You have been asked to advise two entirely different businesses about the benefits and problems associated with what is termed the “traditional approach to budgeting and budgetary control”. One of the businesses operates in a very stable and static market place, where there is little change in either products or demand year on year, whereas the other business operates in a very dynamic, rapidly changing, innovative environment. If your findings suggest that the traditional approach is inappropriate for one or both of the businesses, please summarise some alternative approaches. The “traditional approach” typically involves the following processes: 1)Development of assumptions and plans about the factors influencing next year’s budget in advance of the budget year starting; 2)Approval of the budget before the commencement of the budget year; 3)Once the budget year has started, there are monthly comparison reports which compares budget and actual performance on both a monthly and cumulative basis; 4)Action being taken (where necessary) to correct large variances or differences.
XYZ Limited is a medium sized manufacturing business which makes and sells products to a range of industrial customers who use XYZ’s products in their own products. The working capital of XYZ is typical of a manufacturing organisation in that at any point in time they have cash, debtors, stocks of raw materials, work in progress and finished goods and creditors. The Managing Director of XYZ Limited believes that all parts of the working capital cycle could be improved and has asked you to produce a report which discusses how each part of the working capital cycle could be improved and which critically evaluates the implications of the improvements on XYZ and others (for example debtors).