Group: Charlotte Hartley D17125556
Olayinka Omotayo D17102455
Linda Gallagher D17126062
Finance for Non-Financial Students: Report to Robert Brown
Lecturer: Ciaran Cullen
Submission: 25th November 2018
Table of ContentsPage
Outline what a master budget and supplementary budgets are1
Planning, Motivating and Evaluating5
Potential Conflicts between these roles & Practical suggestions to address6
4.1 Conflict between Planning and Motivation6
4.2 Conflict between Planning and Evaluation6
Bibliography and Referencing8
Master and supplementary budgets play an important role in any organization and help compare the actual performance with the budgeted performance. The idea of a master budget is to plan all financial aspects of the company over the budget period and how to manage each area. We have given a detailed account of the master budget and supplementary budgets, suggesting what each budget may be used for. We have also identified benefits of master and supplementary budgets.
We have also demonstrated the key roles to which a budgeting tool is used for in an organisation. Planning, motivation and evaluation. Each of which may be perceived by the different managers, the sales manager, production manager and financial controller, giving examples of how the managers may demonstrate such roles in the organisation on a day to day basis.
Although each role is significant, different managers in different departments may meet conflict as they all use budgeting tools for different areas of the company. The financial controller will try to save costs, the sales manager feels necessity for extra product to increase revenue and the production manager pushes production levels from staff members. It is significant to note each department has different goals but the company’s objectives are overall. In order for the objectives to be met, we have made recommendations to avoid conflict between roles in the organisation. This will ensure unity between departments of one company.
2. Outline what a master budget and supplementary budgets are.
A master budget is a complete plan of how management expects to conduct all aspects of business over the budget period. The master budget can be achieved in different functional areas and also includes accounted financial statements, a cash forecast, and a financing plan. The Supplementary budget explains the company’s strategic direction in supporting and achieving specific goals, and management action needed to complete the budget and can be presented either a monthly or quarterly structure, the budget usually covers a company’s entire financial year.
Purpose and Benefits of the master and supplementary Budget
There are selection purpose and benefits obtained from budgeting. Consider the following
The master budget is the fundamental planning tool that a management team uses to direct the activities of a corporation, as well as to judge the performance of its various responsibility centres. However, they fall under one of the three main categories:
Capital expenditures budgets
Balance sheet ; Cash flows
A balance reveals the firm’s assets, liabilities and owners net worth and is divided into two-part Current Assets and Non-Current Assets. The balance sheet is linked to income statement and cash flow budget, which makes the foundation of any company financial budget for the shareholder of the company or a potential investor.
Cash flow budgeting records the amount used for money movement of all cash receipts and all cash expenditures that are likely due in a certain period. It is based around the assumptions about the expected performance of the business in the future.
Example of cashflow budget:
Profit and Loss budget
Profit and loss are a company’s financial plan what they are going to sell, the cost and what overheads they will need to pat, including interest. A profit and loss budget sets out the profit and loss the business is planning to make, occasionally on a monthly basis.
Sales budget includes the company’s breakdown sales expectation for the budget period, in both units and dollars. It used to sum up sale into smaller number of product categories or geographic regions. The information in sale budget gives managers a general sense of the scale of operations, for when they crate overhead budget.
Direct Materials Budget
Material budget calculates the materials that purchased by time period, in other to fulfil the production budget. In an organization that sells product this budget contains a majority of all costs earned by the company. The basic calculation used by the direct materials budget is:
Calculates the number of units of products that is manufactured and is derived from a combination of the sales forecast and planned amount of finished goods inventory.
The basic calculation used by the production budget is:
Direct Labour & Manufacturing Overhead Budget
Direct labour is used to calculate the number of labour hours that will be needed to produce the units listed in the production budget. Direct labour is useful for anticipate hiring needs, scheduled overtime and layoffs.
Manufacturing overhead budget becomes part of the cost of goods sold line item in the master budget.
Administrative salaries and payroll taxes
Travel and entertainment Utilities
Total manufacturing overhead
3. Planning, Motivating and Evaluating
Budgeting can act as a great advantage to any organisation and to those who work within the company. According to My Money Coach, ‘Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do.’, (My Money Coach, 2018). There are many roles which a budgeting tool can play in an organisation.
Planning can be defined as ‘the systematic development of action programmes aimed at reaching agreed business objectives by the process of analysing, evaluating and selecting among the opportunities which are foreseen’, (Tiernan, 2013). If the sales manager’s role is expected to set targets for a sales team, the sales manager needs to be able to go by the sales budget to see the demand levels. It can be perceived that the sales manager uses a budgeting tool for planning purposes as the sales budget will allow the sales manager to plan ahead in case any problems arise. For example, if the sales budget shows high sales in the next month, the sales manager may consider hiring extra staff through means of an agency or recruitment fair to ensure there are enough staff at hand.
(Tiernan ; Morley, 2013) define motivation as ‘a set of processes that activate, direct and sustain human behaviour focused on goal accomplishment’. A production manager may perceive the role of a budgeting tool as a way of motivating staff. The production budget will inform management how many units need to be manufactured. With this in mind, the production manager needs to be able to motivate his/her staff to work towards demand. For example, He/she may motivate staff with over time available, double time/bonus pay rewards or other add on benefits like extra annual leave in order to meet targets.
Evaluation ‘allows managers to see the results of the decisions and to identify any adjustments that need to be executed’, (Tiernan ; Morley, Evaluation, 2013). This could be perceived by the financial controller. The financial controller would evaluate the information from the master budget. For example, if a creditor sees that a company has a strong financial position, they are more likely to invest. Also, if the evaluation is accurate, the company’s director or Chief Executive will be notified of any financial difficulties and plan to recover from them.
It is evident that from the research above that there is a high significance to using budgeting tools in an organisation such as a sales or production budget and balance sheet. They prove effective in the key areas of management such as planning, motivation and evaluation. If an organisation use budgeting tools efficiently, they can map out a strategic plan for the future.
4. Potential Conflicts between these roles & Practical suggestions to address
4.1 Conflict between Planning and Motivation:
Understanding the complexity of budgets is vitally important for the organisation. Departments should strategically plan; focus and control spend, for maximum profits with budgets made available to them. Difficulties can arise when efforts are made to impose internal or external policies at departmental level. Conflicting priorities for each manager may take place when restrictions are introduced. Each department deems their goals more important than other divisions. Financial departments focus on cost savings for the organisation, sales teams want sufficient products to sell to generate revenue and the purchase and production teams work to supply the goods.
Bedoya (2014) notes “The only way to prevent conflict is to have a well coordinate process that also makes people accountable for the decisions and assumptions made in each step”
Inflated pipelines by sales give the impression that additional stock is required. Conflict can arise when the purchasing manager orders stock to meet the demands of phantom sales, ultimately finding that the goods were not required in the first instance. This can lead to staff being de-motivated having worked hard to meet deadlines with the production and supply of products and sales being withheld. Holding sales teams accountable for exaggerated figures, could lead to the introduction of micro management procedures for territories. Sales managers require high quality products to sell, in order to capitalize on potential revenue; however production and purchasing managers can gain substantial cost savings in obtaining cheaper raw materials through negotiations with supply partners. Fixed and variable production costs, can also reduce overall profits.
During economic downturns, managers may request production teams work harder and take on additional responsibilities, rather than increasing staffing levels and pay, or introduce pay cuts. The decline in sales, can lead to budgets being slashed, and funding being allocated to other departments, which can affect morale. Sales are motivated by the big win, however restrictions with production supplies can cause the loss of projected sales and the loss of commission for the employee causing conflict within the business. There is no incentive to sell.
4.2 Conflict in Planning and Evaluation:
Johnson (n.d) notes that “a sales department may not fully or closely monitor the money it spends to accomplish its tasks, which can cause friction with a finance department”
Finance departments endeavour to save costs. Sales teams attract business by offering competitive pricing and incentives to customers. Offering extended credit terms can be a major headache for the finance department, such as when customers default on payments. Restrictions on credit policies can be frustrating to sales teams when trying to win business. Johnson (N.D) observes that “Issues between sales and finance departments may arise if the departments establish performance targets that fail to consider the other department”. The total number of business close wins may be a factor for Key performance indicators (KPI’s) for sales teams, therefore restricting credit facilities can jeopardise the sales team gaining commission for the refused business.
To reduce conflict within an organisation, departments must communicate their objectives and priorities at the initial planning stage. Strategic planning of sales to secure favourable business reducing potential risks can yield better profits for the organisation. Delivering commission based goals which are achievable yet challenging, can motivate teams to increase productivity and sales. Working alongside other departments can improve morale, increase friendly competition, increase profits, which in turn can lead to pay rises and create a positive place to work.
Bibliography and Referencing
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