Neo Plastics Ltd.'s Budgeting Strategies for Expansion

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Business Finance
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Table of Contents
Introduction.................................................................................................................................................3
Part 1...........................................................................................................................................................4
(i).................................................................................................................................................................4
(ii)................................................................................................................................................................6
(iii)...............................................................................................................................................................7
Part 2...........................................................................................................................................................9
(iv)...............................................................................................................................................................9
(v)..............................................................................................................................................................11
(vi).............................................................................................................................................................12
Conclusion.................................................................................................................................................13
Reference...................................................................................................................................................14
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Introduction
Through this report, it will able to understand the need and requirement of finance in business
and the associated activities of business also. The fund is always needed by the company to run
its business operations effectively and efficiently and meet the organizational goals as per the
planned budgets. For finding the need of finance in business a company name Neo Plastics Ltd
manufactures is selected who have a business of selling plastics items such as mops and brushes.
This wants to spread its business operations in other countries also for increasing its business
profit and other benefits especially want to expand business in chins due to the high population
and the product which is supplied and sold by the company is general utility for every house. The
expansion is the basis on the incremental budget which is an aid in expanding business in every
part of the country. The purpose of preparing a budget is to executive business plans according
to the prepared budget and help in achieving organizational goals and also aid in eliminating
those errors which are being seen in previous budgeted plan.
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Part 1
(i)
A budget is panned activity of the business to execute business plans for the aim of achieving the
objective of budgets. Budget included company or organization expected future income sources
and expenses areas that will need to run business to achieve business primary objective i.e.
earning profits or income. Budget is an advance process of any company to prepare its budget for
future action of plans (Ittner, and Michels, 2017). In simple words, budget is defined as a process
of creating plans to spend money on business activity through which a company can generate
income from such invested or spend money (capital).
The purpose of the budget for the organization is that because it includes company future income
and expenses and on this basis, company management can make its business decision in the
welfare of the company development and growth (ATRILL, 2015). Following points are shown
the purpose of the budget in the business of Neo Plastics Ltd manufactures:
 The primary aim of the budget to forecast business expected future income and expenses amount
on the estimated value.
 The aim is to establish a proper delegation of authority and responsibility for achieving
(department as well as organizational goals).
 Aid in motivating managers and employee to achieve task goals.
 Act as a set of benchmarks which assist control over the continuing business activities.
 It provides a basis on which the performance of the company can be evaluated and also the
reasonability managers or centres.
 Aid in finding the organization future financial position and need for capital in the future to
invest in the business to keep the company solvency.
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The process of the budget starts when the managers received information about forecasting from
the top management and the market conditions in the future. Usually, the process of the budget
starts from the very first point is to estimate Neo company future expected sales due to a
business entirely depend on the sales. To forecast future sales various factors internal and
external are need to be considered in estimating future sales because of each factor is the impact
on the sale which directly affects company profitability and its performance. The sale depends on
the market situation and trend which is on running in the market and which product is more
demanded in the market (DRURY, 2016). This will be the responsibility of marketing managers,
as the budget future sales are prepared then it needs to be submitted to the top management for
giving reactions such as acceptance or rejected. The acceptance or rejection of sales budget is
taken after comparing the previous sales budget results with the actual outcome whether the
company able to meet the sale budget objective or not, if yes then it can be accepted. If any
changes want in it then revise and restudy the same.
Material cost budget expected the cost of material which is required in the process of production
of the product. Material cost includes the total quantity which is being used in the product and
the cost per unit. The requirement of budgeted quantity is based on the sale and the responsibility
of budgeted material cost is performing by the purchasing department that it should purchase at
minimum cost with the best quality among the best vendor (DRURY, 2016).
Labour cost budge is that budget which the cost of labour which is required to manufacture the
product of Neo Plastics Ltd manufactures company products. Preparation of this budget requires
information regarding the time required to do one unit of work and the wages to be paid for it.
Generally, the following steps are required to prepare any budget for a business like for sale,
production, and other:
Drafting process: It is the first step in which the company need stated its future income and
expenses and also other related activity of the business.
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Submit to the management: It is the second step in which the budget is to be submitted to the
concerned authority or department of the Neo plastics manufacturer company to find the
suitability of budget.
Check: Before approving the budget, it is must review the budget that is prepared as per the
plans and no any error included which already being in the previous one.
Grant approval: After the check, the quality and objective of budget, Neo organization give its
approval on acceptance of budget.
Control: It must be necessary to control the budgeted and regular check business activity
whether the business is going into the direction of achieving goals or not, if not then it should
take necessary step to correct.
The budget helps in developing a business model and the business activity of Neo company by
approaching various benchmarks which assist in develop business in a good manner and aid in
achieving business goals also by an appropriate manner and on time. For example, if the
benchmark for cost of the product is set then it also aids in achieving the output of such product
as per the set of cost standard which aids in increasing company profitability and also its
performance (ATRILL, 2015).
(ii)
The use of traditional budget in the business of the Neo Plastics manufacture organization it to
prepare its future budget considered the previous budget as a base on this basis new traditional
budget for the company is being prepared. Current year budget of the company is prepared by
making some changes in the last year budget through the process of adjusting some expenses
which are based on the inflation rate, demand by customer, market situation and other.
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The traditional budget help management of the company to prepare its budget for making plans
for the future cost of the product through the help of the organization's last year budget. The
traditional budget helps in the following way to plan cost for the future for the business activity:
 Aid in finding the overall cost of each product so that the company can adjust its cost of product
accordingly in the new budget.
 Aid in calculating the future cost for the business.
 Aid to determine the cost of capital required to run the business.
 Aid to control the cost of the entire business process.
The company prepared its traditional budget by research the business market and the current
demand for the product. If the traditional budget is prepared accordingly as per the required by
the management then it also helps in preparing an incremental budget because of it based on a
traditional budget if this will create by applying the appropriate tool and technique it will also aid
in prepare incremental budget and also aid in saving time and cost of the company. The budget
provides a way to utilize resources in the best method of achieving business goals. For example,
if the cost of the new budget is more than company go to choose a traditional budget to prepare
new budget known as the incremental budget because of it saves time and cost by considering
the unnecessary cost which is eliminated in the further activity of the company (Maher, et. al.,
2018).
(iii)
It cannot be said on a pure basis that traditional or incremental budget is important and
appropriate for the Neo Plastics manufacture company. This is because company manufacturing
different product and sale in different market which may be changed frequently or remain the
same for the long term. So the use and necessary of these two budgets are depending on the
market situation. For example, for the sale of the company, incremental budget is important
because it provides the information of the last year sale of the business product on which it can
take the new decision and prepare plans for introducing new technique and technology in the
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production of plastics items. As far seen, traditional budget is taking importance in the business
of the Neo organization as it provides information regarding the current market tendon which the
production of the product is based. Hence it cannot be said totally that business is based on either
traditional or incremental budget, both are important and necessary to plan future forms (Ittner,
and Michels, 2017).
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Part 2
(iv)
Following are the methods which help in understanding each method importance, benefits and
also the key areas of limitations for each.
Zero-based budgeting: This is the most commonly used by the Neo Plastics manufactures
organization as it incorporated with the business from the beginning and also include the
business activity for the planned budget. This budget is preferable over the other because of its
aid in distributing the resources among the department as per the requirement. This is providing
advantages of forecasting data for the projection of the organization (Ittner, and Michels, 2017).
Advantages:
 Cost-effective method of budget.
 Easy to calculate and simple.
 Aid in distributing resources in a well-planned manner.
 Aid to determine the chances of outsourcing.
Disadvantages:
 Rigid in nature.
 Confliction between the skills and managerial need.
 The expensive method in terms of required more and more cots to prepare.
 Need to explain the purpose which creates a delay in the decision-making process.
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Activity-based budgeting: This is the budget which is based on a particular task or activity of
business of Neo organization. This type of budget is most often found in the cost accounting
process of the Neo plastics manufacturer company. Management examines the cost of business
activity to the overall cost of manufacturing product of Neo Company.
Advantages:
 Aid in evaluating the business activity of the product.
 Provide a competitive edge.
 Act business as a single unit.
 Aid in improvement of relation.
 Aid in removing bottlenecks.
Disadvantages:
 Require more understanding.
 Consume more resources.
 Complex by nature.
 Involvement of cost on a high basis.
 Aid in to achieve short term goals.
Rolling budgets: A rolling budget can be said as an extension of incremental budget due to it
required an updating in the most recent budget of the Neo company budgets (Maher, et. al.,
2018). It replaces the old budget by updating old budget with the new budget by adding new
factors in it. There are some benefits to this and also some drawbacks which areas:
Advantages:
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 Aid in setting up planning and control.
 It can adopt changes.
 Spend on a wise basis.
Disadvantages:
 It is a more time-consuming method.
 This method is not suitable for the employee as it demoralizes the employee's satisfaction.
 Uneven updating.
(v)
The above-mentioned budgets are important for the business of Neo plastics Manufacture
Company. The budgets of the company are based either on rolling, activity and zero-based
budgets provide various advantages and some limitations to proceed to use and make it a success
by achieving business goals towards the success and growth of the organization. For example,
Company products such as mops and brushes are manufactured by taking a zero-based budget
which aids in creating a budget from zero or ground level through which the company finds its
relevant cost to the product. If such products are manufactured by taking activity-based budget
then it also helps in finding the real cost per unit and if the option of a budget is rolling chooses
then it may not be impactful due to containing the previous budget information which might be
not useful for the current situation of the market and company as well. The alternative method of
a budget is value proposition budget which assists and increases the profitability of the business
entirely and also aid in achieving a constant success for a long period (Maher, et. al., 2018). The
company can effectively perform its business activist by the use of a value proposition budget
method within its business budgets plans. This can help as it aid in obtaining the information of
reason why the customer such product of the company is best suited. This will find the reason
and aid in improving the relationship and also aid in increase goodwill along with profitability.
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(vi)
In the light of the Neo, Plastics Manufactures Company, value proportion budget is the best and
an appropriate method of the budget for the company products because of it will provide
information regarding its business product demand in the market and accordingly, company will
able to invest its capital in the stock. This will also provide an advantage of creating a sale
budget for the future because of customers influence is more towards the product of the company
which means the product has more demand in the market and this should be fulfilled by
establishing a proper analyzing and research of the market (Maher, et. al., 2018).
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