in nature. Rigidity
and lack of flexibility is one of the major demerit as once the budget is implemented, necessary
changes cannot be made in it. This means that it is not flexible to make changes that can incur
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when variety of factors undergoes changes. The factor such as new rival may enter market,
conditions of market may also change, customer preferences and other relevant factors are not
considered and budget remains the same.
This type of budget is prepared by the top management personnels just by increasing
previous year figures. It implies that no current and future need is analysed and budget figures
are changed which promotes bureaucracy. Moreover, employees are demotivated as their
preferences are not taken into account while preparing budget. Thus, workers feel unimportant in
the company. Moreover, budget is prepared by merely relying on past year budget which is not at
times. The main reason behind the same is that company just changes some figures by seeking
past figures and as such, if any errors are present in past budget, then it is carried forward to
future years as well (Johnstone, 2017). This will inculcate discrepancies in coming years which
would lead to inaccuracies in further preparation of budgets. In the case study of TownScape Plc,
it is having issues because traditional budgeting had been implemented over the years. Thus,
organisation requires implementing modern methods so that inaccuracies and issues can be easily
sorted out with much ease. Thus, in planned future form, traditional budgeting system will not be
worthwhile to the business.
Part 2
4. Different kinds of budget methods and merits and demerits of methods
Rolling budgets: Rolling budgets are those in which that they are re-evaluated are re- forecast
throughout the year. This includes the incremental extension of the existing budget model. When
the company prepare budgets on a monthly, quarterly or annual basis. In this current period is
over the budgeting process begins again by creating a new plan for next accounting period.
Zero base budget: In this type of budgeting includes the preparation of operating budgets on
the assumption. It is prepared without consider the last year budget. In these type of budgeting
allocation of resources is based on needs and cost of the department. Zero based budgeting is an
incremental approach in this the basis of this budgeting is no budget line should carry forward to
the next year. In these budgets are prepared around what is needed for the upcoming period. It is
starts on “zero base” and all functions is evaluated for its needs and costs (Trad and Kalpić,
2017). Zero base budgeting set their process according to top level strategic goals. In this
budgeting requires the organisation objective to be clearly based with assesses different ways of
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delivering those objectives before the budget is allocated. This budgeting focuses on objective
and outcomes of the organisation. Zero base budgeting can be adaptive to changes in
circumstances and priorities and it also leads to better resource allocation. Zero based budgeting
starts from zero and justify of old. Traditional budgeting analyses only new expenditure where
zero base budgeting starts from zero and only justified the old. If an organization is
implementing a zero based budgeting requires qualified employee and give them specialised
training. Which is time consuming and costly.
Activity based budget: Activity based budgeting is a method of budgeting to provide
transparency into the budget process. In this type of budgeting cost are associated with activities
and budget expenditure. An activity based budgeting system include cost planning and focuses
on activities occurring with in the business (Kimbro and Wehrly, 2017). The advantage of
activity based budgeting is to see how much cost is associated with each part of a business, and
then allocate the resources or funds where they needed. Activity based budgeting has direct
control of resources generated from activities to set priories to earn incentives and to develop
new activities. Activity based budgeting are more useful for determine the number of unit related
to each activity. It is used to prepare the budgets and it also does not consider the previous year
budgets to prepare this year budget . In activity based budgeting resource and allocation based on
the efficiencies in business operations. The drawbacks of activity based budgeting is to increase
work load required to track activities.
5. Application of methods for effective performance of company
Traditional budgeting process consumes maximum time and resources allocation not
properly done. In traditional budgeting there are high probability of human errors and not
accurate formulations. Traditional budgeting results are inaccurate and unreliable results. The
traditional budgeting focuses on cost reduction not increasing the value of the business. The
main aim of budgeting is to improving precision, reducing time and consuming task. Traditional
budgeting take too much time to process and zero based budgeting consuming less time to
process. Traditional budgeting use previous year budgets data and zero based budgeting based on
zero, and activity based budgeting also not consider last year budget.
If TownScape Plc choose activity based budgeting so in this budgeting determine the
number of units related to each activity. For example if a company receives a order for selling
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their product in a upcoming year they receive 50000 orders. The cost of a single product $3. So
the activity base budget sales order for upcoming year is $100000($50000*$3).
TownScape Plc used zero based budgeting so they not consider previously budget. This
budgeting start with zero. For example the company makes a construction equipments previously
the company outsourced some parts of the equipments to another manufacturer it increases 10%
every year. The company has the capabilities to make those part in their company. After
evaluating pros and cons of making part in house the company find the parts make cheaper than
the outsourced to the manufacturer (Graham and Sathye, 2017).
Rolling budget re-forecast over the year time to time. That it should be monthly,
quarterly, yearly etc. In the rolling budget revised the rest of the months. For example the
company developed a budget for each next 6 months. And each month all the sales and
expenditure are evaluated. And the rolls forwarded to the next months.
The budget is prepared for forecasting of income and expenditure allocation. It is an
overview of company process over the year. In all those budgeting method Activity based
budgeting is very appropriate for any organization. So the town space company should also use
the activity based budgeting for its company. Zero based budgeting is not very appropriate
because after some experiments in many countries it will be disappeared from the budgetary and
the same time it is very attractive.
There are some elements of budgeting that could be effectively used for earning profit.
These are the first and the key component of budget is income. It also includes fixed expenses
these are bills etc., unplanned expenses, flexible expenses and general savings.
6. Assessing whether one of above methods or combination of method would be appropriate for
business
The business should adopt zero based budgeting as company will be able to prepare
proper budget and as such, inaccuracies involved in traditional budgeting system can be removed
up to high extent (Patni, Tomar and Sharma, 2017). Furthermore, zero based budgeting involves
preparation of budget from completely scratch base. It implies that budget can be prepared
without referring to past year figures. This is advantageous for the business as no historical data
is inculcated in the same for preparing budget. The method help to remove any discrepancies that
might have involved in previous figures. Thus, zero based budgeting would help TownScape Plc
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to effectively remove such errors as entire budget is prepared from zero base and no relevance
can be seen while preparing future budget in the best possible manner.
Moreover, budget inflation is also controlled up to maximum extent as no previous
figures are taken into account by the management (Gupta and Pradhan, 2017). Demand of
various departments are analysed in effective way and as such, costs is assessed and thus, budget
is prepared with much ease. Entire budget is prepared without relying on previous base which
gives accurate budget and as a result, optimum utilisation of resources are made without any
excessive use of funds.
CONCLUSION
Hereby it can be concluded that budgeting plays crucial role in the company so that it
may be able to carry out activities with regards to prepared budget and as such, objectives can be
met by controlling costs. Thus, company can effectively prepare zero based budget so that
organisation may resolve issues inculcated with traditional budgeting system.
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REFERENCES
Books and Journals
Bellucci, A., Borisov, A. and Zazzaro, A., 2017. Bank Organization and Loan Contracting in
Small Business Financing. In THE WORLD SCIENTIFIC REFERENCE ON
ENTREPRENEURSHIP: Volume 2: Entrepreneurial Finance—Managerial and Policy
Implications (pp. 171-199).
Bendell, J. and Doyle, I., 2017. Healing capitalism: five years in the life of business, finance and
corporate responsibility. Routledge.
Graham, P. J. and Sathye, M., 2017. Does National Culture Impact Capital Budgeting
Systems?. Australasian Accounting Business & Finance Journal. 11(2).
Gupta, D. and Pradhan, B. B., 2017. Capital Budgeting Decisions in India: Manufacturing Sector
Versus Non-Manufacturing Sector. IUP Journal of Applied Finance. 23(1). p.69.
Hoque, M. Z., 2017. Mental budgeting and the financial management of small and medium
entrepreneurs. Cogent Economics & Finance. 5(1). p.1291474.
Johnstone, D., 2017. When are investment projects in the same risk class?. Accounting &
Finance. 57(2). pp.499-510.
Kengatharan, L., 2018. Capital Budgeting Theory and Practice: A review and agenda for future
research. American Journal of Economics and Business Management. 1(1). pp.20-53.
Kimbro, M. B. and Wehrly, E. W., 2017. Capital Planning, Selection, and Investment Integrating
Sustainability in Decision-making. Journal of Management for Global Sustainability. 5(2).
Patni, J. C., Tomar, R. and Sharma, H. K., 2017. Data Mining to Business Analytics. Finance,
Budgeting and Investments.
Trad, A. and Kalpić, D., 2017. The business transformation and enterprise architecture
framework The London Interbank offered rate crisis-the model. The Business &
Management Review. 9(2). pp.67-76.
Zetlin-Jones, A. and Shourideh, A., 2017. External financing and the role of financial frictions
over the business cycle: Measurement and theory. Journal of Monetary Economics.92.
pp.1-15.
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Online
Traditional Budgeting. 2018 [Online] Available Through:
<https://efinancemanagement.com/budgeting/traditional-budgeting>
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