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Budget is a term that is used to refer to an approximation of both income and expenditure for a specified period of time. As such, it bears a plan of all the preset expenses and revenues including savings, borrowing and spending. Similarly, budget planning involves the identification of income and taking into consideration of all the current and future expenses with an objective to meet an individual’s or a company’s financial goals. The principal goal of budget planning is to guarantee that there are some savings after the allocation for spending. This document is basically an eye opener to some of the methods that can be embraced in the management of internal cost and controlling of finances. It is a summary report based on Competition Bikes Inc. reviewing the company’s various budgets and budget planning. Additionally, the document provides a number of recommendations proposed to the company for the purpose of reducing production cost and at the same time increase income.
Areas That Raise Concern in Budget Planning
A close critical examination of Competition Bikes Inc. reveals that there are areas that need some slight adjustments. Normally, the output gap should be positive to ensure that there is efficiency in the usage of resources. A positive output gap gives a clear indication that the actual output is higher than the probable output (Economy Watch, 2010). Though this should be the normal trend in budget planning, Competition Bikes’ budgets do not adhere to this expected inclination, something that jeopardizes its future investments. It is a clear indication that there are some areas where resources are either poorly utilized, are working at a reduced level or there are some resource constraints.
Some of the budgetary areas raise concerns are mainly net sales, advertising expenses, transportation out, contribution margin and the operating income. To start with, net sales are the most crucial part of running any corporation as they include the sum amount of sales made by an organization after deduction of allowances, returns and discounts. Net sales help to determine whether a company is making profit or loss which consequently helps in prescription of what should be done in relation to kind of feedback received from calculating the number of sales. If the number of sales is higher than the earlier presumed, the company is encouraged to move on diligently with the trend it has been following but if otherwise, then immediate adjustments in the respective areas have to be made to prevent collapsing of the company.
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Another area that needs to be put into consideration is the advertising expenses. Advertising is important because it notifies the target customers of the company’s goods, helps to retain the loyalty of its customers and helps the company to get an opportunity to build a new brand as well as an identity, if just to mention a few. Within Competition Bikes, the revenue statements reveal that there was overspending in advertising. Though this sector needs to be given special attention as it contributes to the prominence of the company, it is important to be more vigilant because other sectors also need to be catered for. Transportation-out is yet another sector that has to be considered since it can maim the proper running of the company. Delivery of goods from the company to the customer is important because it acts as a discount which helps in luring customers to the company’s products, wins their loyalty and sustains it.
It is important for the company’s managerial group to understand that it is their role to ensure that all the activities within the company should be regulated and monitored by their efforts. Bearing this in mind, strategic management would come into play and ensure that all the projects are being run properly and all that the employees are effective. The company should additionally rid itself from all activities that are likely to raise its expenditure especially the advertising sector.
Contribution margin which refers to the marginal earnings per unit sale should also be considered. Contribution margin is calculated by deducting the variable expenses, both manufacturing and non-manufacturing, from the sales revenue (Accounting Explanation, 2012). The final sector that needs to be evaluated is the operating income. This refers to the earnings realized from a business after deducting all the operating expenses, such as wages and cost of goods sold, and depreciation. All these sectors should be regulated to ensure that their output is favorable to the company.
Evaluation of the Flexible Budget and Its Variances
It is important at this level to understand that a flexible budget is a performance evaluation tool that is prepared at the end of the period. A flexible budget adjusts its counterpart, the static budget, for the concrete level of output (Caplan, 2005). While comparing the actual output of Competition Bikes with the standard output, it is clear that there are various differences that are either favorable or unfavorable to the company. In the revenue sector, if the net sales were to remain as it was prescribed in the standard outcome, then it would be favorable unlike now that the actual net sales are lower than the standard sales. In the variable costs, all the actual output is supposed to be lower than the standard output and when it is otherwise the condition gets unfavorable as with the advertising expenses and transportation out. The contribution margin should be a positive figure to show that the company is making a profit per unit sale. The actual output of the operating income is lower than the standard which reveals that the company incurred some loss.
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Recommendations to Reduce Losses
To ensure that the company reduces loss, there are some activities that can either be increased or reduced to heighten the profit. One of the activities is to ensure that advertisements are made using the appropriate media to reduce cost and at the same time reach a wide number of the target group. Additionally, transportation out should be made taking into account the distance by which the goods are to be transported. For all this to be possible, strategic management should be embraced and properly exercised to ensure that the company is being run appropriately.
Like mentioned earlier, budget planning involves the identification of income and taking into consideration of all the current and future expenses with an objective to meet an individual’s or a company’s financial goals. Financial management and control utilizes budgets and a variety of pro-forma statements for planning and control purposes, including analyzing cash flows to assure adequacy of funds for capitalizing on business opportunities. Various ways on how companies can be able to make profits have been highlighted earlier in this report including proper budget planning. Generally, it is important to take into consideration all the expenditures and income within a company to prevent loss.