Operational Budgeting and Profit Planning Essay

Introduction why cipher? flow rate a cipher externalisening is a declineing fulfil it is crucial for the success of whatever association. The work unwraping process forces managers to be proactive in planning for the future while fostering communication and coordination at bottom a phoner. Different departments must work together in site to develop a proper calculate. A properly develop reckon will aid to define a federations objectives and provides guide barriers to eliminate wasted actions. Also, risk fire be mitigated when objectives and action plans argon clarified through the calculateing process.This article will identify the key components of a work out as well as the methodologies involved in the ciphering process. The influences of instruction behavior will be discussed followed by a brief guinea pig of bad budgeting practices and its consequences. overtop reckonThe master budget is a outline of a ships companys plans that sets concrete targets fo r barters, turnout, distribution and financing activities. Companies m destroy cash budget not only for operating activities but also for investing and financial activities. This is because management should be aw be in bring up of any borrowing needs and when loans can be repaid. reckons be interdependent because the figures of one budget argon convention eithery utilized in the inclined(p)ness of another. Budget estimates are dependent on the nature of the business, its products and services, processes, memorial tablet, and management needs. It is a detailed model of the firms operating cycle that includes every(prenominal) destruction(predicate) internal processes which is developed into a cash budget, a budgeted income statement, and a budgeted balance wheel sheet.AdvantagesThe Master Budget defines the organizations objectives and strategies. As well as all(a)owing the company to realistically project future cash flows, it also smoothens the functioning of org anizations operating cycle.DisadvantagesDisadvantages of growth a master budget is that it is both time consuming and extremely complex. However, it should be noted that the advantages of a proper Master Budget remote outweighs the disadvantages.Components of the Master BudgetThe Sales Budget includes the forecast of gross sales revenue, sale units and sales accumulation in the future market conditions.The Purchase budget would include purchase of merchandise for sale and untoughened material for manufacturing. It is uttered in terms of sales dollars.The Selling follow Budget presents expenses the organization plans to incur in connection with sales and distribution.The General and Administrative Expense Budget presents the expenses the organization plans to incur in connection with general governing body such as the accounts department, the IT department, law etc.The Cash Budget summarizes all cash receipts and disbursements expected to occur during the budgeting period. A fter a company makes sales predictions, an organization uses information regarding credit terms, collection polity, and prior collection experience to develop a cash collection budget. Other items include are an allowance for bad debt, cash sales, sales discount, allowance for mess discounts, and seasonal changes of sales prices and collections. The cash budget shows cash operations deficiencies and unornamented expected to occur at the end of distributively month, which is apply to plan for borrowing and loan payments.Budgeted Financial Statements are pro forma statements that reflect the asif effects of the budgeted activities on the actual financial position of the organization. It reflects the results of operations assume the budget predictions.Budget Development in a Manufacturing OrganizationManufacturing organization converts the raw materials into finished goods and sells it to the customer for consumption. It prepares the master budget before production to make the o rganization successful and survive in a competitory environment. For example, a steering wheel manufacturer will plan a Master Budget in the following fashionA Sales Budget will be reportd on the anticipation of sales of the Bicycle and pricing policy, expected number of units to be sold and the revenue generated.in one case the sales budget is completed the Production Budget will acquire the total volume of Bicycle units to be manufactured establish on the targeted sales and inventory required to maintain sales. For example, if the expected number of sales of Bicylces for the month of January is 500 units, the production budget will plan for 650 units (Sales project (500) + inventory as per company s strategy (30%)).The Purchase budget will be obtained based on volume of Bi Cycles to be manufactured, material required to manufacture a single unit and the cost of materials. As per the above example, the material required for 650 units will be budgeted for the month of January.T he Manufacturing Cost Budget will be derived from the cost of making 650 units of bicycles exploitation the design of product and process used to manufacture while reaching the raw material cost, direct labor cost and manufacturing over headed cost.Finalizing the BudgetFor economic and effective budgeting two questions must be addressed Is the proposed budget practicable?Is the proposed budget acceptable?To be feasible the organization must be able to implement the proposed budget. Possible actions include obtaining equity financing, issue long-term debt, reducing the amount of inventory on hand, or obtaining a line of credit. Constraints for infeasibility are availability of merchandise and production capacity for a manufacturer. When evaluating the budget, management must consider various financial ratios such as return on assets, profit margins, etc. The company must contrast the return provided by the proposed budget, the past budget and industry average as well as the org anizations goals.Budgeting MethodologiesInput/ payoff nestCompanies using the Input/Output b coif on calculate the required commentary or resources through estimating the potential output or performance. For example, if a cow dung manufacturing plant requires 5 grams of metal to create one microchip and each gram be $2, then each microchip cost $10 of material. Thus, a intercommunicate output of 1000 microchips would cost $10,000 and 5 kilograms of material. This start out is mainly used for industries with a measurable relationship between exertion and return, such as manufacturing, service, and merchandising but is not compatible with industries that are inelastic to unit level changes.Activity-based ApproachThe Activity-based Approach is subset of the Input/Output which deoxidizes the potential for error by determining cost through evaluating the cost of each use in the manufacturing process rather than focusing on inputs such as machine or labor hours. Thus, the appro ach provides a more accurate picture of costs involved by providing costs at each level of production. It results in a more effective budget by allowing the identification of the optimal set of activities. However, it is far more time consuming to produce.Incremental ApproachA budget prepared using the previous category budget as a base with some percentage nurture or decrease is called incremental budget. Budgetjustification is to be given only for the percentage change not for the base amount (previous years budget). This geek of budget is surmount suited for non-profit organizations, government organizations or in organizations in which the amount of output is weakly correlated to the money spent. For example, the Boston Public School budget for FY12 increased by 1.2% from the FY 11 and for FY11 it increased by 0.4% of the FY 10 budgets (OBM 2011, 2012). The increase in both budgets was justified as improving opportunities for English spoken communication learners, arts an d physical education, but not for their existing programs. The advantages of this budget are that it is easy to practice, quick preparation, stability and conflict avoidance between departments referable to different budget approval. Some of the main disadvantages are there is no motivator to reduce expense as peopmsle are tempted to spend the parcel out expense so that their future budget is not affected. Also, no mode for innovative changes to the budget is given.Minimum Level ApproachIn this type of approach a marginal budget level is fixed for carrying out current projects and activities and anything above the budget should be justified. For example, the R&D budget in a pharmaceutical company is fixed for ongoing projects and in the altogether projects must be honord by the management. Main advantages are ongoing projects will not be disturbed due to budget changes and last year budget will not be approved without order as in the case of Incremental approach.The Minimum level approach is considered as Zero Level Budgeting in some organizations in which for every amount spent, justification must be (TWF n.d.). For example if an R&D department of an Electronics manufacturer puts forth many project proposals to the management , based on the market trend and project feasibility, the management will approve the most profitable project. Advantages of this method are that allocation of resources is very juicy-octane and detects inflated budgets. However, this method consumes a significant amount of time and resources. coach-and-four BehaviorTop-down vs. Bottom-upIn addition to macro methods of budgeting (Input/output, activity based, incremental, and minimum level) there is also a distinction between top-down/imposed and bottom-up/participative budgets. These two methods represent opposite extremes of a spectrum of which a companys budgeting procedure may capitulation on any point.As the name suggests, a Top-down Budget is formulated by a small number of high ranking managers who make all decisions regarding a companys objectives which are then received by the lower managers who implement the plan. Because only a few plurality are involved in the decision making, it is quick and saves time. It also avoids the cushion that is lower management tend to build into their budgets. However, because only a few people are involved in the decision-making process, those not involved may overleap the motivation and commitment to properly implement the plan.On the opposite end of the spectrum is the Bottom-up process of budgeting. It begins at the lowest possible management level, whose budget plan is then integrated with the proposals at the next level. The process is go along until a comprehensive holistic budget is developed for the company. The Bottom-up process ensures that managers at each level clearly scan their roles in opposition company objectives. Therefore, budgets are usually far more accurate and employees are more commit ted to their self-made budget. However, inefficiencies tend to occur with a bottom-up process. Managers tend to provide a budgetary slack (understating revenues or overstating expenses) in order to provide a cushion against underperformance or unfavorable reviews. While this may cause inefficient spending, it can provide funds to reduce risky activities of which there is insufficient information.Budgeting PeriodsThere are three types of budgeting periods used by companies Fixed-length, aliveness Cycle and Continuous/Rolling Budgets. The type of period used is unyielding by the context of the budget. Most companies use fixed-length budgets determined at the beginning of a specified period. However, for single projects, a Life Cycle budget is more attractive, where a companydetermines the budget for the undefiled project especially if the project occurs within a period or over multiple periods. A continuous budget may be more useful than a fixed-budget as it forces managers to be c ontinually modify their budget. Where a one-year budget plan is only available at the beginning of the year, a 4 quarter rolling budget requires managers to continually vex a budget plan for a whole year at the beginning of each quarter, thus, sustaining the budgets relevancy.Forecasts, Ethics, and Open give-and-take ManagementIn addition to deciding methodologies of budgeting, a manager must also consider company forecasts, ethics and employee support. A manager must allow for the development of various forecasts and consider them during the budgeting process. Industry forecasts, such as economic conditions, as well as internal forecasts, such as collection periods, should be factored into the budget.Because ethical issues regarding budgeting are rarely illegal, there is a strong incentive to either pad the budgetary slack or overstate performance. Organizations should be firm in their rules against unethical behavior as it is easy to fall into a moral gray area.Finally, in orde r to properly set off employees by gaining support for the budget, many companies have adopted an Open Book Management approach. The approach involves interacting with employees by sharing information and teaching employees to understand the relevant financial information.Sample AnalysisA well formulated budget is crucial in order to facilitate a companys operations. However, when a companys budget is poorly formulated, it can have disastrous consequences. An example is OGX Petrleo e Gs Participaes S.A. owned by Eike Batista. At the companys note in 2009, it achieved an IPO of $3 million (Spinetto et al. 2013). However, the company filed for bankruptcy on Oct. 30, 2013 with debts of $5.11 billion with Batista being sued for violations of disclosure ruels (Fontevecchia 2013). While its failure was due to a variety of factors, we will argue that poor budgetingis a crucial factor. indoors the petroleum industry, the exploration and production process is both a high risk and high exp ense venture where predicted outputs require complex calculations (Suslick et al. 2009). even off after production has begun, the projected output may change depending on a variety of proteans (Katusa 2012). OGX had calculated potential output at 4.8 billion barrels and therefore invested heavily into the required infrastructure based on this estimate (Spinetto 2013). However, these decisions were made before the wells were operational which resulted in lowest outputs at roughly 50% of the initial amount (Katusa 2012).Management decisions at OGX were made by Bastista and a small group of managers and its inputs were based on an estimation of outputs (Katusa 2012, Spinetto 2013). In addition, performance was highly overstated due to Batistas endeavor to shoot the messenger (Spinetto 2013).Therefore, OGX should have adopted a bottom-up minimum level approach of budgeting as well as adopting a policy of account performance after confirmation. A bottom-up approach would have genera ted a much more precise picture of performance and costs while a minimum-level approach would have required confirmation of projected outputs before beginning operations at the cost of time. In addition, reporting performance after confirmation would have avoided any overstatements of performance.ConclusionTo be successful in a competitive environment a company must develop proper Master Budget in order to promote proactive thought, communication and coordination within a company. It is also an crucial aide to planning and risk management. In order for a company to run smoothly, the Master Budget must balance all the variable constituents of a companys operational activities. In addition, methodologies used, while utilized at the managements discretion, should reflect the context of the companys operations. As illustrated in the OGX example, failure to properly develop a budget can have catastrophic consequences to a company.ReferencesCity of Boston bureau of Budget Management (OB M). 2011. Summary Budget. Retrieved Oct. 2013 from http//www.cityofboston.gov/images_documents/02%20Summary%20Budget_tcm3-16341.pdfCity of Boston Office of Budget Management (OBM). 2012. Summary of Budget. Retrieved Oct. 2013 from http//www.cityofboston.gov/images_documents/02%20Summary%20Budget%20A_tcm3-24767.pdfEaston, P.D., Halsey, R.F., McAnally, M.L., Hartgraves, A., & Morse, W.J. 2013. Financial & Managerial Accounting for MBAs 3rd Ed. Cambridge Cambridge barter Publishers.Fontevecchia, A. 2013. Death of the Brazilian Dream Ex-billionaire Eike Batistas OGX Files for Bankruptcy. Forbes, Oct. 30. Available at http//www.forbes.com/sites/afontevecchia/2013/10/30/death-of-the-brazilian-dream-ex-billionaire-eike-batistas-ogx-files-for-bankruptcy/Katusa, M. 2012. Brazilian Oil Dreams Get a Sobering humans Check. Casey Research, July 2012. Available at http//www.caseyresearch.com/cdd/brazilian-oil-dreams-get-sobering-reality-checkSpinetto, J.P., Millard, P., & Wells, K. 2013. How Br azils Richest Man Lost $34.5 one million million million in a Year. Bloomberg Businessweek. (October) 60-65.Suslick, S.B., Schlozer, D., & Rodriguez, M.R. 2009. Uncertainty and Risk Analysis in oil color Exploration and Production. Terrae 6 (1) 30-41.