Keeping Control of Budgets.

Accounts are essential for ensuring that directors and managers are accountable to the shareholders and that they act honestly and efficiently in the interests of shareholders.

Financial accounts are also produced for the benefit of creditors, prospective creditors and prospective investors. In addition by tax authorities require the accounts of business to assess tax liability.

Customers, suppliers, the community at large and employee may also be interested in company accounts.

Keeping Control

Keeping control of money is part of life. Is there enough money in the bank to pay the electricity bill? Can we afford that expensive holiday?

Efficient people keep records that allow them to answer these questions quickly and easily. The same principles apply to business. Keeping records provides information that:

gives early warning of the problems the business might be facing. The business can then take action to avoid these problems;

saves time (and therefore money) when information is needed;

makes it easier for the business to stay within the law, as all business have to keep accounts for tax purposes.

Budgets

A budget is a short-term plan of action outlining what the business wants to achieve, what it needs to do to reach its goal and how much it will cost.

Budgets act as a control for the business because they set targets and the people running the business can check to see if they are reaching these targets. To ensure the success of a budget, the following should be considered:

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the targets have to be realistic;

people have to be involved in drawing up the budget;

there should be some incentive for reaching the target (e.g. a bonus).

Cash budget

When it comes to looking after our own finance, we all know that we have to take some form of responsibility.

If we spend too much, we will soon run out of money. We will then either have to go without things that we need, or borrow in order to get them. But if we borrow, can we pay back the lender?

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the targets have to be realistic;

people have to be involved in drawing up the budget;

there should be some incentive for reaching the target (e.g. a bonus).

Cash budget

When it comes to looking after our own finance, we all know that we have to take some form of responsibility.

If we spend too much, we will soon run out of money. We will then either have to go without things that we need, or borrow in order to get them. But if we borrow, can we pay back the lender?

One way to predict if we are able to meet our financial commitments and as when they arise is by drawing up a cash or cash flow budget. A cash flow budget shows business cash income and expenditure.

Budget can be defined as a statement of the financial position of a person, or a business for a future period of time on estimates of expenditures and how to finance them.

Reasons for a firm's Budget

Similar forecasts are made about a firm's expenditures. Budgeting in business has the same characteristics as domestic budgeting:

Planning The objectives must be set such as expected profits level, expected sales (short term planning)

Informative In order to forecast expenditures and estimate the amount of money required to fund it, a business need detailed amount of information on production, cost of materials, labour, etc..

Control This is called budgetary control- it is comparing the actual performance against projected performance, to take the business to the right direction.

Budget Period

A Budget is drawn up in a period of time before it is to be put into practice. Most business use the financial year as budgetary period, then annual budget is then broken down into quarterly or monthly budget depending on the need of the business.

Purposes of the monitoring and management of cash flow and cash budget

The management uses the business budget and cash flow forecasts for variety of reasons, for example to plan for:

an expansion of the business;
the costs of unexpected events;
reductions in the costs of the business;
monitoring and reviewing performance in the light of variances experience.

Planning for an expansion of the business

As we saw before, business can obtain funds from various sources such as their retained profit and also borrowing. Looking at the business financial and management accounts will give the management some ideas about the level of gross, net and also retained profit. The business net profit is usually distributed to three main directions:

tax;
dividends to shareholders;
retained profit.

Net Profit – tax = profit after tax

The management has to make the decisions about the distribution of their profit after tax e.g. how much to give shareholder and how much to retain for future investments. Planning for future expansions might mean giving less profit to shareholders and retained more to fund these expansions programme.

Also in case of lack of retained profit, the management has to make the decision how much to borrow for their future projects.

Planning for the costs of unexpected events

Wise management should always keep some of the business-retained profit to cover the cost of unexpected events. For example 11th of Sept events hit badly many insurance and airlines businesses, which resulted in lose of sales and revenue. Also all airlines companies had to invest a lot of money to tighten their security levels, which meant incurring extra costs.

Planning to reduce the costs of the business

Cash flow forecast and cash budget should help managements to plan to reduce their costs and maximise their profit. By looking at the cash budget the management should be able to see much costs the business incurred throughout the year, how much sales and profit it achieved and compare them with the forecasted ones.

If the management is not happy with the business level of gross or net profit, they have to do one of two things; either to increase sales revenue or/and to reduce costs. Looking at the their cash budget therefore, will help the management to identify items of costs and try to find ways to reduce them such as looking for new technology, cheaper supplier, replacing workers with machines and equipment to save ways or in some extreme circumstances making some of them redundant.

Budgeting and Costing the Project

Management will need to develop a budget or financial plan for the project as part of the Project Initiation Document. IT related projects are notorious for running over budget. There is no reason why this has to be the case if you take time to cost the project properly at the outset. It is not uncommon to see project budgets that cover only part of the costs. There are many reasons for this such as:

A tendency to focus on initial purchase costs and ignores elements such as staffing.

Poor planning that doesn’t allow sufficient resources for training and staff development.

Blind faith in ‘optimistic’ supplier estimates.

Project managers don’t think their senior managers could cope with knowing the true cost.

The last point should not be under estimated. In many organisations the fact that IT projects always run over budget is accepted as the norm. Managers find it far easier to keep asking for small incremental sums than to give their sponsor the shock of saying ‘this is what the whole project will actually cost’. Project costs are relatively easy to ‘hide’ in large IT departments where existing staff are carrying out the work. The types of costs incurred in a project will be split between capital or one-off costs and operational costs. The information below shows some of the major cost headings and suggests issues to think about when trying to cost those items.