Production Budget and Sales Budget
A budget can be defined as a plan that is comprehensive in nature and helps to attain the financial, as well as operational goals. It is tagged as the map of the strategic plan of the company. Creating a budget leads to innumerable advantage. It helps in the coordination of activities and leads to a bigger result. Budget leads to proper evaluation of the performance and influences every area to be efficient in nature (Drury, 2013). The operational budget is one of the major budget that consists of various budget in it such as the production budget, sales budget, materials budget, direct labour, etc. It needs to be noted preparation of all such budget helps in tracking of the activities in the sequence of a department. Further, the cash budget is even computed that provides an estimate of the cash inflow and outflow. Overall, the preparation of the budget helps the companies in many ways. It depends upon organization to organization of the type of budget they want to prepare. The nature of the organization influences it. The Cash and the operating budget are discussed below:
The production budget of the company details the cost requirement so that there is enough products in place to meet the inventory needs of the company (Horngren & Foster, 2008). Inventory need is the major one because the business can perform in an effective manner when the inventory position is settled and in a smooth flow. If there is disturbance the business will lack and face the heat. It is witnessed that the production fluctuated and was at high in August that is 260 units. In tune with this, the sales were higher when the production surged. From the sales budget, the sales in units are estimated and the earnings coming from such sales. It is seen that from February to September, the sales were higher in number. As per the budget when the sales are higher in number it will lead to more sales. In this regard it needs to be noted that production is higher in nature. Selling price is the same when the sales increased, the sales amount is higher. Similarly, another budget such as material purchase, sales budget, and variable distribution is done to know the estimation. It needs to be noted that the production budget should be higher in number as it denotes a stronger capacity. Going by the overall analysis, it is seen that the closing inventory of December is projected at 180 units. On the other hand, the sales budget provides a forecast into the sales capacity of the organization. It is noted that the sales were higher from March to November owing to more production. The materials purchase and the direct labour rate remained constant. As per the variation in the units the amount projected significant differences. For the variable overhead the units varied as per the variation in the production and rate per unit remained the same. Further, the fixed administration budget remained the same owing to the nature of fixed overhead.
Cash Budget
This budget is a forecast of the inflow of cash, as well as outflow over a particular point of time. This budget helps in ascertaining whether the company has the proper cash to meet its operations (Vanderbeck, 2013). Cash budget comprises a vital place in the organization because every matter is indicated to it. Inflow and outflow needs to be ascertained because without any valid figure the business will face problems. The cash inflow comprises of the cash inflows that consist of proceeds from shares and cash sales. Inflow of cash is vital for the smooth functioning of the company as it indicates the cash generation capacity of the company. The inflow of the company should be formidable to cement its place in the industry if there is a lack of it, it leads to unfruitful result. Cash sales significantly increased from month to month signalling a strong business. On the other hand the cash outflow comprised of different payments that were done that ranged from payments to overheads. Going by the analysis of the cash budget it is noted that the cash inflow were higher £5,48,000 as compared to the cash outflow that is £1,78,840 and hence the net cash flow of the organization is positive in scenario. This indicates that the company is having more of inflow as compared to the outflow and therefore, the stability of the company stands strong. The closing cash balance of the company strikes a notion that the cash is sufficient for the company and that the opening balance of the next year will be positive. There is no deficit of cash except for a situation in March when the figure was a deficit. Hence, the utilization of the cash resources of the company has been done in an effective manner projecting the sound policies of the company.
The income statement is prepared by the company by evaluating the financial performance in terms of revenue and expenses that are related to operating, as well as non-operating activities. On the other hand, the balance sheet projects the assets of the company, liabilities, and equity. It projects the condition of the company in terms of owing and investment by the shareholder. The budgeted income statement of the company states the total production cost of the company. Total units were 2340 in number and accordingly the statement has been prepared. The budgeted income statement provides an indication of the profit from operation. The cost of sales is deducted from the total sales to derive at gross profit and after deduction of the distribution and administration expenses the profit from operations is derived.
Factors to consider when creating a cash budget
Hence, in totality it can be observed that budget is a vital component of the company and helps in shaping the company’s destiny. It leads to calculated activities and enables in progress because the activities can be evaluated.
Conclusion
Budget and budgetary control is the major weapon for an organization that enables driving the business in the correct direction. A budget helps the business to forecast and plan its activities accordingly. The preparation of operational and cash budget is a vital tool and hence, must be prepared with utmost precision. It helps the organization in forward looking and any deviation or variances can be traced and rectified. Moreover, budget aids in the preparation of income statement and balance sheet. Overall, it aids in preparation of the financial statements.
Memorandum
To: Shareholder
From: Manager
Subject: Evaluation and analysis and improvement of accounting budget
Date: 26/03/2018
Budget is one of the important tools that help in driving the business. The preparation of budget is therefore done with precision so that it remains error free. Every department must chalk out its budget that will help in ascertaining and evaluation. It is for the same reason that the experts are delegated the task for creation of the budget. The use of budget is manifold in the current scenario. Budget is not only related to recording and evaluating rather goes a step ahead.
Financing Needs
A company may need to create cash budgets for itself as it helps to get a view of the cash shortfall and also to assume the amount of shortage. This budget also shows that when the company has to make borrowings from third parties. These are the loans that are taken to compensate the expenses of the company. These are also required by the company to generate and store some production stocks. This also helps the company to open up new sources of income for the company and to predict and detect future opportunities as per their costs that may be fruitful. This type of budgeting also acts as a boon to the company in terms of product development. It leads the company to select only those projects that are financially beneficial for the company in the future.
Corrective Actions
As told earlier, cash budgets are a way for the company to undertake future opportunities by maintaining a balance between the current finances and the loans to be taken. It also checks that the estimates made up in this budgets match with the current finances for the integrity of the company. If the later things don’t match up then the company should make immediate short-term borrowing in order to make changes in hardware, or to pay taxes, or to give away the payrolls. Long-term loans can also be taken up companies if they need to replace an existing product in the market with a new one or to make changes to the current prevailing item. In case of a negative trend in the market sale is detected then the company should tend to change or negotiate the price of the existing item with the lenders.
Conclusion
Company Performance
A cash budget is a presentation of the financial position of the company which is visible to the ones interested in it. They may be the internals as well external supporters. Stockholders, investors, suppliers are some of the ones interested in the company. If the cash flow of the company shows a positive deflection then the demand for the company’s items will be higher, which will increase the sales and hence will benefit the company and also the current potential investors. A negative case may also arise when the expenses are more than the sales, in which the company requires investment at a large scale. Also, the conditions can be worse if the sales decline firmly, and then the company can lose creditors and investors which may lead it to a state of bankruptcy.
Implement Rolling Forecasts and Budgets
The present result can be used to modernize the rolling predictions and budgets, and the forecast of managers which was made several months ago may not be taken into consideration. This process is used for the prediction of just a quarter and not the full year. The predictions become bigger and wider with every quarter as they are modernized again. For a better alignment of the project and improving the projections of the plan, one should adopt rolling forecasts.
Budget to your plan
The budget is moulded according to a plan. Budgeting means to make decisions on the basis of what your actual profit is, rather than seeking the expenses which may or may not take place. Budgeting helps you to plan the expenses and thus making it simple to spend money or deal with the expenses in potential future. This method is very versatile if the original budget was not dealing will all the opportunities.
The figures of the company’s cash budget is discussed
The cash budget projected comprises of the cash receipts and the disbursements that happened during the period. The inflows and outflows of cash contain a collection of revenues, payment of expenses, overheads, etc. In short, the cash budget is the projection of the cash position of the company in the future.
The cash inflows of the company comprised of three parts that are the proceeds from the issue of shares and happened only in the month of January. The cash sales happened from the month of April and an increase in the trend could be witnessed meaning that the payment has been received by the company. However, the last element of the cash inflow is the debtor and there has been no receipt from the debtor. This implies that all sales were done on the cash basis and the company does not follow the credit line. However, in this regard, the company is failing to reap more profit because if the company follows a credit period of 30 to 45 days then debtors will buy in bulk and more realizations can be made. However, the company is following a stern policy and hereby the receivables will be less.
The cash outflow comprises of payment for material, labor, and other overheads. It has been noticed that the company has a strong line of payment and that can be witnessed by the trend. Further, the overheads, as well as expenditure indicate that the company has a smooth outflow. The net cash flow is positive all throughout apart February and March. Similarly, the closing cash for both these months stands negative in number. Overall, the closing cash is positive in scenario indicating a strong opening to the next year. The cash inflow of the company stands at £5,48,000 as compared to the cash outflow that is £1,78,840 and hence the net cash comes to be positive in nature. This indicates that the business will have surplus cash and the same will be reflected in the opening of the next year.
Cash budget can be improved by the following
There are various ways that can be adopted in order to improve cash budget. Firstly, the budget must be based on a strategic expenditure and policy framework wherein businesses are provided with enhanced responsibility for decisions associated with use and allocation of resources. With the help of such framework, the predictability of both funding and policy can be enhanced, thereby allowing businesses to plan ahead and sustain their programs. Overall, this may facilitate a hard budget constraint and enhanced autonomy that can offer incentives for effective use of funds. Secondly, the best way to address implementation of cash budget can be done by computer-based system of management of funds and accounting, MTEF (Medium-Term Expenditure Framework) based budget system that is characterized by effective link betwixt budget and priorities within a sustainable spending envelope, reflecting trade-offs betwixt competing purposes, and by enhancing predictability and transparency during implementation of budget.
Thirdly, by extending the time period that is covered by every release of cash can be gradually enhanced from one month to higher periods. Such cash releases must be connected more closely to the authorized cash budget. Further, fresh releases of cash must be cut back to heads of the budget that are already over-committed and money diverted to liquidate the equivalent arrears. Fourthly, there must be a set of rules that can be issued signifying how reductions in allocations of cash can be implemented if such reductions became compulsory. Fifthly, such cash budgets must be capable of being altered according to change in circumstances. Such variations must be made in a formal and transparent way by the businesses. In relation to such proposed improvements in a cash budget, a review of the formal mid-year budget can be introduced wherein fresh requests can be taken into account and decided upon in a transparent way in accordance with long-term priorities. Sixthly, some improvements in the cash budget may include incorporation of seasonal variations in account and differentiating betwixt non-discretionary and discretionary expenses. Moreover, in relation to improvements in a cash budget, if there is a downward revision of expenses that becomes unavoidable, it must be first absorbed by the contingency reserves. In addition, if further cuts became compulsory, businesses should attempt to make the same in a transparent and open way so that their priorities can be easily reflected. The forecast should be simple and should be short and clear for small firms instead of being more reserved projection of cash flow. The best implementation for the firms is making a 12 month rolling forecast. A person will come to find that when his expenditure increases which may be during the big sales season and when all the dues are paid at once when he analyzes the data week by week.
Every employee should be made aware of the fact that the improvement of cash flow is very important. The targets motivate the employees and also the collection targets are fulfilled. But the sales department should always be on the summit. If the sales people are not made aware that there exists a revenue goal then they will keep on try and improve the revenue without even paying the dues and invoices on time thus decreasing the revenue all at once. Therefore, implementation of such ways into an organization can assist in improvement in cash budget.
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