Comprehensive Report on Financial Planning and Budgeting

This report provides a detailed analysis of financial planning and budgeting within business organizations. It identifies key financial planning tools such as business planning, budget planning and costing, emergency funds, break-even analysis, and financial statements. The report examines activity-based costing (ABC) and budgeting (ABB), discussing their advantages, disadvantages, and suitability for different organizational contexts. It also explores the components of a master budget, including direct materials, direct labor, production, sales, and manufacturing overhead budgets. The importance of financial planning control is highlighted, along with a clear distinction between capital structure and financial structure. Finally, the report includes a ratio analysis of a sample balance sheet and provides recommendations for improvement. Desklib offers a variety of solved assignments and study tools to support students in understanding these complex financial concepts.

Running head: FINANCIAL PLANNING AND BUDGETING
FINANCIALPLANNING AND BUDGETING
Name of the Student
Name of the University
Author Note

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Executive Summary
The purpose of this project is to determine the importance of a proper financial structure in the business
organisations. This report clearly indicates the different purposes of financial planning and the various
kinds of planning tools that are required by the company. It also explains the importance of such tools.
There is also a detailed discussion about the costing and budgeting techniques used by the firms and why
those structures may or may not be suitable for an organisation. The importance of the financial planning
control is analysed in the report and the difference between the financial structure and the capital structure
of a company has also been clearly explained. The report concludes with the analysis of a balance sheet
and the recommendations to improve the balance sheet has also been provided.

2FINANCIAL PLANNING AND BUDGETING
Table of Contents
Introduction....................................................................................................................................................4
Tools of financial planning............................................................................................................................4
Business planning......................................................................................................................................4
Budget planning and costing......................................................................................................................4
Emergency fund.........................................................................................................................................5
Break-even analysis...................................................................................................................................5
Financial Statement....................................................................................................................................5
Activity based costing and budgeting............................................................................................................5
Master Budget................................................................................................................................................7
Direct materials budget..........................................................................................................................7
Direct labour budget..............................................................................................................................8
Production budget..................................................................................................................................8
Sales Budget..........................................................................................................................................8
Manufacturing overhead budget............................................................................................................8
Importance of financial planning control.......................................................................................................8
Capital structure vs. financial structure.........................................................................................................9
Ratio analysis of Steve and Mary Jo’s balance sheet:.................................................................................10
Liquidity...................................................................................................................................................10
Debt..........................................................................................................................................................10
Savings.....................................................................................................................................................10
Conclusion...................................................................................................................................................11
Recommendation.........................................................................................................................................11
References....................................................................................................................................................12

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Appendix......................................................................................................................................................14

4FINANCIAL PLANNING AND BUDGETING
Introduction
Every organisation wants to acquire financial security. The success of any organisation depends
on the financial planning of that organisation. The short term and the long term goals of any organisation
can be achieved if they maintain a proper budgeting, planning and forecasting procedure. It helps the
companies to assess how successful they are now and how successful they will be in the future and
thereafter prepare a balanced plan to meet its objective effectively and efficiently (Karadag 2015).
The report analyses the various models of financial planning and the importance of financial
analysis. It discusses the basic ideas of activity based costing and budgeting and tells in detail why this
costing system should be adopted or abandoned by the companies. The concept of master budget,
financial and capital structures are also given in the following paragraphs.
Tools of financial planning
In order to do financial planning of a business, the financial advisors must have a plan of the
various stages of the business and must navigate through those stages. Planning the finances and
managing them requires proper tools and implementation of those tools in a correct manner. The tools of
financial planning is discussed below.
Business planning
A solid financial planning must properly plan the business as its very first step. A proper business
plan lists all the critical aspects required to run the business. It include planning on the type of business to
be done, checking the history if any, analysing the market and thereafter preparing for it’s targeting,
segmentation and positioning (Jeston 2014).
Budget planning and costing
In order to manage the money properly one must have a proper budgeting plan. A budget helps in
giving every amount we spend a purpose. It helps in tracking the revenue and the expenditure on a timely
basis and thereafter taking the necessary measures if required. Every organisation must prepare a monthly
or annual budget (Klychova, Faskhutdinova and Sadrieva 2014). Cost projections should be done.

5FINANCIAL PLANNING AND BUDGETING
Reasonable projections of sales during the peak season and the off season are also to be prepared. The
proper budgetary policy will help in determining the cash that will be available in hand at the end of a
certain time period.
Emergency fund
Almost all the organisation put their money in the speculative market for speculative purposes.
Huge amount of investments are made by all the firms. The return on the investment might be positive as
well as negative. So in order to absorb the shock of the negative return a proper emergency fund is needed
(Babiarz and Robb 2014). It will prevent the companies from stopping their regular activities.
Break-even analysis
This is a very important tool for financial planning. It helps the organisations in determining the
revenue to be achieved through sales in order to cover up the expenses (Palia 2014). Any sales that are
achieved over and beyond this pint helps the firms in earning a profit. The total fixed cost and the total
variable cost is compared and analysed with the sales revenue of the organisation to determine the value
of sales where the firm will earn normal profit, which means no profit and no loss.
Financial Statement
Financial statement is one of the significant factors of determining the financial feasibility of an
organization. It contains information about the companies’ profitability, assets and liabilities position. The
most important factors of a financial statement are the trading account, profit and loss statement and the
balance sheet (Robinson et al. 2015). The trading account records all the direct income and expenditure
whereas the profit and loss statement contains all the indirect revenues and expenditures.
Activity based costing and budgeting
Activity based costing is a system of accounting where the costs are classified into overheads
activities and thereafter assigning the costs to those products. Most of the manufacturing industries tend
to use this costing system as they perform a number of activities. It focuses on the activities that are being
performed to produce the products (Dale and Plunkett 2017). The costs are first allocated to the activities
and then to the products.

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Activity based budgeting refers to the system of budgeting that considers the activity based
costing principle. It is a tool of management accounting that does not use the historical costs or the
previous year’s cost in order to decide about the budget of the present year. The activities that lead to
such kind of costs are instead analysed (Pietrzak 2013).
The application of the above mentioned costing and budgeting technique has increased in the
recent days. There are certain advantages of this technique that let the companies adopt this. The kind of
business that use these methods are generally used by the manufacturing industries or industries that has
more than two sets of activities in the production process. The reason for adopting this techniques are:
i. The costing system is much more accurate.
ii. It helps in the understanding of the overhead in a much better way.
iii. It helps in the reduction of the cost by providing with the information on areas where the cost
can be reduced.
iv. There can be two type of activities – one that adds value and the one that does not add value.
This system of costing and budgeting helps in assessing the areas that does not produce value
for the organisation and thereafter eliminating it (Hilton and Platt 2013).
v. Every overheads have their respective costs allocated to them. The manufacturing cost can be
easily calculated and hence the companies can take decision related to make or buy.
vi. The activity based budgeting considers the business as a unit. It does not prepare the budget
with respect to the separate departments of the organisation, rather it considers the business as
a unit.
vii. This budgeting system evaluates and analyses each and every cost driver deeply. It therefore
takes under consideration all the required steps involved in a particular activity therefore all
the irrelevant activities are eliminated.
viii. This type of costing system has a deep integration with the six-sigma procedure of quality
assessment.

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This budgeting and costing system has gained a huge significance in the current market but this
model is not suitable for every organisation and might not be suitable to big industries as well under
certain circumstances. The reasons a company can abandon this principle are:
i. The activity based budgeting requires an in depth understanding of the business model. It
requires to understand and analyse all the functional areas of the business. Improper
understanding can create wrong budgeting that will lead the business towards huge amount of
loss.
ii. A lot of research and calculations are required to be done. Any simple employee cannot
perform such tasks. Proper analyst and top level accountants are required to be hired by the
company to perform this budgeting task.
iii. The activity based costing requires a lot of resources too. The system therefore is very costly
to maintain.
iv. The reports that this procedure provides does not comply with the GAAP. Thus the
organisation maintaining this cost system has to prepare two separate statements – one for the
company itself and the others for the auditing purpose or for the external use (Cooper 2017).
Master Budget
The master budget is the man budget of the organisation. It is the most expensive business strategy
that the company prepares. It is the summation of the budget prepared by each division of the business
(Shcherbina and Tamuleviciene 2016). This kind of a budget is generally prepared for a year. The
components of master budget is a combination of a number of different budgets which includes the
following:
Direct materials budget
The cost of acquiring the raw materials, maintenance spare parts consumption of energy, labour
and machine time are recorded in this budget. The requirement of the materials are determined product
wise (DRURY 2013). The raw material consumption rate can be determined from this budget. The cost of
work in progress can sometimes be included in this budget.

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Direct labour budget
All production process requires a labour force. The production budget has the number of items to
be produced. The direct labour budget provides the number of labour hours requires to produce those
items that are listed in the production budget. It is presented in either monthly or quarterly format. The
budget also contains information about the categories of the labour involved in the process
Production budget
This budget is prepared on the basis of the sales budget. The amount that is required to be sold is
determined and accordingly the production budget is set. It is dependent on the sales forecast. It records
all the costs that can be incurred while manufacturing the product.
Sales Budget
A sales budget is also dependant on the sales forecast. The sales of a product depends on the
demand and the supply condition in the market. It includes the sales estimate for a particular period. A
sales budget is prepared in order to set the production requirements as well as the departmental objectives.
Manufacturing overhead budget
The manufacturing costs are included in this type of a budget. The direct materials and the labour
costs are not included in this budget. This type of a budget is presented either monthly, quarterly or
yearly. This budget usually consists of items like the administrative expenses, the rent, freight, supplies,
depreciation, utilities, travelling and entertainment and administrative taxes.
Importance of financial planning control
Financial planning is one of the most important task of every organization. Any organisation will
undergo a huge amount of loss if there is no proper financial planning. It refers to advance decision in
regards to what amount is to be spent on which product or services depending upon the availability of
funds (Agarwal et al. 2015). The importance of financial planning control can be discussed as below:
i. It helps in the collection of the best possible funds. It helps in selecting only those funds that
provides with a positive return and helps in avoiding the wastage of the investments. It also
prevents the organisation from the risk of over capitalisation.

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ii. It helps in the management of the revenue of the organisation in a proper manner. It helps in
deciding in advance regarding what amount is to be spent on which purpose and thus the
revenue does not get wasted on useless resources. It helps in deciding the amount of tax
needed to be paid and the savings that the organisation can earn (Williams and Dobelman
2017).
iii. A proper financial structure will also help in the designing of the suitable capital structure of
the organisation. The organisation can gather several funds from several areas in order to
utilise it for either long term or short term. The company can take the funds as per its
requirement that is how much loaned capital it needs and how much own capital it needs
(Rasumovskaya 2013).
iv. The proper financial planning will also use the application of hedge funds and derivatives that
helps the companies in the long term if there is any inflation in the economy (Afza and Alam
2013). If the demand for the product is more than the supply of the product the price of the
products may rise in the market and in order to cope up with this certain rise and fall in the
prices of the products the company needs a proper financial planning to cushion itself from a
sudden shock.
Capital structure vs. financial structure
The funds are required by the companies for different purpose. They may want the fund for a long
term or for meeting the working capital requirement. The term financial structure and capital structure are
not the same and varies in the following ways:
i. Capital structure refers to the pool of different long term funds raised by the organisation
whereas the financial structure of a company represents the combination of both long term and
short term funds (Robb and Robinson 2014).
ii. Financial structure is a broad term and capital structure is a part of the financial structure.
iii. The financial structure of a company includes all types of capitals, the reserve and surpluses,
debentures and long term borrowings, any short term borrowings and other payables whereas

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the capital structure includes the equity and the preference capital, the reserve and the surplus,
debentures and other long term borrowings (Zeitun and Tian 2014).
iv. Capital structure helps in deciding the amount of various kinds of capital required by the
company. It means that it helps the company in deciding the proportion of the borrowed
capital and the owned capital and thereafter decide how much return the company can achieve
by this capital. Whereas, financial structure helps the company in deciding the investments to
be made and all other planning that will help the company maintain its good asset liability
position.
Ratio analysis of Steve and Mary Jo’s balance sheet:
Liquidity
Steve and Mary Jo are having a good liquidity position but they are not having enough monetary
assets. The monetary assets are required to be increased in order to save more. A goal to increase the
LEC ratio should be set. The purchases amount should be reduced along with some spending in order to
conserve cash. Selling of some assets can also be beneficial. They must prepare a strong budget and must
reduce spending much on the debt payments in order to create a savings and emergency fund (Appendix
1).
Debt
Steve and Mary Jo are having too much debt. Almost 71% of their assets are financed by loaned
funds. The debts must be reduced as they are much closer to the minimum range of 2.5.
Almost 38% of their income is used in the payments of long-term debt. The expenses should be cut down
and the debts should be reduced along with the selling of some expensive assets against some cheaper
ones (Appendix 1).
Savings
Almost, 10% of the income of Steve and Mary Jo are being saved, which is a good indicator.
However the balance sheet and the income statement shows that they have recently started to make
investments, which they could have done from beforehand. It can be encouraged to them that they reduce

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their spending and increase their savings aim to 20% if possible. This would help them save more and
increase their emergency funds (Appendix 1).
The liquidity ratio measures the ability of the firms to pay of its short term debts without taking
help of funds from external environment (Van Den End and Kruidh 2013). The liquidity position was
assessed to be distressed as Steve and Marry Jo were not having adequate amount of current assets for
covering the current liabilities of the company (Vogel 2014). It is essential to maintain sound liquidity so
that the daily operations stay uninterrupted (Williams and Dobelman 2017). The financial position,
liquidity position and leverage position of Steve and Marry Jo is not optimal and they should focus on
improving the same (Uechi et al. 2015).
Conclusion
It can be concluded from this report that financial planning is one of the critical tasks performed
by any financial organisation. All the companies must follow a proper financial structure and planning
system to survive in the competitive market. The report concludes that different companies adopt
different costing and budgeting techniques as a part of its financial planning. The manufacturing
companies usually undertake the ABC and ABB techniques whereas the small firms opt for traditional
accounting and costing techniques. The thin line of difference between the capital structure and financial
structure has also been mentioned. The balance sheet of Mary and Jo’s balance sheet has also been
assessed and it is concluded from there that all business must be very much flexible and prompt in taking
financial decisions to take most of the advantage.
Recommendation
The financial analysis Steve and Mary Jo was done thereby assessing the financial performance
and position which was not stable and needs to be improvised. It is essential that they reduce the leverage
associated and increase the savings ratio so that the operations could be more sustainable.