Cash Budget for Stoddard Ltd
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Foundation Degree in Accounting & Finance Subject: Financial Planning Tutor: Linda Jordon Title of work: Cash Budget for Stoddard Ltd Name: Daisy So Cash Budget for Stoddard Ltd for six months to 1 November 2001 Jun Jul Aug Sep Oct Nov £ £ £ £ £ £ Cash inflows Credit Sales 7350 8750 10150 11550 Cash Sales 3150 3750 4350 4950 6000 6000 3150 3750 11700 13700 16150 17550 Cash Outflows Freehold Property 60000 Equipment 8000 20000 Vehicle 4000 Purchases 34375 10875 12375 13875 16500 Wages & Salaries 1000 1000 1000 1000 1000 1000 Overheads 400 400 400 400 800 800 Commission to salesmen 525 625 725 825 1000 73400 36300 12900 14500 16500 39300 Cash flow (70250) (32550) (1200) (800) (350) (21750) Opening Balance 80000 9750 (22800) (24000) (24800) (25150) Closing Balance 9750 (22800) (24000) (24800) (25150) (46900) Financial Position of Stoddard Ltd Based on the cash budget which I prepared on previous page, we can see Stoddard Ltd is having problem with their cash situation. It is mainly due to the long credit terms for their debtors, overstocking and the initial cash payment for the freehold property and equipment. The management should use the economic order quantity (EOQ) method to carry out their stock control. Other methods such as just-in-time and optimised production technology are also available but since Stoddard is worry about the interruption towards the end of the accounting year, just-in-time method is not the best solution to this situation.
We can argue that it is true that behavioural problems can lead to lack of objectivity in budgetary information, lack of motivation and consequent dysfunctional effects. However this should not be seen as a reason for not budgeting but as a reason to budget in such a way as to minimise the behavioural impacts. The first stage in doing so is recognising the existence of the possibility of such impacts. Measures can then be taken to minimise their effects. Discuss how budgeting may be harmful to the achievement of business objectives By involving managers in budget preparation we can create a communication channel, and managers at all levels are more likely to understand the justification for any changes in operations. In such case, instead of complaining, they might well become more constructive, and even innovative in their responses. However, there are advantages and disadvantages of budgeting in the dynamic business environment. P Atrill & E McLaney (2002:132) suggested that budgets are seen as having five main benefits to the business - promote forward thinking and the possible identification of short-term problems, motivate managers to better performance, provide a basis for a system of control, help co-ordinate the various sections of the business and provide a system of authorisation. The advantages of budgeting are to help to control income and expenditure, helping to draw attention to waste, losses and inefficiency.
For example, just think of the consequences of this: a manager may add 10% to the proposed budget expenditure in anticipation of being cut down later, senior management cuts it down by only 5%. It takes only a few budget managers to do this and the company will soon be suffering. If four managers require £100 000 each but bid for £110 000 each and receive £105 000 each, the company will be wasting £20 000. In conclusion, the intention of budgeting is to provide budget managers with a powerful incentive to make company priorities their own, to seek out and deliver economies, driving down costs while maintaining or boosting performance. By rewarding relatively objective budgetary performance, organisational performance can be improved. This may work to some extent, but it can also produce a further twist in the spiral of distrust, self-protection, deception and cynicism. When pressure to achieve budgetary targets frequently requires managers to make false economies, to withhold co-operation from other department, and to avoid expenditures by imposing even greater costs on other people's budgets, then clearly something has gone wrong. Furthermore, there is the issue of information and uncertainty. Senior managers do not know what sorts of saving are possible, or what levels of service would be associated with different levels of expenditure. They may have hunches and rough ideas, but they cannot be certain, perhaps by spending considerable time or resources finding out themselves.
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