Say for example your financial department decide it is right to invest all their money in a new product like the Wii and try to make the maximum return possible as there is high demand for the product. When trying to distribute, advertise and sell the Wii they then see that they don’t have enough cash flow through the business in order to carry out such tasks. Its not as if they are broke, as their business value is worth all of the Wiis put together, they just can’t find any money to sell the product and actually regain money back into the business. This can happen quite easily with any business and this is just one brief example of why costs and budgets need to be controlled efficiently.
Some of the many reasons of controlling costs and budgets include not getting into debt. If you aren’t keeping a close eye on what you are spending out on resources and services then you could find your company in a spiral of debt very quickly. This is one result of unmonitored costs and budgeting, it can be hard to resolve once you are in debt as you have large payments increasing the longer you stay in debt.
Another result of an unmonitored financial system of costs and budgets is not only debt, which was previously mentioned, but a bad credit report which prevents your company from lending from banks and won’t allow you the money to invest in development in your business. There is an old saying that ‘Money makes money’ and without being able to lend big amounts to produce more money then your company can expect a long wait until it can advance and make even more money.
Again, if the financial system is left unmonitored you would eventually see, providing you are losing money, a drop in profits and could even be working at a loss. With the information in hand that you are losing money and not even making enough profit to cover costs you could, as a result, start dropping staff and maybe selling assets such as computers and vehicles that are, not necessarily not needed, but aren’t useful without the staff operating them. The business value will eventually decrease significantly as a result of an unmonitored financial system not checking the costs and budgets effectively.
Conclusions: In conclusion it is vitally important that every business monitors their costs and budgets as the effects of an unmonitored and unresolved financial system will eventually undermine the whole foundation of a business. This could be by either debt, a bad credit rating, loss of staff and loss of assets.
Recommendation: My recommendation to anyone who owns a business is that you make sure from the very start that you have a clear business plan and list all of the expenses and try to make a rough estimate on how much profit you will make on a product or certain service so that you avoid losses.
Terms of reference: Lectures, ,
Unit 2: Exploring Business Activity Assignment 2 M2
by
sc_shivatsal (student)
