This report is in two aspect. The first aspect will be looking at traditional budgeting both in a static market and dynamic market. While the second aspect will be looking at the various parts of XYZ working capital cycle and how to improve each part.
Budgeting, which for many companies, stands as the cornerstone for management planning and control, is still relevant even in our today dynamic and rapid changing economy. Many still make use of traditional budgeting but its limitation has lead many companies today to seek for better approaches in form of Zero-based budgeting for static market and activity based budgeting for dynamic markets. In this report, rolling budgets has been suggested for both the type of markets while other types can be introduced at interval. Suggested interval being 3 to 5 years. But it would be misleading to suggest that rolling forecasts are a panacea for every business. It depends, among other factors, on the planning horizon, the nature of the business and revenue volatility. XYZ Limited, a manufacturing company will like most manufacturing have its major investment in its working capital and if not well managed might lead to liquidation. Ways of improving each part of its working capital like inventory, trade receivable and payable and cash in order to improve profitability and liquidity, are looked at in this report. Reduction of cash conversion cycle will improve profitability and less fund will be require for the working capital. ANSWER TO ASSIGNMENT PART A
Budget as defined by CIMA U.K (Cited by The institute of Cost Accountants of India 2012 pg.306) is “a financial and/or quantitative statement prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of achieving a given objective”. While Cheong (cited by Banvoic (2005 pg. 1) called it a “financial plan that set out anticipated revenues and estimated expenditures over a period of time”. According to McLaney and Atrill (2008) budget is a business plan which serves as an important tool in management planning and control and it is usually set annually for the forthcoming year. Banvoic (2005) in his research found out that many companies, both small and large uses budget and has rated it as a key job function. This is due to its multiple functions which as cited by University of Sunderland (2011) includes planning, coordination, communication, motivation, control and evaluation which helps management to achieve its overall objective of maximizing shareholders wealth. Budgeting by most companies is often done using the traditional approach not taking into consideration the factors listed by Banvoic (2005) which include but not limited to the type of organization, leadership style, even the industry in which the company operates, no wonder so many are dissatisfied with it. Steffan (2008) is of the opinion that the style of budget to be adapted must suit the operational activities and objectives set by the company’s management. This report will be reviewing the use of traditional approach to budgeting and budgetary control in a 1. Stable and static market
2. Dynamic, rapid changing, innovative environment,
And other different types of budget which will be suitable for the two types of companies
Traditional budgeting according to Steffan (2008 pg.72) “usually uses the actual data from the previous the previous year, along with the variance analysis, to identify planning weaknesses or areas where the company did not perform in line with budget.” She further explained that the combination of historical data, information about future event and assumption relating to unknown issues which will impact on operations is then used to prepare the next period budget. It is also referred to as the incremental approach to budgeting and is set on the basis of what had in the previous year with some adjustment for any changes in factors...
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