A flexible workforce
To ensure that production can respond to demand, a firm needs flexible labour force. This means that, if someone is ill, another employee must be able to cover for them or that, if demand is high in one area of the business, people can be moved to that area to help out. Firms using Just in time expect employees to be ready to work anywhere, anytime. People must change to meet the demand for different products because Just in time production is focused entirely on matching supply to customer orders.
Introducing Just in time production involves:
Investment in machinery, which is flexible and can be changed from producing one type of item to another without much delay.
Training of employees so that they have several skills and can do a variety of jobs (multi-skilling).
Negotiation with employees so that their contracts are flexible and allow them to move.
Building relationships with suppliers who can produce Just in Time as well.
Problems of Just in Time production
Although the Just in time process has many advantages, there are several potential problems or disadvantages as well.
First, the system relies on suppliers providing parts and components at exactly the time they are needed. If this type of flexible and reliable supplier cannot be found, the system breaks down. Just in Time production can also cause problems if the suppliers fail to deliver on time. The manufacturer has no buffer stock and so cannot produce. The system also means that the firm is vulnerable to action taken by employees. Any stoppage can be extremely expensive because production is halted completely.
Switching to Just in Time production can also lead to an increase in costs because of the extra reordering. Because parts are ordered much more frequently, the firm may lose bulk discounts and will also have more administration costs.
Critically examine the alleged advantages of traditional budgeting
Budgeting is used by businesses as a method of financial planning for the future. Budgets are prepared for important aspects of the business – sales, production, purchases, debtors, creditors, cash – which give detailed plans of the business for the next three, six or twelve months. The budgets are brought together in a forecast operating statement, a forecast trading and profit and loss account and a balance sheet.
Businesses need to plan for the future. In large businesses such planning, usually known as corporate planning, is very formal while, for smaller businesses, it will be less formal. Planning for the future falls into three time scales:
Long term: from about three years up to, sometimes, as far as twenty years ahead
Medium term: one to three years ahead
Short term: for the next year
Clearly, planning for these different time scales needs different approaches; the further on in time, the less detailed are the plans. In the medium and longer term, a business will establish broad business objectives. Such objectives do not have to be formally written down, although in a large business they are likely to be; for smaller businesses, objectives will certainly be thought about by the owners or managers.
A budget may be set in money terms, e.g. a sales budget of £1,000,000 or it can be expressed in terms of units, e.g. a production budget of 50,000 units.
Budgets can be income budgets for money received, e.g. a sales budget, or expenditure budgets for money spent, e.g. a purchases budget.
Most budgets are prepared for the next financial year (the budget period), and are usually broken down into shorter time periods, commonly four weekly or monthly. This enables control to be exercised over the budget: the actual results can be monitored against the budget, and discrepancies between the two can be investigated and corrective action taken where appropriate.
Benefits of budgeting
Budgets provide benefits for both the business, and also for its managers and other staff:
The budget assists planning, by formalising objectives through a budget, a business can ensure that its plans are achievable. It will be able to decide what resources are required to produce the output of goods and services, and to make sure that they will be available at the right time.
The budget communicates and coordinates, because a budget is agreed by the business, all the relevant managers and staff will be working towards the same end.
When the budget is being set any anticipated problems should be resolved and any areas of potential confusion clarified. All departments should be in a position to play their part in achieving the overall goals.
The budget helps with decision making, by planning ahead through budgets, a business can make decisions on how much output – in the form of goods or services – can be achieved. At the same time, the cost of the output can be planned and changes can be made where appropriate.
The budget can be used to monitor and control; an important reason for producing a budget is that management is able to monitor and compare the actual results against the budget. This is so that action can be taken to modify the operation of the business as time passes, or possibly to change the budget if it becomes unachievable.
The budget can be used to motivate; a budget can be part of the techniques for motivating managers and other staff to achieve the objectives of the business. The extent to which this happens will depend on how the budget is agreed and set, and whether it is thought to be fair and achievable. The budget may also be linked to rewards (for example, bonuses) where targets are met or exceeded.
Limitations of budgeting
Whilst most businesses will benefit form the use of budgets, there are a number of limitations of budgets to be aware of:
The benefit of the budget must exceed the cost. Budgeting is a fairly complex process and some businesses, particularly small ones, may find that the task is too much of a burden, with only limited benefits. Nevertheless, many lenders, such as banks, often require the production of budgets as part of the business plan. As a general rule, the benefit of producing the budget must exceed its cost.
The budget information may not be accurate. It is essential that the information going into budgets should be as accurate as possible. Anybody can produce a budget, but the more inaccurate it is, the less use it is to the business as a planning and control mechanism. Great care needs to be taken with estimates of sales, often the starting point have the budgeting process, and costs. Budgetary control is the technique that is used to compare the budget against what actually happened, the budget might need to be changed if it becomes unachievable.
The budget may demotivate. Employees who have had no part in agreeing and setting a budget, which is imposed upon them, will feel that they do not own it. As a consequence, the staff may be demotivated. Another limitation is that employees may see budgets as either as a “carrot” or a “stick”, i.e. as a form of encouragement to achieve the targets set, or as a form of punishment if targets are missed.
Budgets may lead to dysfunctional management. A limitation that can occur is that employees in one department of the business may over achieve against their budget and create problems elsewhere. For example, a production department might achieve extra output that the sales department finds difficult to sell. To avoid such dysfunctional management, budgets need to be set at realistic levels and linked across all departments within the business.
Budgets may be set at too low a level. Where the budget is too easy to achieve it will be of no benefit to the business and may in fact, lead to lower levels of output and higher costs than before the budget was established. Budgets should be set at realistic levels, which make the best use of the resources available.
Bibliography
Andrew Ashwin, Stuart Merrils, Richard Thompson and Denry Machin, 2008, AS Business Studies, Harper Collins Publishers.
Malcolm Surridge and Andrew Gillespie, 2008, AS Business Studies, Second Edition, Hodder Arnold Headline Group.
David Cox, 2007, AS Accounting for AQA, The complete resource for the AS examination, Osborne Books.
Frank Wood and Alan Sangster, 2008, Business Accounting 1, eleventh edition, FT Prentice Hall.
Terry Lucey, Costing, seventh edition, 2008, CENGAGE Learning.
Seminar tutor Andrew Wilkinson’s notes
Arthur J. Keown, John D. Martin, J. William Petty, David F. Scott, Jr. 2008, Foundations of Finance, The Logic and Practice of Financial Management, sixth edition, Pearson International Edition.
George Callaghan, Ian Fribbance and Martin Higginson, 2007, Personal Finance, WILEY in association with The Open University.
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