Role of budgeting in an organisation
Table of Contents
Merits of preparing a budget 3
Variances in company’s revenue and expenditure. 3
Detected areas of improvement 4
Suggestions for bringing in profitability and sustainability. 6
Merits of preparing a budget
Fleet Highlands Café can prepare a budget for its business to analyse its current position of cash flows and the extent to which it should control its budgetary expenses. Budgeting can be an effective tool for managing the finance of a company as it presents the overall income and expenditure of the business suggesting for necessary measures. Budgeting clearly illustrates effective and optimal allocation of money based on the financial limitation of a particular business (Mauskopf et al. 2017). Through this process, the management can have control over its finances for meeting the short term and long term objectives of the organisation.
The company should prepare a budget for creating an awareness among all the internal members of the organisation about the usage of money within the organisation. By studying a budget, the management can plan for buying and investment opportunities in future. A financial goal can be developed for the organisation considering both the expenses and incomes in short as well as long term (Kamau et al. 2017). The management can also analyse the way money should be circulated between the internal and external environment of the business. The budget serves as a reference for the organisation of bills, receipts and other financial statements.
Variances in company’s revenue and expenditure
In the financial year of March, the variance analysis of the company has displayed a few bright areas and also other areas of improvement. Some of the financials have been identified to have degraded, while some others have raised showing both negative and positive picture of the financial condition of the company. The sales have shown a downward trend and have fallen drastically creating a gap of 11% between the actual and the budgeted figure. This is quite a negative signal for the company.
Taking into account the expenses of the company, it can be observed that the company has been able to manage some of the avoidable expenses like raw materials, wages and salaries and utilities. This is because the management has estimated a higher cost for all these elements, while the actual cost has been quite low as compared to the budgeted number. The fall in raw materials has been 11%, showing a significant difference of 5000, which can be quite impressive (Song, 2019). The drop in wages and salaries has been slightly low as compared to the raw materials, showing a percentage of 5%, which signifies the small amount of salary deduction from the employees for pulling down the actual cost as incurred by the company. Similarly, the utilities have declined by 3%, which is also an infinitesimal decrease as compared to other figures. However, it shows the effective management of utility cost by the company.
Considering other uncontrollable and unavoidable costs, it can be noticed that they have increased due to a change in economic environment and other external factors influencing their prices. These costs include rental costs of the infrastructure, fuel costs and insurance costs. All these costs have increased by 9%, 13% and 11% respectively (Khan, 2019). Such a substantial increase has led to the massive decline of the net operating income by 28% from the projected figure. The net operating income has also been impacted by the constant fall in the sales figure of the company. Therefore, the company needs to check all these expenses and adopt strategies for improving its sales.
Detected areas of improvement
From the study of the variances, it is clear that the company has certain weak areas, which need constant improvement and the management should take into concern all these areas to improvise suitable strategies for their betterment. One such area is the segment of sales, which has fallen below the forecasted figure of the management. Many reasons could be associated with such a drop in sales (Brotcorne et al. 2018, January). One reason could be losing of customers due to degradation in the quality of products or services. Another reason could be poor pricing strategies or ineffective marketing plan of the management. The company did not bring about variation in the food according to the trends in the market and the changes in the tastes and preferences of the customers.
Another weak area for the company would be increase in the costs of the facility rents. This might occur in a situation when the owner decides to increase rental prices due to a variety of reasons. One of the reasons could be keeping up with the changes in the local real estate market (Sheren, 2018). The company might consider changing its location in the financial year of March due to which the rental costs might increase suddenly more than the predicted value. A rising local economy could be another significant factor contributing to such a negative situation when the rental costs of the facilities would increase substantially. Another primary reason for the rise of the rental costs could be an improvement in the value of the property.
Another high expenditure incurred by the company has been insurance cost, which has also shown an elevated picture of the actual cost as compared to the budgeted cost. This might occur due to a change in the structure of the policies provided by general insurance. The company might have also opted to go for new kinds of policies, which require payment of a high amount of premiums (Ncube, 2019). This is governed entirely by the external environment as these changes are not entirely in the hands of the company. Due to a change in the structure and nature of policies, the company might be willing to pay higher premiums for getting handsome returns upon the damage of any of its insured products.
Fuel costs have shown an increase in the actual figure as compared to the planning figure. This might happen due to high prices of the crude oil and high taxes of the excise duty levied on the transportation of the fuel throughout the economy. Petroleum prices are controlled mainly by the cost of crude oil in the international markets (McKenzie, 2016). Due to all these factors, the transportation of the company would be most affected, and the company might face issues in the supply chain process. The raw materials might not reach on time, which would further hamper the food services of the company. This will also negatively affect the revenue of the company.
The most critical area of weakness in Fleet Highlands Café can be the net operating profit figure, which has shown the maximum gap between the actual and the budgetary value. The actual number has fallen sharply by 28%, which can be treated as a terrible signal concerning the financial condition of the company. Management of sales has a direct effect on the net operating income figure of any company. Due to the sharp fall in sales, the income from operations can decline gradually (Vavřina and Lacina, 2018). Considering this case, it can be stated that the situation has been further degraded by the rising up of the additional costs. These two factors had a combined detrimental effect on the financials of the company.
Suggestions for bringing in profitability and sustainability
The first and foremost step for increasing the profit margin is management of the cost structure of the company. Fleet highland Café can suitably detect areas of maximum expenditure like transport, insurance and rental areas and improvise suitable strategies for the cutting down these costs (Singh et al. 2017). The company can focus on the management of other costs too like planning of better strategies for decreasing the costs of raw materials, labour and other overheads. This would require concentrating on the sales efforts and coming out with attractive offers to attract more customers. Innovation in food services can increase the overall customer base of the company as people would always be willing to try out new recipes.
The company can search out its best and loyal customers and formulate strategies to retain them for longer period of time. The company can segment its customers through effective techniques and chock out the most profitable segment for targeting. The value proposition of this segment can be enhanced by coming up with better quality of products, which would be both healthy as well as tasty. The company should analyse the competitors and the variety of products offered by them (Fuller, 2016). Through this analysis, the company can reduce the threat of the competitors by offering better quality and quantity of products at cheaper rates. Employee satisfaction is a major element of a profitable business. The company should provide a work-friendly atmosphere to the customers. As the company cannot easily cut-short its expense, it can go for these alternative options.
Sustainability is another crucial element of the business through which a company can gain a competitive advantage in the market. The company can cook healthy products for the health-conscious customers and should also come up with environment friendly techniques for preparing food for the customers (Mahadevan, 2019). The company can buy raw materials from local customers through which it can cater to the wellbeing of the local communities by offering them meals that are prepared from fresh raw materials. The company can also offer seasonal choices to meals to the customers so that they can enjoy variety of dishes according to the trends of the season.
References
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