Assignment Cover Sheet
ACCT5000 – INTERMEDIATE MANAGEMENT ACCOUNTIG PORTFOLIO
CASE STUDY
Due: Monday, 9th October 2017, 4 pm
Family Name / Surname:
Other Names:
Student ID:
Name of Tutor
Workshop day/Workshop Time
9.30 am, Friday
TABLE OF CONTENTS
1. INTRODUCTION 2
2. BUDGETING 2
2.1- Purpose of Budgeting 2
2.2- How Budget Can Be Used to Better Manage 4
2.3- How Budget Can Be Used to Grow a Business 5
3. CONCLUSION 5
4. RECOMMENDATIONS 6
5. REFERENCE LIST 7
1. INTRODUCTION
The growth of a company even during tough times depends on the ability of the company to form strategies from budgets. However, the case of PEG is unique as the company first succeeded without budgets. The Phoenix Enterprises Group was thriving due to the boom in mining in Singapore. Instead of use data and analyzed data from the budgets and financial statements, Francis used his intuition for budgetary planning purposes. However, the case study reveals that even with an understanding of the market, the preparation of budgets help the company to grow during the rapid economic deterioration. If Francis had hired Bonnie Williamson during the start of the venture, the revenue of the company could not have been impacted in 2014 due to a slowdown in the resources sector. PEG would not have experienced financial difficulties and inability to meet the suppliers’ payment. The impact of making investment choices is dependent on the ability of the company to prepare budgets and use it for making vital investment decisions. The purpose of this report would be to highlight the purpose of budgeting to PEG’s manager Francis Sik.
2. BUDGETING
2.1- Purpose of Budgeting
Francis did not use budgets initially as he did not feel the need for the budgets. Besides, the business was growing steadily without the preparation of the budgets. The business had grown and become more diverse without the knowledge about the future results (Barrett 2007). The situation is worrying Francis because there is no knowledge nor data to help him to consolidate the investment and ensure superior financial performance. The purpose of budgeting would entail the forecast of income and expenditure. Therefore, it uses profitability as a basis and a tool for making a decision. The budgeting is a means to monitor the business performance (Barsky and Morris 2016).
The major purpose of budgeting is five. The purpose of budget entails (1) planning, (2) facilitating communication and coordination, (3) allocating resources (4) controlling profits and operations and (5) evaluating performance and provision of incentives (Hofstede 2012). The preparation of budget entails forecasting the future revenue and expenses of the business based on previous revenue and expenses. It is vital to understand that the purpose of the business is to maximize profits through the minimization of cost and maximization of revenue (Hofstede 2012). However, the minimization of cost and expenses should not interfere with the quality of services. Therefore, the purpose of budgeting is meant to help the company in planning for the revenue, cost, and profitability of the company.
The second major purpose of budgeting is the facilitation of communication and coordination. Previous budgets can be used to compare the actual performance and determine the variance. The variance can be used to facilitate communication and coordination when preparing the current budgets. The third major purpose of budgeting is the allocation of resources (Arnold and Artz 2016). During the preparation of budgets, there is an allocation of resources to different business venture. Budgets help the company to know what and how resources can be allocated to different venture for the maximization of revenue and profits. Thus, the purpose of the budget would be to allocate resources to different business diversity according to the needs, expenses and revenue generation.
Another significant purpose of budgeting is controlling profits and operations. The preparation of budget ensures that the company not only plan for profitability but also control. The controlling of profits and operations occurs when resources allocated is monitored to ensure that there is no wastage. Finally, the purpose of budgeting is to evaluate performance as well as the provision of incentives (Barrett 2007). In most cases, the budgets are often compared against the actual performance to determine the variance. Ideally, the variance for revenue and profits should be positive while variance for expenses should be negative. The performance Assessment of the business is dependent on these two main variables in the budgets (Barsky and Morris 2016). It can also be used to provide incentives to encourage the employee to work hard. For instance, the budget can be used and used as an incentive by telling employees that the group or department that meet the budgets would be rewarded. Therefore, it boosts the morale of the employees.
2.2- How Budget Can Be Used to Better Manage
All businesses regardless of their size, the budget can help them to improve management. The budget helps the business to control spending, maximize resources as well as head off cash flow problems before they can potentially harm the business. The budgets help the company to use human resources effectively through the collection of data and use it forecasts depending on the human resources (Barsky and Morris 2016). Through the opinions of employees on areas of cost reduction or better management can help to improve sales or insights from the ground. The preparation of budget helps the company to think about the future, the competitive environment, resources of the company and possible changes in the industry (Arnold and Artz 2016). These four factors are the cornerstone of making a strategic decision.
The budget can be used to manage the company through the forecast of the future better. The company can think of how to manage fixed cost such as rent, staff salaries, insurance, and utilities amongst others (Barsky and Morris 2016). It would also help the company to determine how to reduce the variable cost as well as identification of non-operational costs like taxes and changes in financing. The budgets would help to eliminate the management philosophy of Francis that was based on optimism rather than realism. The updating of the budget as circumstances changes ensure that the company is on top of the situation as well as allocate resources effectively.
2.3- How Budget Can Be Used to Grow a Business
The preparation of a realistic, accurate and thoughtful budget give the company valuable insights into the business strategy. For instance, Phoenix Enterprise Group can start to examine the performing parts or services that have untapped potential in the business portfolio (Barsky and Morris 2016). The preparation of budgets also helps the business to examine areas that are underperforming. The underperforming can help the company to grow as the management can strip the dead wood and free or resources for more profitable projects. The expansion of the business would be based on potential rather than intuition. The budget helps to evaluate the opportunities using profitability growth index.
3. CONCLUSION
The failure of Phoenix Enterprise Group to cope with economic turmoil is due to the lack of proper budgets in the previous years. The hiring of Bonnie Williamson is good news, but there is lack of processed data on the budgets. The company should have hired Bonnie Williamson instead of Jessica Boulter. Bonnie Williamson would have prepared budgets used for growth, better management as well as the formulation of strategies. Finally, Francis has realized that intuition is a mere luck that cannot help the company to survive tough economic times.
4. RECOMMENDATIONS
The first recommendation would be for the Bonnie Williamson to use the process accounting records to understand the trend of each business venture in the portfolio. Secondly, all the accounting records should be for the formulation of business strategy. Finally, Bonnie Williamson and Francis Sik should work together through an open communication channel for the business to return to profitability in these tough economic times.
5. REFERENCE LIST
Arnold, Markus C., and Martin Artz. 2016. “The Use of a Single Budget or Separate Budgets for Planning and Performance Assessment.” Arnold, Markus C. and Artz, Martin, The Use of a AAA 2017 Management Accounting Section (MAS) Meeting 1-49.
Barrett, Richard. 2007. Planning and Budgeting for the Agile Enterprise: A driver-based budgeting toolkit. Butterworth-Heinemann.
Barsky, Noah P., and Jan Taylor Morris. 2016. “Corporate Budgeting: Perceptions of a Next Generation of Corporate Leaders.” Management Accounting Quarterly 17 (4): 1-10.
Hofstede, G. H. 2012. The Game of Budget Control. Routledge.
